The Labor Market

1
The Labor Market

• Chapter 16

2
Individual Labor Supply

• Households supply labor. People in the households
  allocate their time to work or to leisure.
• This leads to individuals having to make a labor
  supply decision based upon the labor-leisure
  tradeoff.
• The backward-bending labor supply curve results
  because a person is willing and able to work more
  hours as the wage rate increases until, at some
  sufficiently high wage, the person chooses to
  work fewer hours.
• The person feels that he or she has enough
  income, and would rather have more leisure time.
• At a high enough wage rate, the person feels that
  he or she can afford to take more leisure time.

3
The Individuals Labor Supply Curve
4
Determinants of Equilibrium Wages

• Compensating Differentials. Refers to difference
  in wages that arises from non-monetary
  characteristics of different jobs.
• Summer jobs (safe vs. dangerous)
• Painting Golden Gate Bridge
• Night shift vs. day shift

5
Determinants of Equilibrium Wages (cont.)

• Human Capital
• College graduates vs. high school graduates
• Ability, Effort, and Chance
• Ability Because of heredity and upbringing,
  people differ in their physical and mental
  attributes.
• Effort Some people work hard, others are lazy.
  Those that work hard are more productive and
  earn more.
• Chance Being in the right place at the right
  time.
• Example The Benefits of Beauty

6
Determinants of Equilibrium Wages (cont.)

• Signaling
• Firms use educational attainment as a way of
  sorting between high-ability and low-ability
  workers.
• Superstar Phenomenon
• Every customer has a desire to enjoy the good
  supplied by the best producer.
• The good is produced with a technology that makes
  it possible for the best producer to supply every
  customer at a low cost.

7
The Economics of Discrimination

• Discrimination (def.) occurs when the
  marketplace offers different opportunities to
  similar individuals who differ only by race,
  ethnic group, sex, age, or other personal
  characteristics.

8
Economics of Discrimination (cont.)

• Discrimination is often measured by looking at
  the average wages of different groups (e.g., male
  vs. female)
• Differences in human capital (education) and job
  characteristics (night shift vs. day shift) are
  often reflected in the average wages earned, not
  because of discrimination.

9
Discrimination by Employers

• Example Hiring workers based on hair color
  (blonde vs. brunette)
• Firms that do not discriminate will have lower
  labor costs by hiring the workers who are
  discriminated against (e.g., blonde)
• Eventually, the entry of blonde firms and the
  exit of brunette firms cause the demand for
  blonde workers to rise and the demand for
  brunette workers to fall. Finally, the wage
  differential disappears.

10
Discrimination by Customers

• Customers may prefer being served by brunette
  servers.
• If customers have discriminatory preferences,
  blonde restaurants (firms) would hire blondes,
  have lower costs, and charge lower prices while
  brunette restaurants (firms) would hire
  brunettes, have higher costs, and charge higher
  prices.

11
Remedy for Employer Discrimination

• Competitive markets provide a natural antidote to
  employer discrimination and that is the profit
  motive.
• The entry of firms that care only about profit
  tends to eliminate discriminatory wage
  differentials. These wage differentials persist
  in competitive markets only when customers are
  willing to pay to maintain the discriminatory
  practice.

12
Comparable Worth

• The persistent wage gap between men and women has
  led to another approach equal pay for equal
  work.
• More formally, this is called comparable worth
  the pay ought to be determined by the job
  characteristics rather than by supply and demand,
  and jobs with comparable requirements should
  receive comparable wages.
• Proponents of this approach argue that
  market-determined wages are not appropriate
  because of the markets inability to assess
  marginal products.
• Opponents argue that interference with the
  function of the labor market will lead to
  shortages in some occupations and excess supplies
  in others.