Modern Labor Economics This page intentionally left blank Modern Labor Economics Theory and Public Policy Eleventh Edition Ronald G Ehrenberg School of Industrial and Labor Relations Cornell University Robert S Smith School of Industrial and Labor Relations Cornell University Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor-in-Chief: Donna Battista Senior Acquisitions Editor: Adrienne D’Ambrosio AVP/Executive Editor: David Alexander VP/Editorial Director: Sally Yagan Project Manager: Jill Kolongowski AVP/Executive Marketing Manager: Elizabeth Averbeck Marketing Assistant: Ian Gold Senior Managing Editor (Production): Nancy Fenton Senior Production Project Manager: Kathryn Dinovo Permissions Coordinator: Michael Joyce Production Manager: Fran Russello Art Director: Jayne Conte Cover Design: Bruce Kenselaar Cover Image Credit: Alena Brozova/iStockphoto Full-Service Project Management: Chitra Ganesan/PreMediaGlobal Printer/Binder: Edwards Brothers Cover Printer: Lehigh Phoenix Typeface: Palatino 10/12 Copyright © 2012, 2009 by Pearson Education, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher Printed in the United States of America For information on obtaining permission for use of material in this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617-671-3447, or email at http://www.pearsoned.com/legal/permissions.htm Library of Congress Cataloging-in-Publication Data Ehrenberg, Ronald G Modern labor economics : theory and public policy / Ronald G Ehrenberg, Robert S Smith — Eleventh ed p cm Includes index ISBN-13: 978-0-13-254064-3 ISBN-10: 0-13-254064-9 Labor economics Labor policy Personnel management I Smith, Robert Stewart II Title HD4901.E34 2012 331—dc22 2011002784 ISBN-13: 978-0-13-254064-3 ISBN-10: 0-13-254064-9 Brief Contents Contents vi Preface xviii CHAPTER INTRODUCTION CHAPTER OVERVIEW OF THE LABOR MARKET CHAPTER THE DEMAND FOR LABOR CHAPTER LABOR DEMAND ELASTICITIES CHAPTER FRICTIONS IN THE LABOR MARKET CHAPTER SUPPLY OF LABOR TO THE ECONOMY: THE DECISION TO WORK CHAPTER LABOR SUPPLY: HOUSEHOLD PRODUCTION, THE FAMILY, AND THE LIFE CYCLE 208 CHAPTER COMPENSATING WAGE DIFFERENTIALS AND LABOR MARKETS CHAPTER INVESTMENTS IN HUMAN CAPITAL: EDUCATION AND TRAINING CHAPTER 10 WORKER MOBILITY: MIGRATION, IMMIGRATION, AND TURNOVER 323 CHAPTER 11 PAY AND PRODUCTIVITY: WAGE DETERMINATION WITHIN THE FIRM 357 CHAPTER 12 GENDER, RACE, AND ETHNICITY IN THE LABOR MARKET CHAPTER 13 UNIONS AND THE LABOR MARKET CHAPTER 14 UNEMPLOYMENT CHAPTER 15 INEQUALITY IN EARNINGS 531 CHAPTER 16 THE LABOR-MARKET EFFECTS OF INTERNATIONAL TRADE AND PRODUCTION SHARING 559 25 59 94 127 Subject Index 241 278 393 443 495 Answers to Odd-Numbered Review Questions and Problems Name Index 165 587 637 642 v Contents Preface xviii CHAPTER INTRODUCTION The Labor Market Labor Economics: Some Basic Concepts Positive Economics The Models and Predictions of Positive Economics Normative Economics Normative Economics and Government Policy 10 Efficiency versus Equity 11 Plan of the Text Example 1.1 12 Positive Economics: What Does It Mean to “Understand” Behavior? Review Questions 13 Problems 14 Selected Readings 15 Appendix 1A Statistical Testing of Labor Market Hypotheses CHAPTER 16 OVERVIEW OF THE LABOR MARKET 25 The Labor Market: Definitions, Facts, and Trends 26 The Labor Force and Unemployment 27 Industries and Occupations: Adapting to Change 30 The Earnings of Labor 31 How the Labor Market Works 35 The Demand for Labor 36 The Supply of Labor 40 The Determination of the Wage 42 Applications of the Theory 47 Who Is Underpaid and Who Is Overpaid? 48 International Differences in Unemployment 53 Example 2.1 The Black Death and the Wages of Labor Example 2.2 Forced Labor in Colonial Mozambique 46 50 Empirical Study Pay Levels and the Supply of Military Officers: Obtaining Sample Variation from Cross-Section Data 52 vi C ont ent s vii Review Questions 55 Problems 57 Selected Readings 58 CHAPTER THE DEMAND FOR LABOR 59 Profit Maximization 60 Marginal Income from an Additional Unit of Input Marginal Expense of an Added Input 63 61 The Short-Run Demand for Labor When Both Product and Labor Markets Are Competitive 63 A Critical Assumption: Declining MPL 64 From Profit Maximization to Labor Demand 65 The Demand for Labor in Competitive Markets When Other Inputs Can Be Varied 70 Labor Demand in the Long Run More Than Two Inputs 72 70 Labor Demand When the Product Market Is Not Competitive Maximizing Monopoly Profits 74 Do Monopolies Pay Higher Wages? 74 75 Policy Application: The Labor Market Effects of Employer Payroll Taxes and Wage Subsidies 76 Who Bears the Burden of a Payroll Tax? 76 Employment Subsidies as a Device to Help the Poor 79 Example 3.1 The Marginal Revenue Product of College Football Stars 62 Example 3.2 Coal Mining Wages and Capital Substitution 72 Empirical Study Do Women Pay for Employer-Funded Maternity Benefits? Using Cross-Section Data over Time to Analyze “Differences in Differences” 80 Review Questions 82 Problems 83 Selected Readings 84 Appendix 3A Graphical Derivation of a Firm’s Labor Demand Curve 85 CHAPTER LABOR DEMAND ELASTICITIES 94 The Own-Wage Elasticity of Demand 95 The Hicks–Marshall Laws of Derived Demand 97 Estimates of Own-Wage Labor Demand Elasticities 100 Applying the Laws of Derived Demand: Inferential Analysis 102 viii C on te n t s The Cross-Wage Elasticity of Demand 104 Can the Laws of Derived Demand Be Applied to Cross-Elasticities? Estimates Relating to Cross-Elasticities 107 Policy Application: Effects of Minimum Wage Laws 105 108 History and Description 108 Employment Effects: Theoretical Analysis 109 Employment Effects: Empirical Estimates 113 Does the Minimum Wage Fight Poverty? 