Chapter 17: Work and the Labor Market

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter GoalsExplain how the supply of labor is determinedExplain how wages are determined by both the supply and demand for labor in combination with social forcesExplain how the demand for labor is determinedContrast four types of discrimination that occur in labor marketsSummarize the evolving labor laws and the implications of the labor market analysis for youThe Supply of LaborThe higher the wage, the higher the quantity of labor supplied.The labor supply curve has a positive slope because the opportunity cost of not working increases as wages get higherWage RateQ of LaborSupply of LaborReal Wages and the Opportunity Cost of Work The upward sloping labor supply curve tells you that, other things equal, as wages go up, the quantity of labor supplied goes upThis is explained by the income effect; higher incomes make people richer, and richer people can afford to choose more leisure causing a decrease in hours workedHistorically real wages have been increasing and people have reduced the number of hours they work, but they still work more hours than predicted The Elasticity of Labor SupplyElasticity of labor supply depends on:Individuals’ opportunity cost of workingThe type of labor market being discussedThe elasticities of individuals’ supply curveIndividuals entering and leaving the labor marketEmployees prefer an inelastic labor supply, but employers prefer an elastic labor supplyEstimates for labor supply elasticity are about 0.1 (inelastic) for heads of household and 1.1 (elastic) for secondary earners The Derived Demand for LaborThe demand for labor follows the basic law of demand: the higher the wage, the lower the quantity of labor demandedThe demand for labor by firms is a derived demand meaning the demand for factors of production by firms depends on consumers’ demandsWage RateQ of LaborDemand for LaborFactors Influencing the Elasticity of Demand for LaborFour factors that influence the elasticity of demand for labor are:The elasticity of demand for the firm’s goodThe relative importance of labor in the production processThe possibility, and cost, of substitution in productionThe degree to which the marginal productivity falls with an increase in laborLabor as a Factor of ProductionThe traditional factors of production are land, labor, capital, and entrepreneurshipThe labor market includes labor and entrepreneurshipEntrepreneurship refers to labor services that require high degrees of organizational skills, concern, oversight responsibility, and creativityDays of entrepreneurship can be equivalent to weeks and months of non-entrepreneurial laborDetermination of WagesSupply and demand forces strongly influence wages, but they do not fully determine wagesReal-world labor markets are filled with examples of individuals or firms who resist these supply and demand pressures:Labor unions Professional associationsAgreements among employersImperfect Competition and the Labor MarketMonopsony is a market in which a single firm is the only buyer of laborIf a monopsonist hires another worker, the equilibrium wage will riseThe marginal factor cost is above the supply curveA bilateral monopoly is one in which a single seller of labor (a union) faces a single buyer of laborFairness and the Labor MarketSocial and political views of fairness play a role in wage determinationEfficiency wages are wages paid above the going market wage to keep workers happy and productiveComparable worth laws mandate comparable pay for comparable workLiving wage laws require employers to pay a worker a wage that would support a family of four at the poverty levelDiscrimination and the Labor MarketDiscrimination exists in all walks of lifeThe three types of demand-side discrimination are:Discrimination based on relevant individual characteristics Discrimination based on group characteristicsDiscrimination based on individual characteristics that do not affect job performance or are incorrectly perceivedInstitutional DiscriminationInstitutional demand-side discrimination can also existInstitutional factors have an effect on things such as pay, but workplace discrimination also explains a portionInstitutional discrimination is a discrimination in which the structure of the job makes it difficult for certain groups of individuals to succeedInstitutions can have built-in discriminationEvolution of Labor MarketsLabor markets as we now know them developed in the 1700s and 1800sThe political and social rules that operated at that time pushed wage rates down to subsistence levels, work weeks were long, and working conditions were poorLaws, such as minimum wage or child labor laws, play an important role in the structure of labor marketsLabor laws and unions have evolved in response to workers’ political pressureUnions and Collective BargainingIn the late 1800s and early 1900s, the government supported business’ opposition to workers’ right to strikeIn the 1930s the Wagner Act guaranteed workers the right to form unions, strike, and bargain collectivelyIn 1947 the Taft-Hartley Act was passed limiting union activities and also provided for:States could pass right-to-work lawsClosed shops were illegalUnion shops were allowedProhibited secondary boycottsChapter Summary Incentive effects are important in labor supply decisions; the higher the wage, the higher the quantity suppliedThe demand for labor by firms is derived from the demand by consumers for goods and servicesThe higher the wage, the lower the quantity demandedElasticity of labor supply depends on: Individuals’ opportunity cost of working, type of market, elasticity of individuals’ supply curves, individuals entering and leaving the labor marketChapter Summary Elasticity of labor demand depends on: elasticity of demand for the product, relative importance of labor in the production process, possibility and cost of substitution in production, degree to which marginal productivity falls with an increase in laborA monopsony is a market in which a single firm is the only buyer; a bilateral monopoly is a market in which there is a single seller and a single buyerViews of fairness have led to laws that mandate comparable pay for comparable workSince the 1980s, labor unions have been declining in importance