Fourth Edition
MODERN
LABOR
ECONOMICS
Theory and Public Policy
Ronald G. Ehrenberg
Cornell University
Robert S. Smith
Cornell University
YLdirperCcAYmsPublisbers
Contents
PREFACE
1
XV
INTRODUCTION
1
The Labor Market
2
Labor Economics: Some Basic Concepts
Plan of the Text
11
2
Example 7.7 Normative Economics, Positive Economics, and the War of
1812
9
Appendix 1A
2
Statistical Testing of Labor Market Hypotheses
OVERVIEW OF THE LABOR MARKET
21
The Labor Market: Definitions, Facts, and Trends
How the Labor Market Works
32
Applications of the Theory
46
3
22
Example 2.7
The Black Death and the Wages of Labor
Example 2.2
A Modern Exodus from Egypt
THE D E M A N D FOR LABOR
56
60
A Simple Model of Labor Demand
61
Modified Models of Labor Demand
75
Policy Application: Minimum Wage Legislation
13
82
41
viii
CONTENTS
Example 3.1 Professional Hockey: One Player's Marginal Revenue
Productivity
64
Example 3.2 The Winner's Curse: Is There a Tendency to Overpay
Baseball's Free Agents?
70
Example 3.3
Coal Mining
Example 3.4
Minimum Wages in Developing Countries
Example 3.5
Mandating Employee Benefits
Appendix 3A
4
80
89
93
Graphic Derivation of a Firm's Labor Demand Curve
97
LABOR DEMAND ELASTICITIES, TECHNOLOGICAL CHANGE,
AND FOREIGN TRADE
106
The Own-Wage Elasticity of Demand
106
The Cross-Wage Elasticity of Demand
113
Empirical Evidence on Wage Elasticities of Demand
115
Policy Applications
121
Applying Concepts of Labor Demand Elasticity to the Issue of Technological
Change
124
International Trade and the Demand for Labor: Can High-Wage Countries
Compete?
126
Example 4.1 Gross Complementarity and Substitutability: The Rise and Fall
of the Handloom Weavers, 1780-1850
116
Example 4.2
Are Targeted Wage Subsidies Harmful?
123
Example 4.3
Industry
Import Quotas and Employment in the Automobile
132
Appendix 4A The Elasticity of Demand for Labor and Labor Share:
Understanding the Exception
137
5
QUASI-FIXED LABOR COSTS A N D THEIR EFFECTS O N
DEMAND
141
Nonwage Labor Costs
142
The Employment/Hours Trade-off
146
Firms' Labor Investments and the Demand for Labor
155
Training Investments
160
Hiring Investments
166
Policy Application: Why Do Employers Discriminate in Hiring?
Example 5.1
168
Recruiting and Training Longshore Crane Operators
143
Example 5.2 "Renting" Workers as a Way of Coping with Fluctuations in
Product Demand
153
Example 5.3
Quarries"
Paying for America's Minor Leagues and Spain's "Stone
162
CONTENTS
Example 5.4 Paternalism in Japan —Is It Rooted in Feudalism or
Economics?
169
6
SUPPLY OF LABOR TO THE ECONOMY: THE DECISION TO
WORK
174
Trends in Labor Force Participation and Hours of Work
A Theory of the Decision to Work
179
Policy Applications
202
Example 6.7
Incentives and Absenteeism
Example 6.2
Primitive Cultures and Labor Supply Theory
Example 6.3
Countries
Disability and Economic Incentives in Three
204
Appendix 6A
Working
7
174
183
196
Child Care, Commuting, and the Fixed Costs of
222
LABOR SUPPLY: HOUSEHOLD PRODUCTION, THE FAMILY,
AND THE LIFE CYCLE
227
The Theory of Household Production
227
Joint Husband-Wife Labor Supply Decisions
233
Household Production Theory and Some Social Issues
Life-Cycle Aspects of Labor Supply
242
Example 7.1
237
Household Productivity and Labor Supply in Japan
235
Example 7.2 Differences in Swiss Child-Rearing Practices Around
1800
241
Example 7.3
8
The Value of a Homemaker's Time
246
COMPENSATING WAGE DIFFERENTIALS AND LABOR
MARKETS
257
A Verbal Analysis of Occupational Choice
257
A Hedonic Theory of Wages
266
Empirical Tests of the Theory of Compensating Wage Differentials
Policy Applications
277
Example 8.1
The Economic Implications of Flogging Workers
274
260
Example 8.2 Compensating Wage Differentials for the Evening and Night
Shifts
266
Example 8.3
275
Compensating Wage Differentials in the Soviet Union
ix
X
CONTENTS
Examp/e 8.4 Compensating Wage Differentials in 19th-century
Britain
282
Example 8.5 What Price Status?
285
Appendix 8A Compensating Wage Differentials and Layoffs
9
294
INVESTMENTS IN HUMAN CAPITAL: EDUCATION AND
TRAINING
299
Demand for Education by Workers
301
The Education/Wage Relationship
314
Is Education a Good Investment?
318
Applications of Human Capital Theory
330
Example 9.7 Hiroshima, Hamburg, and Human Capital
300
Example 9.2 Do Unskilled Jobs Cause Poor Mental Health?
308
Example 9.3 Valuing a Human Asset: The Case of the Divorcing
Doctor
321
Examp/e 9.4 The Socially Optimal Level of Educational Investment
327
Examp/e 9.5 Socialists or (Human) Capitalists: Wage Differentials in the
Soviet Union
331
Example 9.6 Do Families Move Up and Down the Income
Distribution?