115 “Living Wage” Laws 116 Applying Concepts of Labor Demand Elasticity to the Issue of Technological Change 116 Example 4.1 Industry? Why Are Union Wages So Different in Two Parts of the Trucking 103 Example 4.2 The Employment Effects of the First Federal Minimum Wage 114 Empirical Study Estimating the Labor Demand Curve: Time Series Data and Coping with “Simultaneity” 122 Review Questions 124 Problems 125 Selected Readings 126 CHAPTER FRICTIONS IN THE LABOR MARKET 127 Frictions on the Employee Side of the Market 128 The Law of One Price 128 Monopsonistic Labor Markets: A Definition 131 Profit Maximization under Monopsonistic Conditions 132 How Do Monopsonistic Firms Respond to Shifts in the Supply Curve? 136 Monopsonistic Conditions and the Employment Response to Minimum Wage Legislation 139 Job Search Costs and Other Labor Market Outcomes 140 Monopsonistic Conditions and the Relevance of the Competitive Model 142 Frictions on the Employer Side of the Market 143 Categories of Quasi-Fixed Costs 143 The Employment/Hours Trade-Off 147 Training Investments 151 The Training Decision by Employers 151 The Types of Training 152 Training and Post-Training Wage Increases 153 Employer Training Investments and Recessionary Layoffs 155 C ont ent s Hiring Investments ix 156 The Use of Credentials 156 Internal Labor Markets 159 How Can the Employer Recoup Its Hiring Investments? 160 Example 5.1 Does Employment Protection Legislation Protect Workers? 144 Example 5.2 “Renting” Workers as a Way of Coping with Hiring Costs 149 Example 5.3 Why Do Temporary-Help Firms Provide Free General Skills Training? 157 Empirical Study What Explains Wage Differences for Workers Who Appear Similar? Using Panel Data to Deal with Unobserved Heterogeneity 158 Review Questions 161 Problems 162 Selected Readings 164 CHAPTER SUPPLY OF LABOR TO THE ECONOMY: THE DECISION TO WORK 165 Trends in Labor Force Participation and Hours of Work 165 Labor Force Participation Rates 166 Hours of Work 168 A Theory of the Decision to Work 170 Some Basic Concepts 170 Analysis of the Labor/Leisure Choice 175 Empirical Findings on the Income and Substitution Effects 190 Policy Applications 192 Budget Constraints with “Spikes” 193 Programs with Net Wage Rates of Zero 196 Subsidy Programs with Positive Net Wage Rates 200 Example 6.1 The Labor Supply of Pigeons 173 Example 6.2 The Labor Supply of New York City Taxi Drivers 175 Example 6.3 Do Large Inheritances Induce Labor Force Withdrawal? Example 6.4 Daily Labor Supply at the Ballpark Example 6.5 Labor Supply Effects of Income Tax Cuts 192 Example 6.6 Staying Around One’s Kentucky Home: Workers’ Compensation Benefits and the Return to Work 195 Example 6.7 Wartime Food Requisitions and Agricultural Work Incentives 204 185 190 Empirical Study Estimating the Income Effect among Lottery Winners: The Search for “Exogeneity” 202 Review Questions 205 Problems 206 Selected Readings 207 Subject Index substitution effects and, 172–174, 184–187, 190–191 support programs, 579 wage constraints and, 178–181 wage increase and substitution effects, 183–184 wealth and, 171 Income effect, 171–172, 181–183, 197 wage increase and, 184f work hours and, 188f Income replacement programs, 193 work-incentive aspects, 194 Income tax cuts, labor supply effects, 192 Incomplete contracts, 359–360 Indentured servitude, 257 Independent variable, 17 holding constant, 21 Index of dissimilarity, 400 Indicators, acquired, 306 Indifference curves, 213, 263, 176–178, 176f, 178f, 210 budget constraint and, 179f, 182f leisure hours, 179f negatively sloped, 178f Individual data, 420 Individual incentives, 368–369 Individual model, 209–211 budget constraint, 211 implications, 211–214 income and substitution effects, 211 preferences, 210–211 Industrial unions, 444 Industries, occupations and, 30–31 Inelastic demand, 97 curve, 95 Inequality causes, 542–551 measuring, 532–535 Inequity, 533 Inferential analysis, 102–104 Information asymmetries, 360–362 Inheritance, labor force withdrawal and, 187 Input, 60 complements, 74 production substitutes, 73f substitutes, 73 Institutional forces, changes in, 549–551 Interest arbitration, 470 Intergenerational data, economic mobility and, 550–551 Internal comparison, 561 Internal labor markets, benefits, 159 Internal rate of return method, 282, 286, 301 International Labour Organization (ILO), 220 International trade, production-sharing and, 559–560, 577–583 Investment behavior, 278 education model, 292 firm-specific, 386 in worker knowledge and skills, 279–280 Isoexpenditure lines, 89, 90 Isoprofit curves, 252 employer, 252f flatter slope, 264–265 steep slope, 265–266 unitary slope, 264 Isoquant, 85 convexity of, 86 J Japan, openness and trade, 567 Job loss, demand and, 111f Job matching, 241–248 unemployment benefits and, 508 Job search costs, 142 labor market outcomes and costs, 140–142 model, 502–504 theory, 502–505 Job tenure, 350t earnings and, 385–389 wages and, 141 Job training, women and, 299 Joint decision, 218 Joint labor supply decisions, 214–221 Journeymen workers, 464 K Kentucky, worker compensation benefits and, 195 Knowledge and worker skills, investment in, 279–280 L Labor aggregate demand for, 514–515 allocation, 243 average cost and marginal expense, 138 categories, 72–73 contract, earnings, 31–35 economics, 2–3 energy and, 107 marginal expense of, 132–133 marginal product of, 64t short-run demand, 63–70 skilled and unskilled, 107–108 Labor costs, 99–100 variable, 127 Labor demand, 36–40, 59–60, 101t analysis, 39–40 changes, 545–548 elasticity, 116–124 long run, 70–72, 88–93 markets and, 70–74 money wages and, 67–69 net effect, 571–575 non-competitive market, 74–76 product demand and, 38f profit maximization and, 65–70 real wages and, 65–67 real wage terms, 65 responses, employers, 100 schedule, 37t shifts, 39f, 476 short