Chapter 29 - Labor markets and wage rates. This chapter presents the following content: The supply of labor, the demand for labor, high wage rates and economic rent, real wages and productivity, the minimum wage dispute.
Chapter 29 Labor Markets and Wage Rates Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 291 Chapter Objectives • • • • • The supply of labor The demand for labor High wage rates and economic rent Real wages and productivity The minimum wage dispute Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 292 Income Disparity • Why do some individuals make millions and millions of dollars a year while the typical American wage earner was paid between $25,000 and $35,000 • There are several reasons but the bottom line is supply and demand Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 293 The Supply of Labor • Noncompeting groups – There are three classes of labor • Skilled, semiskilled, and unskilled – In a sense there are thousands of noncompeting groups – However, if there are opportunities in certain fields, people will go through the necessary training and compete for the jobs – So in another sense, we are all competitors in the same employment pool – In the long run most of us can learn to do many different jobs • In the short run we are all partial substitutes for one another Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 294 The Theory of the Dual Labor Market • The theory of the dual labor market places the labor force into two broad categories – The primary market and the secondary market • The primary market has most of the good jobs, which not only pay well but offer good opportunities • The secondary market market consist of all the jobs that are left over – Socalled disposable workers fill these low pay, dead end, and often temporary jobs Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 295 The Theory of the Dual Labor Market • The theory of the dual labor market is a class theory of employment – The rich stay rich and the poor stay poor – The college degree seems to be the dividing line • The theory of the dual labor market does not account for the huge middle level of occupations, but it does support the contention that there are noncompeting groups in the labor market Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 296 The Labor Supply Curve • The substitution effect – As the wage rate rises, people are willing to substitute more work for leisure because leisure time is becoming more “expensive” • The income effect – At some point, as your wage rate continues to rise, you are willing to give up some income in exchange for more leisure time • After all, you need more leisure time to spend all the money you are now making Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 297 Hypothetical Labor Supply Curve A person will be willing to work an increasing amount of hours per week as the hourly wage rate goes up. But a some point (point J in this instance) he or she will begin to cut back on the hours worked as the wage rate continues to rise S 180 160 140 120 100 Up to point J, work is substituted for leisure time (substitution effect) 80 Beyond point J the curve bends backward as the income effect outweighs the substitution effect and the person is willing to trade away some money for more leisure time 40 J 60 20 0 15 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 30 45 60 75 90 Hours worked per week 298 The Demand for Labor • Demand is the firm’s Marginal Revenue Product schedule (MRP) • The MRP schedule slopes down and to the right – When the price of a good is lowered, more of it is demanded; when it is raised, less is demanded – The demand for labor is a derived demand • It is derived from the demand for the final product that the labor produces Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 299 Hypothetical General Demand Curve for Labor 180 160 This is the sum of every firm’s MRP curve. As the wage rate is lowered, increasing quantities of labor are demanded 140 120 100 80 60 40 20 D 10 20 30 40 50 60 70 Hours worked per week (millions)* Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 80 2910 Real Wages versus Nominal Wages Problem: Your wage rate rises from $5 an hour in 1993 to $8.40 an hour in 1999. Meanwhile the consumer price index (CPI) rises from 100 in 1993 (the base year) to 120 in 1999 (the current year). How much is your real hourly wage in 1999, and by what percentage has it increased since 1993 Money wages (current year) Real wage (current year) = X 100 CPI (current year) $8.40 = X 100 120 = $.07 X 100 = $7.00 Percentage change = Change Original number Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2923 Real Wages versus