Labor markets and income distribution

1
Labor markets and income distribution

• Today Value of work, human capital, unions,
  discrimination, and income distribution

2
Today 5 mini-lectures about labor markets

• Value of work
• How much is labor worth?
• Human capital
• Training, education, experience, etc.
• Unions
• Direct effects and indirect effects
• Discrimination
• What does theory tell us about discrimination?
• Income distribution
• Is income inequality a bad thing?

3
Value of work

• Will every person get the same wage for the same
  hour of work?
• Maybe
• It depends what the structure of the market is
• It depends on the marginal value of the hour of
  work

4
Suppose a competitive labor market

• If each persons hour of work results in 50 in
  additional output, should each worker get paid
  50 per hour?
• Not quite
• You have to deduct the firms costs
• Capital costs
• Input costs
• Transaction and handling costs

5
Simple example with input and capital costs

• I need 20 in supplies and one hour to build a
  small cabinet
• The firm I work for also needs to rent a cubicle,
  at 8 per hour
• Once I finish building the cabinet, the firm can
  sell it to a wholesaler for 50
• What is my worth to the company?

6
What is my worth to the company?

• The company is willing to pay up to 22 per hour
  for my labor to build cabinets
• Costs 28 (supplies and cubicle)
• Benefits 50
• In a competitive environment, if Firm X offers
  less then 22, Firm Y can offer me more than what
  Firm X does
• The battling between Firms X and Y will continue
  until one offers 22

7
Marginal product of labor

• In this example, my marginal product (MP) of an
  hour of labor is 1 cabinet
• The value of my marginal product (VMP) of an hour
  of labor is the additional value my hour of work
  produces 22
• All workers just like me will earn 22 per hour
  in a competitive labor market

8
Suppose that you could build two cabinets per hour

• Should you earn 22 per hour?
• No
• Costs per hour 48 (Supplies for two cabinets
  and one hours cubicle rental)
• Benefits per hour 100 (two cabinets)
• You should earn 52 per hour for your work

9
Back to an old example
of empl./day Phones per day
0 0

1 20

2 45

3 55

4 63

5 67
10
Recall the following information

• Phones sell for 18 each
• Variable cost is 100 per worker
• Only other costs are fixed

11
Different analysis, same resultProduce as long
as VMP gt 100
of empl./day Phones per day MP (extra phones per day) VMP ( per day)
0 0
20 360
1 20
25 450
2 45
10 180
3 55
8 144
4 63
4 72
5 67
Hire?
Yes
Yes
Yes
Yes
No
12
Recall this table from Lecture 6 We hire 4
workers either way
of empl./day Phones per day MB (/phone) MC (/phone)
0 0
18.00 5.00
1 20
18.00 4.00
2 45
18.00 10.00
3 55
18.00 12.50
4 63
18.00 25.00
5 67
13
When analyzing labor problems

• You can often choose the method you use to
  maximize a firms benefits
• Notice that we get the same answer either way

14
Summary Value of work

• In a competitive labor market, the long-run
  equilibrium wage is a workers VMP
• More productive workers will get paid more in a
  competitive environment equilibrium
• Some labor problems that were analyzed using the
  MB/MC approach can also be analyzed using a VMP
  approach

15
Human capital

• Human capital comprises of the characteristics
  that affect the value of the persons work when
  hired
• The better the characteristics of human capital,
  the more a person is likely to earn

16
Some human capital qualities

• Education
• Direct knowledge
• Intelligence
• Signaling
• Training
• Work and life experiences

• Energy level
• Work habits
• Trustworthiness
• Initiative

17
Education sends many messages to a potential
employer

• I have learned everything needed to finish this
  level of education
• I am intelligent enough to finish this
  education, which probably means I am smarter than
  those without my level of education
• I am using this level of education to send a
  signal that I have other good qualities that you
  are looking for others that do not finish this
  level of education can say the same thing

18
Education and employment

• Many jobs require a minimum level of education to
  be considered for a job
• M.D. to be hired as a doctor
• License for many specialized fields
• Real estate
• Pilot
• High school or college diploma for many
  entry-level jobs

19
Education and employment

• The more education you have, the higher you are
  in demand for your services
• Exceptions People that get a Ph.D. in the
  humanities often end up in the same type of job
  that they had before

20
For more on education

• See Mandatory starting dates for kindergarten,
  p. 367
• See Economic Naturalist 13.4, p. 387
• A new class is being developed in the Economics
  department

21
Summary Human capital

• Many characteristics form human capital
• Education probably most important for most people
• Human capital is valued by employers due to the
  fact that it increases a workers productivity

22
Unions

• Unions form so that workers can collectively
  bargain
• Wages
• Working conditions

23
Unions and wages

• Can anyone unionize and demand higher wages?
• In most cases, yes
• Demands will not always be agreed to
• As wage increases, the firm can employ fewer
  people profitably

24
When are unions effective?

• Finding qualified workers outside of a union is
  difficult or impossible
• Example Writers strike
• See Additional reading on class website for
  more on this topic
• When a firm is making economic profits
• When a unionized firms can hire better workers
  than nonunionized firms

25
Quote from writers strike article

• In the world of labor negotiations today, the
  writer of a hot TV show has more power than an
  auto assembly worker with a rivet gun.
• (From Writers a rarity a union with power.
  Posted 11/5/07. See http//www.msnbc.msn.com/id/2
  1598412/)

26
Why can writers form a powerful union?

• Few good outsourcing options
• Requires specialized skills
• Unionization of all writers means that no writer
  will write for a show without the unions
  blessing
• Scabs that write without the unions blessing
  during a strike are often unable to obtain work
  once the strike is over

27
What can networks do to combat the writers union?

• More unscripted programming
• Reality shows
• Game shows
• Sports
• TV news magazines (60 Minutes, 20/20, etc.)
• Specials (Barbara Walters, concerts)

28
Summary Unions

• Unions can be effective in some situations
• When workers doing the same kind of job are
  heterogeneous in human capital
• When replacement workers cannot easily be found
• No good outsourcing options
• Nobody outside of the union is able to do the job

29
Discrimination

• The wage gap between men and women has been a
  hot topic for decades
• How much of this is due to discrimination?
• How much of this is due to other factors?