run, 66f, 68f, 87–88 trade and, 566–575 645 Labor demand curve, 37f, 38, 39, 122–123 long vs short run, 40 production function, 85–87 scale effect, 92–93 substitution effect, 91–92 union actions to alter, 462–464 union member employment and wage rates, 452f vertical shifts, 581f Labor force, 165 demographic changes, 458–459 unemployment and, 27–30 Labor force participation changes, 191 by gender, 28, 28t mothers of young children, 214t single mothers, 236 trends, 165–170 U.S., employment and unemployment rates, 496t Labor force participation rates, 166–168 American, 167 females, 166t, 168t gender and, 298t male, 167t race and gender, 406t Labor force withdrawal, inheritance and, 187 Labor investments, 143–145 Labor/leisure choice, preferences, 175–178 Labor-Management Relations Act See Taft-Hartley Act Labor-Management Reporting and Disclosure Act (Landrum-Griffin Act), 447 Labor market, 349f categories, 28 competitive, 63–70 crowding, 421f discrimination, identifying, 434–435 dual, 421–422 engineers, 320f equilibrium, shifts, 44f, 45f, 47f flow states, 28 frictions, employee, 128–143 functions, theory applications, 47–55 immigration and, 340f internal, 159 local, 26 national, 26 nonpecuniary factors, outcomes, job search costs and, 140–142 policies, 580 policies, European meta-analysis, 582–583 stocks-flow model, 497–501, 497f supply curve, vertical, 78 unskilled, 111 Labor supply, 40–42, 165 ballpark, 190 changes, 543–545 child care and, 229, 230f, 231f curves, 78–79, 175f cycle, 221–229 military, 51, 51f mobility costs, 130f 646 Subject Index Labor supply, (continued) model, household production and, 208–214 monopsonistic firms and, 137f monopsonistic market and, 135f preferences, market demand and, 169 shifts, marginal expense and, 136–137 temporary wage increases and, 224 wage increases and, 233–234 Landrum-Griffin Act (1959), 447 Language proficiency, 410 Law of diminishing marginal returns, 64 Law of one price, 128–131 Layoffs, 273–277 experience, 520 training investments and, 155–156 unemployment insurance and, 521 Least squares regression analysis, 18 Legislation, on unions, 463 Leisure activities, weekly hours, 209t costs, 171 hours, 176f Less-than-truckload (LTL), 103 Levels of employment, 36 Lewis, H Gregg, 484 Lewis, John L., The Miners’ Fight for American Standards, 72 Life cycle time allocation, 223f wage increases, 222 Lifetime pension benefits, value of, 227 Lifetime perspective, 278 Living wage laws, 116 Local unions, 447–449 Lorenz curves, 554–558 Lottery winners, income effect, 203–204 LTL See Less-than-truckload M Magnitude, 95 Male earnings by ancestry, 409t full-time, 293f immigrant, 332f Mandated maternity benefits, 81 Mandatory retirement, 380 Mandatory transactions, Marginal changes, 60 Marginal expense (MEL), 133 added input, 63 labor supply shifts and, 136–137 Marginal income, 61–63 Marginal product, 61 labor schedule, 65 Marginal productivity, 87–88 decline of labor, 88f theory of demand, objections to, 69–70 Marginal product of labor (MPL), 61, 64t, 65, 148 downward-sloping, 66 Marginal rate of substitution, 177n Marginal rate of technical substitution (MRTS), 90 negative, 86 Marginal revenue, 61–62, 62–63 Marginal revenue product of labor (MRPL), 67–69, 67t, 135 Mariel boatlift, 342 Market-clearing wage, 43–44, 50 influences, 46–47 Market demand curves, 69, 77f labor supply preferences and, 169 supply and, 43f Market discrimination theories, 411–425 Market failure, 8–10 Market operations, 35–36, 35f Market productivity, versus home, 217f Markets competitive, labor demand and, 70–74 values and, Market supply, 40–41 curve, 41 paralegals, 41f Maternity benefits, employer-funded, 80–81 Mean earnings, demographic groups, 394f Measured productive characteristics, 420 Measurement Error in Consumer Price Index, 33n Mediator, 470 MEL See Marginal expense Merit increases, 373 Meritorious considerations, Merit-pay plans, 373 Method of least squares, 440 Miami, wage and unemployment rates, 342 Michigan furniture industry, 418 Migration characteristics of movers, 326–328 distance and, 328 earnings distribution, 328–330 economic reasons, 330 family, 330–331 internal, 330 international, earnings, 328–330 personal characteristics, 326–328 rates by education, 328t returns, 333 southern African-Americans, 227 time horizon, 329 Migratory flows, 325–326 Military officers, pay levels and supply, 52–53 Minimum wage effects, 112f Minimum wage laws debate, 94 effects of, 108–116 employment effects, 113–115 manufacturing, 109f monopsonistic condtions, 138f, 139–140 noncompliance, 111 poverty and, 115 rough laborers, 339f uncovered sectors, 111–113 Mobility, 323 See also Geographic mobility; Immigration; Migration Mobility costs labor supply and, 131 monetary and nonmonetary, 130 Models economic, 6–7 physical, Money wages, 65 labor demand and, 67–69 Monopolies profits, maximizing, 74–76 unionism, 451 wage rates of, 75–76 Monopsonistic conditions, 142–143 profit maximization, 132–136 Monopsonistic firms, supply curve shifts, 136–139 Monopsonistic labor markets, 131–132 labor supply and, 135f profit-maximizing, 135f Monopsony, search-related, 422–424, 423f Mozambique, forced labor, 50 MRPL See Marginal revenue product of labor MRTS See Marginal rate of technical substitution Multiple regression analysis, 20–21 Mutually advantageous, N National Commission on Employment and Unemployment Statistics, 221n National Football League (NFL), 62 National Institute for Occupational Safety and Health (NIOSH), 267–268 National Labor Relations Act (NLRA), 446, 460 National Labor Relations Board (NLRB), 461 Net wage rates subsidy programs with, 200–204 zero, 196–200 New entrants, 498 New York City taxi drivers, labor supply of, 175 NFL See National Football League NIOSH