342
Appendix 9A
Appendix 9B
10
"Signaling" in the Labor Market
Measuring Inequality
355
349
WORKER MOBILITY: TURNOVER AND MIGRATION
360
The Determinants of Worker Mobility
361
Geographic Mobility
363
Voluntary Turnover
373
Policy Application: Restricting Immigration
379
" Example 10.1 Job Satisfaction: An Alternative View
362
Examp/e 70.2 "Economic" vs. "Political" Immigrants
370
Example 10.3 A Positive and Normative Theory of Quitting in
19th-Century Japan
375
Example 10.4 The Mariel Boatlift and Its Effects on Miami's Wage and
Unemployment Rates
388
Example 10.5 Discouraging Immigration to Zurich in the 18th
Century
390
Appendix 10A Cohort Quality Changes, Assimilation, and the Earnings
Growth of Immigrants
394
CONTENTS
11
THE STRUCTURE OF COMPENSATION
xi
397
The Economics of Employee Benefits
398
Implicit Contracts, Explicit Contracts, and Asymmetric Information
The Basis of Pay
411
Internal Labor Markets and the Level and Time Pattern of
Compensation
420
409
Example 11.1 The Wage/Benefit Trade-off in the Collective Bargaining
Process
408
Example 11.2
Agriculture
Piece Rates and Supervisory Effort in California
414
Example 11.3 Incentive Pay and Output—or "You Get What You Pay
For"
418
Example 11.4 The Wide Range of Possible Productivities: The Case of the
Factory That Could Not Cut Output
421
Example 11.5
Did Henry Ford Pay Efficiency Wages?
424
Example 11.6 Monitoring Costs, Occupational Segregation, and Gender
Differences in Compensation Methods in the 1890s
429
Example 11.7 Do Professional Golf Tournaments Have Incentive
Effects?
433
Appendix 11A
12
Profit Sharing and the Demand for Labor
438
UNIONS AND COLLECTIVE BARGAINING IN THE PRIVATE
SECTOR
442
Unions and Collective Bargaining
443
How Unions Achieve Their Objectives
455
The Effects of Unions
469
Example 12.1
Deregulation and the Airlines
453
Example 12.2
458
The Rise and Fall of the Mississippi Steamboat Pilots' Union
Example 12.3 The Paradox of Large Wage Increases in Declining
Sectors
478
Example 12.4
Appendix 12A
13
Corporate Takeovers and Union Wages
"Monopoly Unions" or "Efficient Contracts"?
PUBLIC SECTOR LABOR MARKETS
A Model of a Public Sector Labor Market
501
The Growth and Effects of Public Sector Unions
496
504
485
490
xii
CONTENTS
The Effects of Arbitration Statutes on the Wages of State and Local
Government Employees
509
Public vs. Private Pay Comparisons
511
The Effect of Expenditure- and Tax-Limitation Legislation
515
Public Sector Employment Programs
517
Example 13.1 Final-Offer Arbitration and Police Wages in New
Jersey
510
Example 13.2
Appendix 13A
14
Are Postal Workers Overpaid?
513
Arbitration and the Incentive to Bargain
THE ECONOMICS OF DISCRIMINATION
What Is Discrimination?
529
• Earnings Disparities by Race, Ethnicity, and Gender
Theories of Market Discrimination
541
State Fair Employment Practice Legislation
556
Federal Programs to End Discrimination
558
524
529
531
Example 14.1 Customer Discrimination and Professional
Basketball
546
Examp/e 74.2
South Africa's "Civilized Labour Policy"
555
Example 14.3
Comparable Worth and the University
564
Examp/e 74.4
How Fast Can Discrimination Be Eradicated?
569
Appendix 14A Estimating "Comparable Worth" Earnings Gaps: An
Application of Regression Analysis
575
15
UNEMPLOYMENT
579
A Stock-Flow Model of the Labor Market
581
Types of Unemployment and Their Causes
585
The Demographic Structure of Unemployment Rates
601
Government Policy and Frictional Unemployment: The Effects of
Unemployment Benefits on Job Search
607
Normative Issues in Unemployment
614
Examp/e 75.7
Advance Notice for Layoffs and Plant Shutdowns
Example 15.2
International Unemployment Rate Differentials
589
Examp/e 75.3
Unemployment Insurance Benefits in Great Britain
611
Example 15.4
The Unemployment Insurance Bonus Experiments
613
594
Appendix 15A The Relationship Between the Unemployment Rate and Labor
Market Flows
618
CONTENTS
16
INFLATION AND UNEMPLOYMENT
xiii
620
Measuring Wage Inflation
620
The Inflation/Unemployment Trade-off
621
Wage Inflation, Price Inflation, Productivity, and the Long-Run
Trade-off
638
Expected vs. Unexpected Inflation
644
Unions and Inflation
647
Structural Policies to Reduce Inflation
651
Example 16.1 The Growth of Employment in Small Businesses: Will Wages
Become More Downwardly Flexible? 635
Example 16.2
The Slowdown in U.S. Productivity Growth
Example 16.3
Incomes Policies During the Roman Empire
640
655
Appendix 16A Does a Long-Run Trade-off Exist Between the Rate of Price
Inflation and the Unemployment Rate?
659
ANSWERS TO ODD-NUMBERED REVIEW QUESTIONS
NAME INDEX
SUBJECT INDEX
693
701
665