Human Capital Labor Market Model

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• Human Capital Labor Market Model
• QUESTIONS
• What is human capital?
• According to the human capital model how are
  wages determined?
• In the human capital model what is the key factor
  that distinguishes high paid workers from lower
  paid workers?

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Supply and Demand for Labor
Wage /worker
6.00
Supply of Labor
5.00
4.00
3.00
Demand for Labor
2.00
1.00
Quantity of Workers (000s)
0 20 40 60 80 100 120
140 160 180
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Years of Schooling Less than 4 Years of high
school
4 years of high school
1 to 3 years of college
4 years of college or more
Total
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Supply and Demand for Skilled and Unskilled Labor
SUPPLY OF SKILLED WORKERS
30.00 25.00 20.00 15.00 10.00 5.00
DEMAND FOR SKILLED WORKERS
SUPPLY OF UNSKILLED WORKERS
DEMAND FOR UNSKILLED WORKERS
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Rule for the Optimal Combination of Workers
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Optimal Combination of skilled and Unskilled
Workers
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Questions 1. What other factors besides human
capital affect job placement and hiring? 2.
What other factors besides human capital affect
job promotions and wage increases?
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Dual Labor Market Model According to the dual
labor market model the labor market is divided
into primary and secondary sectors. These two
sectors have very different characteristics.
Furthermore the model suggests that there are
strong institutional barriers that separate the
two sectors, so mobility from the secondary
sector to the primary sector is very difficult.
PRIMARY SECTOR 1. High and consistently
increasing wages 2. Job stability 3. Lucrative
fringe benefits (including health insurance
and pension plans) 4. Opportunities for
promotion
SECONDARY SECTOR 1. Low-paying jobs 2.
Unstable employment 3. No fringe benefits 4. No
opportunities for upward mobility 5. Work
that mainly involves manual labor
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PRIMARY SECTOR 1. High and consistently
increasing wages 2. Job stability 3. Lucrative
fringe benefits (including health insurance
and pension plans) 4. Opportunities for
promotion
SECONDARY SECTOR 1. Low-paying jobs 2.
Unstable employment 3. No fringe benefits 4. No
opportunities for upward mobility 5. Work
that mainly involves manual labor
The characteristics in each of the sectors are
self-reinforcing and thereby keep the two
sectors distinct and separate. In the primary
sector, rising wages compel management to adopt
strategies to increase productivity so as to
offset the increased cost of production. Such
strategies include using advanced technology and
offering opportunities for investment in human
capital through on-the-job training. The
enhanced training leads to even higher wages. In
order to keep their good jobs, workers in the
primary sector have an incentive to develop good
work habits.
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In the secondary market, management faces no
pressure to introduce new technology or provide
worker training because of the low wages.
Workers in the secondary sector have no
opportunity for upward mobility and therefore
they have little incentive to develop good work
habits. High absenteeism and tardiness are
common in the secondary sector. Those who end up
in this sector become trapped into dead-end
jobs. In these circumstances even if a worker
begins with good habits, those good habits
eventually fade away.
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• What causes the separation of the labor market?
  The dual labor market model suggests it arises
  through "internal labor markets." An internal
  labor market is an administrative unit where wage
  determination and the allocation of job
  assignments are determined primarily by
  administrative procedures rather than market
  forces. In this setting, there exists a clearly
  stipulated hierarchy of jobs. A worker starts at
  one job and climbs the career ladder to jobs with
  more responsibility and higher wages. The initial
  point where an employee gains access to the job
  ladder, called the port of entry, is where
  management can assign some employees to the
  primary sector and others to the secondary
  sector. According to the proponents of the dual
  labor market model, one's earnings and
  productivity is not necessarily determined by the
  amount of human capital investment. Other
  factors -- such as "connections," "networking,"
  and discrimination -- are thought to be more
  important in determining success at the port of
  entry. Those who gain access to a good job
  ladder in the primary sector end up with high
  incomes. Those on a job ladder in the secondary
  sector end up with low-paying jobs and therefore
  have a high probability of being poor.

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The Minimum Wage
Minimum wage laws result in a price floor in the
market for labor.
6.00
Supply of Labor
5.00
4.00
3.00
Demand for Labor
2.00
1.00
Quality of Workers (000s)
0 20 40 60 80 100 120 140 160
180
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WHO LOSES AND WHO GAINS FROM MINIMUM WAGE LAWS
Wage (/worker)
B
A
MINIMUM WAGE
Supply of Labor
Demand for Labor
Quantity of Workers (000s)
GAIN LOSS
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THE IMPACT DEPENDS ON THE SHAPE OF THE DEMAND
CURVE
Wage (/worker)
B
A
6.00 5.00 4.00 3.00 2.00 1.00
Supply of Labor
Demand for Labor
Quantity of Workers (000s)
0 20 40 60 80 100 120
140 160 180
GAIN LOSS
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The Trickle Down Theory
Zero-sum game Positive-sum game
1. Advocates of redistribution believe the
economy resembles a "zero-sum game." 2.
Advocates of the "trickle down theory" believe
the economy resembles a "positive-sum
game." "The "trickle down theory" asserts that
people at the bottom of the economic hierarchy
benefit from any increased prosperity at higher
income levels." If this is true, then public
policy need not focus on the poor but can instead
pursue more general growth and income
strategies." Schiller, Economics of Poverty ,
p. 81.
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ARGUMENTS IN SUPPORT OF THE TRICKLE DOWN
VIEWPOINT 1. The best way of helping the poor is
through economic growth that increases job
opportunities for everyone. 2. The higher taxes
required to support social programs will result
in reduced work incentives for the rich and the
poor. 3. People should be rewarded according to
how hard they work, not according to the
governments definition of need. 4. Too much is
already being spent on social programs which
account for 13 of the U.S. GNP 5. Social
programs do not accomplish their stated aims, but
do induce the poor to become dependent on
government aid.
ARGUMENTS IN SUPPORT OF THE REDISTRIBUTION
VIEWPOINT 1. Poverty reflects a fundamental
inequality of opportunity that cannot be
corrected by economic growth alone. 2. Trickle
down does not work because economic growth
benefits primarily the rich and not the poor. The
tax system is not progressive when loopholes are
considered. 3. Greater equality in the
distribution of income and wealth is needed to
maintain social cooperation. 4. Only 1/6 of the
expenditures on social programs are designated
for the poor. 5. It is well-to-do special
interest groups that receive most of the benefits
of government programs.