See National Institute for Occupational Safety and Health NLRA See National Labor Relations Act NLRB See National Labor Relations Board Nominal terms, 108 Nominal wages, 31–33, 515 Noncomparable jobs, 42 Nondiscrimination, mandated, 425 Nondiscriminatory hiring, racial composition, 431t Nonlabor income, 185, 203 Nonunion wage rates, 473 Normative economic analysis, Normative economics, 7–11 Normative principle, 123 No-strike wage demand, 466 Null hypothesis, 19 O Obesity, household production model and, 212 Occupational safety, 257–262 Occupational Safety and Health Act (1970), 257 Subject Index Occupational Safety and Health Administration (OSHA), 258–262 benefits, 261–262 standards, 259–260 Occupational segregation decline, 400 measurement, 399–401 wage discrimination and, 407–409 Occupations, industries and, 30–31 OECD See Organisation for Economic Co-operation and Development OFCCP See U.S Office of Federal Contract Compliance Programs Offer curve, 255–256, 256f Office of Federal Contract Compliance, 433 Offshore American jobs, 573 Offshored, 560 Omitted variables bias, 21, 24 problem, 21–24, 484–485 On-the-job training age-earnings profiles, 294–296 investments, 296f Opportunistic behavior, 361 Opportunity costs, 561 Organisation for Economic Co-operation and Development (OECD), 54n OSHA See Occupational Safety and Health Administration Outcomes, average tendencies, Out-of-pocket expenses, 280 Output, 87 corollaries, 60–61 effect, 38 optimal level, 60 Outsourced, 560 Overpayment, 377–381 Overtaking age, 296 Overtime effects, 151 exemptions, 149–150 hours, marginal expense and, 148f pay, 148–150 spreading and, 150 total pay and, 150–151 Own-wage elasticity, 101t conditions, 97 of demand, 95–104 estimates, 100–101 P Paid work single mothers and hours, 236 weekly hours, 209t Panel data heterogeneity and, 160–161, 160n, 351 Paralegals, supply and wages, 41–42 Parameters, 18 Parenthood, occupational choice and risk, 255 Pareto efficiency, 7, 9, 483 Pareto-improving, 8, 453 Pay comparisons, 367–368 firm size and, 389–390 for output, 368–371 for performance, 363 sequencing, productivity and, 377–385 for time, 373 union and nonunion gap, 484–485 variability, 367 Payments in kind, 34, 34f, 262, 263 Payroll subsidies, 79 Payroll tax burden of, 76–79 vertical supply curve, 78f Peer effects, 289 Pension benefits, lifetime value, 227 Pension fund contributions, 263 Perfect complements, 74 Performance, pay for, 363 Personal discount rates, immigrants and, 345 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), 198 Physical quantities, profit-maximization and, 65 Piece rates, 384 Pigeons, labor supply of, 173 Policy applications, 192 Political refugees vs economic immigrants, 351–352 Politicking, 373 Positive differentials, 244 Positive economics, 3–4 behavior and, models, 4–7 predictions, 4–7 Post-investment surplus, 159 Post-training revenue, 151 Potential productivity, 483 Poverty, minimum wage and, 115 Predictions, 4, Prejudice, personal models, 416–418 Present value, 280–282 method, 282, 286, 301 Price distortion, 10 Price elasticity, 106 Product demand, 38, 98, 113 elastic, 102 labor demand and, 38f shifts, 117, 462–463, 568–569 Production factors, 60, 98–99, 107–108, 569–571 function, 86f inputs, 73 without trade, 562–564 Production possibilities curve, 121f comparisons, 563f, 564f food and clothing, 119–120 with trade, 564–565 Production-sharing, international trade and, 559–560, 577–583 Productive characteristics, 404 measurable, 434 Productivity actual and potential, 483 bargaining, 464 career and, 383–385 fairness and, 387–388 interdependent, 218 pay and, 374–377 647 pay sequencing and, 377–385 rises and falls, 156 tenure and, 386 unions and, 480–481 wage growth and, 154f wide range of possible, 358 yearly pay and, 366–373 Product market competitive, 63–70 substitutions, 100 Profit maximization, 4, 60–63 employers, 412 labor demand and, 65–70 level, output falls, 92 long run, 70–72 requirement for, 71 rule, 66–67 Profits discrimination and, 416 unions and, 480–481 Profit-sharing plans, 366 Promotion tournaments, 381–383 incentives for effort, 381–382 problems, 382–383 PRWORA See Personal Responsibility and Work Opportunity Reconciliation Act Psychic losses, 280 Public goods, 10 Public sector bargaining, 469–472 training, 313–314 Q Quasi-fixed costs, 143–147 Quit-rate data, average-wage and, 17f, 17t, 22t Quit rates, 349f labor market and, 349f wages and, 22f, 23f Quota Law, 334 R Race and gender employment ratios, 406t unemployment rates, 406t Racial exclusion, 433 Railroad work, 248 Rational expectations, 321–322 Rationality, 3–4 “Rat race” in law firms, 383 Real wages, 31–33, 65, 515 calculations, 32 labor demand and, 65–67 Recessions, 221 labor supply and, 218–221 Reemployment bonuses, unemployment and, 526–527 Reentrants, 498 Regression analysis, 402 application, 439–442 Relative terms, 108 Relative wages discriminatory employers, 415f nondiscriminatory employers, 414f women and minorities, 414f 648 Subject Index Renting workers, 149 Replacement rate ratio, 506 Replication, union and nonunion pay gap, 484–485 Reservation wage, 50, 188–190, 504, 519 fixed time costs, 189f Reserve Officer Training Corps (ROTC), 53 Resource reallocation, 565–566 Retirement, 224–229 optimum age, 227f Right-to-work laws, 482 Risk, unknown, 261f Risk aversion, 490, 492 utility function, 491f wage rigidity and, 518 Risk-neutral party contract zone, utility function, 493f Risk of injury, 248–262 employee considerations, 249–250 employer considerations, 251–253 indifference curves, 251f matching, 253–257 normative analysis, 257–262 wages and, 250f Risk reduction benefit, 257–259 ROTC See Reserve Officer Training Corps Rough labor demand and supply, 337f, 339f employers of, 340 Russian