30
Recall human capital theory

• Human capital theory says that wages are
  determined by factors such as education and
  experience
• Education likely to affect wage gap
• Mid-20th century More men than women with
  college education
• Today 4 women graduate college for every 3 men

31
The wage gap, declining

• As more women enter the work force, the wage gap
  declines
• More women enter a job with the same education as
  men
• Despite changes in education, there is still a
  wage gap

32
What else explains the wage gap?

• Holding constant important factors such as
  occupation, education, field of expertise, and
  years of experience
• Men often choose majors with high salary
  potential after graduation
• Math, science

33
What else explains the wage gap?

• Customer discrimination
• Examples
• Lawyers
• Physicians
• Incorrect conclusions about the relative
  productivity of men and women

34
Does discrimination actually occur?

• Probably
• Likely due to the incorrect conclusions about the
  productivity of men and women

35
Does discrimination actually occur?

• Example of what might be occurring
• Some managers may look at two candidates for a
  promotion, one male, one female
• Both are nearly equally qualified
• On paper, most managers would promote the woman
• 90 of managers would promote the woman based
  solely on human capital

36
Does discrimination actually occur?

• Some managers may have experiences from the past
  that women are family oriented and men are
  career oriented
• Although todays workforce is more homogeneous
  than it used to be, some managers may
  subconsciously favor the man when the gender of
  both applicants is known
• When gender of both is known, maybe only 30 of
  managers promote the woman

37
Does discrimination actually occur?

• In jobs where men are mostly managers, they may
  incorrectly weigh human capital traits
• High weight to human capital traits that men have
  more of
• Low weight to human capital traits that women
  have more of

38
Does discrimination actually occur?

• What will happen when these managers get it
  wrong?
• Promotion of a lower-productivity worker
• Lower productivity leads to lower profits
• Lower profits lead to a higher likelihood that a
  business in a perfectly competitive environment
  will not survive in the long-run
• Higher productivity worker may find a better job
  at another firm

39
Does discrimination actually occur?

• Results of this example
• When human capital differences are clear, the
  best candidate will get the promotion
• When human capital differences are not clear, the
  promotion may be more likely to go the male
  worker
• Perfectly competitive firms that discriminate are
  less likely to survive in the long run

40
Summary Discrimination

• A wage gap between men and womens pay has
  existed for decades
• Some of this can be explained by controlling for
  education, experience, and other factors
• Some discrimination may be occurring
• Firms that do discriminate based on factors such
  as gender and race are less likely to be
  competitive in the long run

41
Income distribution

• Is income inequality a bad thing?
• Some argue that people would prefer more income
  equality
• Others argue that economic incentives are needed
  to keep the economic pie from getting smaller

42
Mean income table (families), from F/B, p. 411
(2000 dollars)
Quintile 1980 1990 2000
Bottom 20 percent 12,756 12,625 14,232
Second 20 percent 27,769 29,448 32,268
Middle 20 percent 41,950 45,352 50,925
Fourth 20 percent 58,200 65,222 74,918
Top 20 percent 97,991 121,212 155,527
Top 5 percent 139,302 190,187 272,349

• Real income growth, 1980-2000
• Bottom 20 has been flat
• Top 20 has seen huge growth (59)

43
The gap between rich and poor widens

• The rich are getting richer, but the poor are not
  getting poorer
• The middle class has seen moderate real growth in
  income
• 16-29 growth for the categories in the middle 60

44
The veil of ignorance

• John Rawls, a moral philosopher, came up with the
  following argument to create income equality
• Veil of ignorance
• Conceals knowledge and talents from people
• Risk averse people will want to have income
  equality under these conditions
• No inferiority, jealousy or envy based on income

45
Problems with income inequality

• Those that are relatively poor may feel inferior
• This problem may perpetuate to their children
• Jealousy towards other people
• Envy towards other peoples accomplishments

46
Problem The economic pie will shrink with
Rawls ideas

• If income was guaranteed to be equal to everyone,
  nobody will have an economic incentive to gain
  human capital
• Smaller economic pie
• Less human capital
• People work less

47
Is there an optimal amount of income inequality?

• Impossible to answer
• Different people have different opinions about
  effectiveness of realistic ways to redistribute
  income

48
Some methods of income redistribution ( their
problems)

• Welfare payments
• Little economic incentive to get off of welfare
  without time limits
• Negative income tax
• Incentive to work for pay diminishes

49
Some methods of income redistribution ( their
problems)

• Minimum wage
• Unemployment
• Public employment of the unemployed
• Needs to have enough incentives for unemployed
  people to want to work
• Needs to have incentives low enough for employed
  people to stay in their old job

50
A success story ofincome redistribution

• The earned-income tax credit (EITC)
• The working poor receive a sizable credit for
  working and making an income in a given range
• Essentially a negative income tax for those
  working and making low incomes

51
Summary Income distribution

• In recent decades, income inequality has grown
• Due mostly to large real growth in upper income
  groups
• Income equality is a moral issue, but with many
  costs when implemented
• The EITC is a success story of balancing income
  redistribution and economic incentives