Chapter 16 – Labor Markets

Individual labor supply Labor-leisure tradeoff Effects of a wage increase:

substitution effect income effect

Backward-bending labor supply curve

Market labor supply curve reservation wage = lowest

acceptable wage offer horizontal summation of individual

labor supply curves market labor supply curve is

expected to be upward sloping (since different individuals have different reservation wages)

Equilibrium

Compensating wage differentials Differences in wages caused by

differences in nonwage job characteristics: risk educational requirements stress geographical location

Wages and job risk

Human capital A measure of an individual’s productive

capacity Individuals who are more productive receive

higher wages. An individual’s human capital may be

increased by investments in: education work experience health care

Individuals invest in additional human capital if the lifetime benefits exceed the lifetime costs

General and firm-specific human capital General human capital – raises

productivity in more than one firm Firm-specific human capital –

raises productivity only in the current firm

Long-term employment relationships are common when there are nontrivial investments in firm-specific human capital.

CEO pay packages CEOs earn more than 200 times as

much as an average worker Due to separation of ownership

and control of corporations? Tournament theory

Discrimination occurs when pay or job market opportunities

are tied to factors other than a worker’s productivity

Discrimination due to prejudice: employer prejudice worker prejudice customer prejudice

Competitive labor markets and employer prejudice?

Enclave effects and worker and customer prejudice?

Statistical discrimination occurs if workers are judged based

on the average characteristics of the groups of which they are members

affects women and older workers (especially when there are substantial training costs).

Crowding and occupational segregation Statistical discrimination and

prejudice may result in occupational segregation and “crowding” in labor markets in which there is a large proportion of women or minorities

Antidiscrimination law Civil Rights Act of 1964 – made it

illegal to discriminate on the basis of race, color, religion, sex, or national origin (except when there is a legitimate reason for such policies)

Standards of discrimination Disparate treatment

occurs when a policy intentionally treats individuals differently based on their sex, race, color, religion, or national origin

perpetuates past discrimination? Disparate impact

based on outcomes of policies, not intention of policies

stricter standard, designed to offset past discrimination

Complete unionization in a perfectly competitive market

D

Swage

Quantity of labor

union wage

Union and nonunion firms in a perfectly competitive labor market

Bilateral monopoly

monopsony wage

Bilateral monopoly (cont.)

monopsony wage

union wage

Minimum wage laws equivalent to effect of union perfectly competitive labor market

w/ complete coverage perfectly competitive labor market

with incomplete coverage monopsony

“Superstar” effects Some athletes, musicians, actors,

etc. receive wages substantially above the wages of others

Due to the high return that these workers provide to their employers

A form of economic rent