Civil War, farmers’ budget constraint, 201f S Safety, 251 Safety net, 583 Sample selection bias, 233–234 Saudi Arabia, 45 Scale effect, 36, 38, 72, 98, 100, 105–106, 570–571 labor demand curve, 92–93 Scarcity, Schooling, ability and, 303 School quality, 311–313 Screening, problem of, 418f Search costs, prejudice and, 423 Seasonal unemployment, unemployment insurance and, 522 Selection bias, 304 Self-enforcement, 361 Seniority, 427 Shakers, 370 Shared surplus, 362 Share of labor, 571 Shift, supply curve, 40–41 Short-run labor demand elasticity, 100 Short run period, 63 Signaling, 307–308, 307f, 360–361 advocates of, 313 benefits and costs, 308f, 309f cautions, 309–310 human capital and, 311 model, 306–307 Signals, 306 Simultaneity, 122–123 Single mothers, labor force participation, 236 Skill-biased technological change, 545–547 Social investment, 313–314 Social norms, worker status, and wage rigidity, 518–519 Social Security benefits and earning, 226t payroll-tax liability, 146n Social welfare potential increases, 483–486 potential reductions, 482–483 Southern black migration, 327 Spanish-speaking immigrants, 410 Specialization, market and household, 215–216 Standard deviation, 534 Standard error, 19 Statistically significant, 20 Strategic Bombing Survey, 279 Strikers, permanent replacement, 467 Strikes asymmetric information and, 468 joint costs, 467 model, 464–466 negotiations and, 468 threat, 464–469 Structural unemployment, 508–514, 509f Subsidies general or selective, 79 net wage rates and, 200–204 not targeted, 79 programs, 200–204 welfare, 196–197 Subsidized employment, 579–580 Substitutability factors, 98–99 Substitutes in production, 73 Substitution, 98–99 restricting, 463–464 Substitution effect, 37, 38, 72, 91–92, 97, 101, 106–107, 172, 188, 197, 219, 569–570 findings, 190–191 income and, 184–187 income and wage increase, 183–184 lifetime, 222–223 wage increase and, 183f, 187f wage rise, 174–175 Supply capital, 38 demand, market levels, firm levels, and, 44f market demand and, 43f Supply curve, 40–42 paralegals, 41f Supply factors, 99 Surplus, 361–362 divisions, 362f Symphony orchestras, musician selection bias, 398 Synthetic cohorts, 351–352 T Taft-Hartley Act (1947), 446–447 Targeted Jobs Tax Credit (TJTC), 79, 81 Technological change, 116–124 compensated, 123 effects, 118–124 unemployment and, 54 Technological innovation, effects, 119 Technological invention, 120 Teenage employment, 114 Teenage minimum wage, 107, 107n Temporary-help firms, 157 Tenure, wages and, 386f Terms of employment, 36 Time-based pay moral hazard of, 364 with supervision, 364 Time series data, 16n, 122–123 Time-use data, 233–234 Title VII, 426 TJTC See Targeted Jobs Tax Credit TL See Full truckload Total compensation, 34, 34f Tournaments, 381–383 Trade exchange, 568 function of, 560 incentives, 562–566 Japan, 567 labor demand and, 566–575 open effects, 567 policy issues, 577–583 Trade Adjustment Assistance program, 578–580 Training age and, 295 costs, 145, 145t, 153 costs and returns, 153–155 decisions, 151–152 general skills, 1577 investments, layoffs and, 151–156 profiles, 294–296 returns, 151 types, 152–153 wages and, 153–155 Transaction barriers, Trucking deregulation, 461 industry, union wages, 103 T statistic, 19 Twinsburg Twins Festival, 316 U UI See Unemployment insurance Underemployed, 504 Underpayment, 377–381 Unearned income, 35 Unemployment costs, 142 cyclical, 514–521 defining, 495 demand-deficient, 514–521 demographic characteristics and, 524–525 Subject Index efficiency wages and, 511–514 frictional, 501–508 hidden, 221 international differences, 53–55 labor force and, 27–30 long-term, 55t, 511 natural rate, 524 re-employment bonuses and, 526–527 seasonal, 521–523 sources, 498–499 structural, 508–514 U.S., 499t Unemployment benefits, eligibility effects, 507–508 Unemployment compensation, financing, 519–521 Unemployment insurance (UI) benefits, 505–508 Canadian, 508 layoffs and, 521 payments, 277 payroll tax, 519–520 previous earnings and benefits, 506f seasonal unemployment and, 522 tax rates, 520f Unemployment levels, flow rates, 499–501 Unemployment rate, 29 black/white ratios, 406–407, 406t civilian labor forces, 29f demographic group, 525t economic hardship and, 496 natural, 525–527 U.S labor force, 496t Unemployment rate differences geographic imbalances, 510–511 occupational and regional, 509–511 occupational imbalances, 509–510 Unfair labor practice complaints, 462t Union bargaining, 464–469 centralized and decentralized, 444 constraints, 450 model, 464–466 model implications, 466–468 restricting substitution, 463–464 Union contracts efficient model, 452–456 formal model, 453–455 Union effects, 472 Unionism, international comparisons, 444–446 Unionization, demand and supply, 457f Union leaders, 468–469 Union membership, 444–456 competitive pressures, 460 decline, 459 demand and supply, 457–462 employer resistance, 460–462 selected countries, 445t U.S., 448f Union members (U.S.), 449t, 468–469 Union monopoly model, 451–452 Union objectives, constraints on, 449–451 Union representation elections, 462t Union resistance curve, 465 Unions, 26–27 employment effects, 479–480 normative analyses of, 481–486 procedural objectives, 449 productivity and profit effects, 480–481 spillover effects, 473f, 474 staffing requirements, 463 subcontracting, 463 threat effects, 474–475, 475f U.S legal structure, 446–449 wage rigidity and, 516–517 Union structure, 444–456 Union total compensation effects, 478–479 Union wages effects, 476–478 theory, 472–476 trucking industry, 103 Unitary elastic, 95 Unitary trade-off, 265f United Mine Workers, 72 Univariate test, 16–20 U.S Bureau of Labor Statitistics, 28t U.S Office of Federal Contract Compliance Programs (OFCCP), 430–431 