ECON 301 Week 4: Tues 5th August 1 pm

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ECON 301 Week 4 Tues 5th August 1 pm

• I. The effects of minimum wage laws
• Employment effects
• Theoretical
• Empirical
• Minimum wages and poverty
• TC and labour demand
• International trade and the demand for labour
• Production without trade
• Domestic and foreign
• The mutual benefits of trade
• Labour market implications

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I. The effects of minimum wage laws

• Designed to gaurantee workers a resonable wage
  for their work effort and to reduce the incidence
  of poverty.

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Employment effects Theoretical analysis

• Standard neoclassical analysis tells us that
  higher wages for low-paid workers reduces
  employment opportunities for the least-skilled or
  least-experienced.
• If demand is elastic then ?E is greater than
  the ?W and aggregate earnings of low-wage
  workers will fall.
• Good research must be guided by good theory.
• Issues that must be addressed by research into
  the minimum wage include
• Nominal vs. real wages
• Min wages are set in nominal terms ie. in s/hr
  BUTgeneral price inflation gradually lowers the
  real minimum wage changing incentives for
  employers SO
• Must divide the Wmin by average hourly earnings
• Must allow for regional differences in wages and
  prices.

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Holding other things constant

• We want to measure the employment effect of a
  higher minm wage only. But what if labour demand
  in that sector is growing?

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Effects of uncovered sectors

• Non-supervised and non-complying firms.
• As total supply of labour to both sectors is
  fixed an ?Wmin in the covered sector reduces
  employment there ? supply to the uncovered sector
  ? ?W there.

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Intersectoral shifts in product demand

• Product price changes depend on the proportion of
  the low-wage labour cost to total cost of
  production. Where this proportion is lower cf.
  other sectors relative output prices may fall
  leading to a scale effect which dominates
  increasing the employment of this now higher
  waged labour.
• So increased minimum wages can increase
  employment in some subsectors but at the expense
  of others.
• Need to look at entire sectors not individual
  firms or subsectors.

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Employment effects Empirical effects

• Results are sensitive to research design or
  methodology.
• Some results give no (others a ve) effect on
  employment of an increase in the minm wage for
  teenagers.
• Labour demand elasticities are typically of the
  order of
• 0.1 to 0.3 for teenagers covered by minm wage
  legislation.
• One explanation is the monopsony model and how
  employment increases in the face of mandated wage
  increases.
• Does the minimum wage fight poverty
• DL is at worst very inelastic then a minm wage
  increase should increase total earnings going to
  the low-wage workers as a whole.
• However most teenagers benefitting from the minm
  wage increase come from non-poor families.
• So the minm wage is a relatively blunt instrument
  with which to reduce poverty.

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Technological Change and labour demand

• TC ? shifts in product demand curves and changes
  in demand elasticities both of which influence
  own-wage labour demand elasticities.
• The introduction of new products often requires
  painful adjustment to the new environment.
• TC ? can lead to the substitution of new K for L
  but where L and the new K are gross complements a
  fall in the product price ? an increase in the
  demand for L (usually skilled).
• Even factors that are substitutes in production
  can be gross complements (if scale effects are
  large enough).
• TC ? scale effects which change the composition
  of E.

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II. International trade and the demand for labour

• The more open an economy the greater are X IM
  to GDP (58 for NZ approx 25 for the US).
• The public are often inclined to support laws
  which restrict free trade b/c of the view that
  low foreign wages will inevitably cause
  employment losses at home.
• But the effects of trade on the Ld is analogous
  to the effects of TC and that two countries will
  generally find trade mutually beneficial
  regardless of their respective wage rates.
• Ch 4A 2 countries (US China) 2 goods (food
  and clothing) USs LF 100m Chinas LF 500m

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Figure 4A.1
Hypothetical Production Possible Curves,
United States
x
-0.9
x
-0.5
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Figure 4A.2
Hypothetical Production Possibilities Curves,
China
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Labour market implications

• Trade is determined by the relative internal
  (real) costs of production and not by the living
  standards (real wages) in two different
  countries.
• Trade can cause employment to shift across
  industries which ? UEt if workers, employers or
  mkt wages are slow to adjust.
• However theres no reason for this UEt to become
  permanent and trade does not condemn jobs in high
  wage countries to extinction.