Utility discrimination and, 416 labor, 581 maximization, 3–4, 245 V Values, markets and, Variables errors in, 267–268 holding independent constant, 21 omitted, 21–24 Vertical contract curve, 455 Voluntary transactions, W Wage/benefit offers, 265f nonunitary trade-offs, 266f Wage changes, 36–37, 188 supply and, 543f Wage convergence, 575–577 Wage curve, 513f Wage determination, 42–47 Wage differences, analyzing, 404 Wage differentials, impact on unemployment, 523 Wage discrimination, 398–399, 403–404 measurement, 401–402 monopsony and, 423f occupational segregation and, 407–409 Wage effects estimates, 573–575 Wage elasticity, 95 demand growth and, 451f long and short run, 98 Wage growth, productivity and, 154f Wage increases income and substitution effects, 183–184 income effect and, 184f labor supply and, 233–234 substitution and scale effects, 92f 649 substitution effect and, 183f, 187f temporary, 224 Wage levels, 140–141 Wage offers, 242–243, 503 distribution, 503f Wage outcomes, 122 Wage policies, monopsonistic conditions and, 135–136 Wage rate, 22, 31 downward-sloping function, 59–60 labor demand, 59–60 labor expense and, 132–133 Wage rigidity asymmetric information and, 517–518 downward, 515–519 human capital and, 517 risk aversion and, 518 unions and, 516–517 worker status, and social norms, 518–519 Wages, 31–35, 34–35, 264f above-market, 48–49, 48f below-market, 49–50, 49f effects of mandated, 137–139 employment levels and, 134–135 experience and, 141 hours and experience, 397 industry differentials, 129 nominal vs real, 110 occupation and, 396–397 paralegals, 42f quit rates and, 22f, 23f subsidies, labor market effects of, 76–81 tenure and, 141–142 unexplained differences, 397–398 variation, 160–161 Wages and benefits joint determination, 266–269 market determination, 267f Wage setting discretion, 76n Wage takers, 42 Wait unemployment union effects, 475–476 War, human capital and, 279 Wartime work requirements, 201 Wealth income and, 171 rises in, 171 Welfare constraints, 234–235 reform, 198 subsidies, 196–197 Welfare system basic, 197f income and substitution effects, 196f lifetime limits, 198 work requirements, 198–200, 199f Women age/earnings profiles, 300f college education and earnings, 290 college graduates, 301t earnings and education, 290 education and, 300–301 human capital and, 297–301 job training and, 299 650 Subject Index Work decision theory, 170 Worker choices, 242–244 Worker information, 241–248, 245–246 Worker knowledge and skills investment, 279–280 Worker mobility, 246, 324–325 costs, 129–130 Worker motivation, 359, 363 Worker preferences, 241–248 Worker productivity, pay and, 374 Workers, renting, 149 Workers’ compensation insurance, 195 Kentucky benefits, 195 Workers’ hours changes, 194 mix, 147–148 reduced, 185, 187 Worker sorting, 367, 378 Worker status, wage rigidity, and social norms, 518–519 Worker wages, and skills, 128 Work incentives, 378 Work requirement, 198–200 World War II Japan’s farmers’ budget constraint, 201f veterans, 288 Y Yearly net wage, 226 Yearly pay, productivity and, 366–373 Z Zero profit, 251 curves, 253f appendix 9B A Hedonic Model of Earnings and Educational Level T his chapter employs human capital theory to explore the demand for education and the relationship between education and pay This appendix uses the hedonic theory of wages (introduced in chapter 8) to more formally explore the factors underlying the positive association between wage and educational levels Thus, it treats the higher pay associated with a higher education level as a compensating wage differential Unless education is acquired purely for purposes of consumption, people will not undertake an investment in education or training without the expectation that by so doing, they can improve their stream of lifetime earnings or psychic rewards In order to obtain these higher benefits, however, employers must be willing to pay for them Therefore, it is necessary to examine both sides of the market to fully understand the prediction made over 200 years ago by Adam Smith that wages rise with the “difficulty and expense” of learning the job.1 Supply (Worker) Side Consider a group of people who have chosen sales as a desired career These salespersons-to-be have a choice of how much education or training to invest in, given their career objectives In making this choice, they will have to weigh the returns against the costs Crucial to this decision is how the actual returns compare with the returns each would require in order to invest Figure 9B.1 shows the indifference curves between yearly earnings and education for two workers, A and B To induce A or B to acquire X years of education would require the assurance of earning Wx after beginning work However, to induce A to increase his or her education beyond X years (holding utility constant) See Adam Smith, Wealth of Nations (New York: Modern Library, 1937), book 1, chapter 10 The five “principal circumstances” listed by Smith as affecting wages were first discussed in this text in chapter Appendix 9B A Hedonic Model of Earnings and Educational Level Figure 9B.1 Indifference Curves for Two Different Workers Wage Worker A Worker B Wx X Years of Education beyond Compulsory Level would require a larger salary increase than B would require A’s greater aversion to making educational investments could be explained in several ways Person A could be older than B, thus having higher forgone earnings and fewer years over which to recoup investment costs Person A could be more present-oriented and thus more inclined to discount future benefits heavily or could have less ability in classroom learning or a greater dislike of schooling Finally, A may find it more difficult to finance additional schooling Whatever the reason, this analysis points up the important fact that people differ in their propensity to invest in schooling Demand (Employer) Side On the demand side of the market, employers must consider whether they are willing to pay higher wages for better-educated workers If they are, they must also decide how much to pay for each additional year Figure 9B.2 illustrates employers’ choices about the wage/education relationship Employers Y and Z are both willing to pay more for better-educated sales personnel (to continue our example) because they have found that better-educated workers are more productive.2 Thus, they can achieve the same profit level by paying either lower Whether schooling causes workers to be more productive or simply reflects—or signals—higher productivity is not important at this point Demand (Employer) Side Figure 9B.2 Isoprofit Curves for Two Different Firms Wage Firm Z Zero-Profit Isoprofit Curves Firm Y Years of Education Required of Employees beyond Compulsory Level wages for less-educated workers or higher wages for more-educated workers Their isoprofit curves are thus upward-sloping (see chapter for a description of isoprofit curves) The isoprofit curves in Figure 9B.2 have three important characteristics: For each firm, the curves are concave; that is, they get flatter as education increases This concavity results from the assumption that at some point, the added benefits to the employer of an additional year of employee schooling begin to decline In other words, we assume that schooling is subject to diminishing marginal productivity The isoprofit curves are the zero-profit curves Neither firm can pay higher wages for each level of education than those indicated on the curves; if they did so, their profits would be negative and they would cease operations The added benefits from an extra year of schooling are smaller in firm Y than in firm Z, causing Y to have a flatter isoprofit curve Firm Y, for example, may be a discount department store in which “selling” is largely a matter of working a cash register While better-educated people may be more productive, they are not too much more valuable than lesseducated people; hence, firm Y is not willing to pay them much more Firm Z, on the other hand, may sell technical instruments for which a knowledge of physics and customer engineering problems is needed In firm Z, additional education adds a relatively large increment to worker productivity Appendix 9B A Hedonic Model of Earnings and Educational Level Market Determination of the Education/Wage Relationship Putting both sides of the market for educated workers together, it is clear that the education/wage relationship will be positive, as indicated in Figure 9B.3 Worker A will work for Y, receiving a wage equal to WAY and obtaining X1 years of education The reason for this matching is simple Firm Z cannot pay higher wages (for each level of education) than those shown on the isoprofit curve in Figure 9B.3, for the reasons noted earlier Clearly, then, worker A could never derive as much utility from Z as he or she could from Y; working for firm Z would involve a loss of utility to worker A For similar reasons, worker B will accept work with firm Z, obtain X2 years of schooling, and receive higher pay (WBZ) When examined from an overall social perspective, the positive wage/ education relationship is the result of a very sensible sorting of workers and employers performed by the labor market Workers with the greatest aversion to investing in education (A) will work for firms where education adds least to employee productivity (Y) People with the least aversion to educational investment (B) are hired by those firms most willing to pay for an educated workforce (Z) Given the assertion by the critics of the human capital view of education that education adds nothing to worker productivity, it is interesting to consider the implications of an unwillingness by employers to pay higher wages to workers with more education If employers were unwilling to pay higher wages for more-educated workers, no education-related differentials would exist and employer isoprofit Figure 9B.3 Wage Worker B Worker A B WBZ Firm Z Firm Y WAY A Y The Education/Wage Relationship X1 Z X2 Years of Worker Education beyond Compulsory Level M a r k e t D e t e r m in a tio n o f t he E duc at ion/ Wag e Relat ionship Figure 9B.4 Unwillingness of a Firm to Pay for More Education of Employees Wage Worker A Worker Indifference Curves Worker B Employer Isoprofit Curve W Years of Worker Education beyond Compulsory Level curves would be horizontal Without a positive education/wage relationship, employees would have no incentive to invest in an education (see Figure 9B.4) The fact that educational wage differentials exist and that workers respond to them when making schooling decisions suggests that for some reason or other, employers are willing to pay higher wages to more-educated workers Unemployment Rates for the Civilian Labor Force, 1946–2009 (data displayed graphically in Figure 2.2 on page 29) Year Rate Year Rate 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 3.9 3.9 3.9 5.9 5.3 3.3 3.1 2.9 5.6 4.4 4.2 4.3 6.8 5.5 5.6 6.7 5.6 5.7 5.2 4.6 3.8 3.8 3.6 3.5 4.9 5.9 5.6 4.9 5.6 8.5 7.7 7.1 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 6.1 5.8 7.1 7.6 9.7 9.6 7.5 7.2 7.0 6.2 5.5 5.3 5.6 6.8 7.5 6.9 6.1 5.6 5.4 4.9 4.5 4.2 4.0 4.7 5.8 6.0 5.5 5.1 4.6 4.6 5.8 9.3 1994† 1995† 1996† 1997† 1998† 1999† 2000† 2001† 2002† 2003† 2004† 2005† 2006† 2007 2008 2009 Note: The rates shown from 1967 on relate to those over 16 years of age, and the prior data relate to those over 14 The differences between the rates for those over 14 and over 16 in the years where both were computed