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ECON 301 Week 4 Wed 6th 12 - 12.50 pm

• I. Quasi-fixed costs and their effects on labour
  demand
• These are nonwage labour costs ie.
• Hiring and training costs
• Employee benefits eg. holiday and sick pay
  entitlements, ACC, superanuation and redundancy
  payments
• These are borne by the firm on a per-worker basis
  and are mostly independent on hours worked.
• They explain why some firms prefer to work their
  existing workforce longer on penal rates rather
  than hiring more staff.

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I. Training costs

• Explicit monetary costs
• in hiring trainers and
• of materials used in the training process
• Implicit costs
• of using capital and experienced workers
  suboptimally
• of the employees time
• Recruitment agencies can reduce total time spent
  screening and interviewing from 22 hrs to 15 hrs.
• Another study indicated that 1/3 of new workers
  1st 3 months was spent in some form of training.
• The high-wage low-wage strategy.

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Employee benefits

• Accident compensation, superannuation, holiday
  and sick pay entitlements, and other legally
  required payments can be as much as 30 of total
  remuneration.
• These non-wage benefits have been growing over
  time.
• Many of the non-wage costs are costs per worker
  rather than costs per hour worked.
• In the US UEt insurance is another quasi-fixed
  cost.

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The employment hours trade-off

• Our simple model of lab demand assumed L had to
  increase to produce more Q in the short run but
• if instead average hours per employee increased
  then
• we can think of the MPL as two marginal products
• MPM (where M denotes the no of workers hired) and
  the
• MPH (where H denotes the average no of hrs each
  works)
• Both MPM and MPH are positive and subject to
  diminishing returns
• What is the optimal employment/hours combination?
• To minimise the cost of producing any level of Q
  
• MEM MEH
• MPM MPH

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The Predicted Relationship Between MEM/MEH and
Overtime Hours
Figure 5.1
If MEM rises relative to MEH rises more overtime
is worked. What would an increase in penal rates
to double time do for Overtime? Increased
employment?
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What about the part-time to full-time employment
mix?

• This ratio has increased substantially over the
  past 4 decades. WHY?
• Supply side reasons
• Married women balancing child care with P/T work
• Older workers phasing into retirement
• Students wanting to finance their education
• Demand side reasons
• Growth in the share of service sector employment
  opportunities
• Any legislation which madates an increase in
  quasi-fixed costs of P/T emploment will reduce
  P/T empoyment.

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Investment in hiring and training increase the
MPL in future periods ie. MP1 gt MP0
Effects of Training on Marginal Products Schedules

• Figure 5.2

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Multiperiod Demand for Labour
Figure 5.3
The firm should employ labour up to the point
where the PVP PVE ie. MP0 MP1/(1 r) W0
Z W1/(1 r) or W0 Z - MP0 (MP1 - W1)/(1
r)
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General and specific training

• general training increases an individuals
  productivity to many employers
• specific training increases an individuals
  productivity only to the firm theyre employed
  with
• eg. compare teaching a person to use a computer
  program vs. training someone to use a plant
  specific machine.
• If the individual undertakes general training
  that increases their worth to MP1 then they will
  force workers to pay the full costs of their
  training by paying wages less than their MP0 by
  an amount equal to the direct training costs.
• If the individual receives specific training
  that increases their worth to MP1 then they can
  offer to pay for the training b/c they can pay a
  wage W1 above W but below MP1 (allowing them to
  recoup investment costs).

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A Two-Period Wage Stream Associated with Specific
Training
Figure 5.4
The degree of worker mobility will determine how
far below W in the 1st period and how far above
W in the 2nd period they must pay to induce
those workers to stay.
The higher W0 is relative to MP0 during
training, the greater are the training costs
borne by the firm.
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Figure 5.5
Productivity and Wage Growth, First Two Years on
Job, by Occupation and Initial Hours of
Employer Training
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Next Week Tue 11th Aug 1 1.50 pm

• Begin labour supply so over the next 2 weeks read
  Chs 6 and 7 of ES.
• 2nd Tutorial on Thurs 7th of August.