are very small † In 1994, changes were made in the Current Population Survey, upon which estimates of unemployment are based, that increased the reported unemployment rate by 0.5 percentage points Increases were especially noticeable among women, teenagers, and the elderly Definitions did not change, but the new questionnaire apparently led more respondents to report that they were actively engaged in search of a job or were on layoff status Thus, data for 1994 and beyond are not directly comparable to those for earlier years Source: 1946–1966: U.S Bureau of Labor Statistics, Employment and Earnings 13 (January 1967), Table A-1 1967–2006: U.S President, Economic Report of the President (Washington, D.C.: U.S Government Printing Office, February 2007), Table B-42 Employment Distribution by Major Nonfarm Sector, 1954–2010 (data displayed graphically in Figure 2.3 on page 30) Year Goods-Producing Industries* (%) Nongovernment Services (%) Government Services (%) 1954 1964 1974 1984 1994 2004 2010 37.7 33.8 29.8 24.9 19.9 16.6 13.8 48.3 49.6 52.0 58.1 63.2 67.0 68.9 14.0 16.6 18.2 17.0 16.9 16.4 17.3 *Manufacturing, construction, and mining Source: U.S Department of Labor, Bureau of Labor Statistics, “Employment Situation Summary,” Table B-1, at http://www.bls.gov Ta b l e Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2007 Belgium Canada Denmark France Germany Ireland Netherlands Norway United Kingdom United States Unemployment Overall Rate (%) Percent of Unemployed Out of Work > One Year (%) Unemployment Long-Term Rate (%) 7.5 6.0 3.8 8.3 8.4 4.6 3.2 2.5 5.3 4.6 50.0 7.5 18.2 40.4 56.6 30.3 41.7 8.5 24.5 10.0 3.8 0.5 0.7 3.4 4.8 1.4 1.3 0.2 1.3 0.5 Source: OECD, Employment Outlook (Paris: OECD, 2009), Tables A and G Ta b l e Labor Force Participation Rates of Females in the United States over 16 Years of Age, by Marital Status, 1900–2008 (Percentage) Year All Females 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 20.6 25.5 24.0 25.3 26.7 29.7 37.7 43.3 51.5 57.5 59.9 59.5 Single Widowed, Divorced 45.9 54.0 32.5 34.1 55.2 53.1 53.6 58.6 56.8 64.4 66.7 68.9 65.3 34.4 33.7 35.5 41.6 40.3 43.6 47.2 49.0 49.2 Married 5.6 10.7 9.0 11.7 13.8 21.6 31.9 40.5 49.8 58.4 61.1 61.4 Sources: 1900–1950: Clarence D Long, The Labor Force under Changing Income and Employment (Princeton, N.J.: Princeton University Press, 1958), Table A–6 1960–2008: U.S Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics, Bulletin 2340 (Washington, D.C.: U.S Government Printing Office, 1989), Table 6; and U.S Census Bureau, 2010 Statistical Abstract, Section 12 (Table 583), http://www.census.gov/compendia/statab/2010edition.html Ta b l e Labor Force Participation Rates for Males in the United States, by Age, 1900–2008 (percentage) Age Groups Year 14–19 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 61.1 56.2 52.6 41.1 34.4 39.9 38.1 35.8 16–19 20–24 25–44 45–64 Over 65 63.2 56.1 56.1 60.5 55.7 52.8 40.1 91.7 91.1 90.9 89.9 88.0 82.8 86.1 80.9 85.9 84.4 82.6 78.7 96.3 96.6 97.1 97.5 95.0 92.8 95.2 94.4 95.4 94.8 93.0 91.9 93.3 93.6 93.8 94.1 88.7 87.9 89.0 87.3 82.2 80.5 80.4 81.4 68.3 58.1 60.1 58.3 41.5 41.6 30.6 25.0 19.0 16.3 17.7 21.5 Sources: 1900–1950: Clarence D Long, The Labor Force under Changing Income and Employment (Princeton, N.J.: Princeton University Press, 1958), Table A–2 1960: U.S Department of Commerce, Bureau of the Census, Census of Population, 1960: Employment Status, Subject Reports PC(2)–6A, Table 1970: U.S Department of Commerce, Bureau of the Census, Census of Population, 1970: Employment Status and Work Experience, Subject Reports PC(2)–6A, Table 1980–2008: U.S Census Bureau, 2010 Statistical Abstract, Section 12 (Table 575), http://www.census.gov/compendia/ statab/2010edition.html Ta b l e Employment Ratios, Labor-Force Participation Rates, and Unemployment Rates, by Race and Gender,a 1970–2009 Employment Ratio Labor-Force Participation Rate Unemployment Rate Men Year Blacks (%) Whites (%) Blacks (%) Whites (%) Blacks (%) Whites (%) 1970 1980 1990 2000 2009 71.9 62.5 61.8 63.4 53.7 77.8 74.0 73.2 72.9 66.0 77.6 72.1 70.1 69.0 65.0 81.0 78.8 76.9 75.4 72.8 7.3 13.3 11.8 8.1 17.5 4.0 6.1 4.8 3.4 9.4 42.6 51.4 57.5 59.8 59.1 9.3 13.1 10.8 7.2 12.4 5.4 6.5 4.6 3.6 7.3 Women 1970 1980 1990 2000 2009 44.9 46.6 51.5 58.7 52.8 40.3 48.1 54.8 57.7 54.8 49.5 53.6 57.8 63.2 60.3 a For 1970 and 1980, data on blacks include other racial minorities Data in all years are for persons aged 16 or older Sources: U.S Bureau of Labor Statistics, Employment and Earnings 17 (January 1971), Table A-1; 28 (January 1981), Table A-3; 38 (January 1991), Table 3; 48 (January 2001), Table 3; 57 (January 2010), Table Ta b l e Union Membership and Bargaining Coverage, Selected Countries, 2004 Country Austria France Sweden Australia Italy Netherlands Germany Switzerland United Kingdom Canada Japan United States Union Membership as a Percentage of Workers Percentage of Workers Covered by a Collective Bargaining Agreement 37 10 81 25 35 23 25 18 31 28 22 13 98 93 93 83 83 83 68 43 33 32 18 14 Source: Organisation for Economic Co-operation and Development, http://www.oecd.org; search under “union density, 2004.” .. .Modern Labor Economics This page intentionally left blank Modern Labor Economics Theory and Public Policy Eleventh Edition Ronald G Ehrenberg School of Industrial and Labor Relations... G Modern labor economics : theory and public policy / Ronald G Ehrenberg, Robert S Smith — Eleventh ed p cm Includes index ISBN-13: 978-0-13-254064-3 ISBN-10: 0-13-254064-9 Labor economics Labor. .. CHAPTER INTRODUCTION The Labor Market Labor Economics: Some Basic Concepts Positive Economics The Models and Predictions of Positive Economics Normative Economics Normative Economics and Government