Nominal Wages Problem: Your wage rate rises from $5 an hour in 1993 to $8.40 an hour in 1999. Meanwhile the consumer price index (CPI) rises from 100 in 1993 (the base year) to 120 in 1999 (the current year). How much is your real hourly wage in 1999, and by what percentage has it increased since 1993 Money wages (current year) Real wage (current year) = X 100 CPI (current year) $8.40 = X 100 120 = $.07 X 100 = $7.00 Percentage change = Change Original number $2 = $5 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2924 Real Wages versus Nominal Wages Problem: Your wage rate rises from $5 an hour in 1993 to $8.40 an hour in 1999. Meanwhile the consumer price index (CPI) rises from 100 in 1993 (the base year) to 120 in 1999 (the current year). How much is your real hourly wage in 1999, and by what percentage has it increased since 1993 Money wages (current year) Real wage (current year) = X 100 CPI (current year) $8.40 = X 100 120 = $.07 X 100 = $7.00 Percentage change = Change Original number $2 = $5 = .04 = 40% increase Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2925 Real Wages versus Nominal Wages Problem: Ms. Klopman has been working at the same job since 1989, the base year. She was making $400 a week at that time, and now, in 1999, she is earning $540 a week. If the CPI rose to 180 to 1999 , how much are Ms. Klopman’s real wages in 1999 and by what percentage did they change? Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2926 Real Wages versus Nominal Wages Problem: Ms. Klopman has been working at the same job since 1989, the base year. She was making $400 a week at that time, and now, in 1999, she is earning $540 a week. If the CPI rose to 180 to 1999 , how much are Ms. Klopman’s real wages in 1999 and by what percentage did they change? Money wages (current year) Real wage (current year) = X 100 CPI (current year) $540 = X 100 180 = $3 X 100 = $300 Percentage change = Change Original number $100 = = .25 = 25% decrease $400 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2927 Index of Real Wages, 19752001 (Base: Second Quarter of 1989 = 100) The real wage now is below the level in the late 1970s Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2928 The Minimum Hourly Wage Rate • The Fair Labor Standards Act of 1938 – Called for a 25cent an hour minimum wage • This was raised to 30 cents in 1939 – Called for a standard workweek of 44 hours • Reduced to 40 hours in 1940 – Called for the payment of time and a half for overtime – Twentyfive cents in 1938 would buy approximately $3 worth of goods and services today – Minimum wage • In 1990 it was raised from $3.35 to $4.25 • In 1996 it was raised to $4.75 • In 1997 it was raised to $5.15 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2929 The Minimum Wage and the Unemployment Rate Monthly Unemployment Rate, 1996, 1997, and 1998 / 1996 1997 1998 January 5.7 5.3 4.7 February 5.5 5.3 4.6 March 5.7 5.2 4.7 April 5.5 5.0 4.3 May 5.5 4.8 4.4 June 5.3 5.0 4.5 July 5.4 4.9 4.5 August 5.2 4.9 4.5 September 5.2 4.9 4.5 October 5.2 4.8 4.5 November 5.3 4.6 4.4 December 5.3 4.7 4.4 Green indicates minimum wage increase in that particular month and year Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2930 Should There Be a Minimum Wage Rate? • Conservatives say the minimum wage law hurts the very people it is supposed to help – They claim the basic effect of the minimum wage is to cause millions of marginal workers to be unemployed • They point to rising teenage unemployment as proof Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2931 Hypothetical Demand and Supply Schedule for Unskilled Labor The equilibrium wage rate is $3.75 8.00 7.00 S 6.00 The minimum wage is $4.25 5.00 4.00 * Minimum wage rate 3.00 There is a surplus of about 4 million workers D 2.00 12 16 20 24 Unskilled workers (millions) 28 32 How many of these 4 million marginal workers would work for $3.75? Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2932 Elastic Demand and Supply A 5.00 S Minimum wage 4.00 MRP 3.00 2.00 10 12 14 16 Workers (millions) 18 20 22 24 26 The elimination of a minimum wage rate of $4.25 allows the wage rate to fall to its equilibrium level of $3.45, resulting in a jump in employment from 7 million to more than 18 million Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2933 Elastic Demand and Inelastic Supply of Labor B S 5.00 Minimum wage 4.00 MRP 3.00 2.00 10 12 14 16 Workers (millions) 18 20 22 24 26 The elimination of a minimum wage rate allows employment to rise from 7.3 million to just over 19 million Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2934 Inelastic demand and elastic supply A Inelastic demand and supply B 5.00 S 5.00 S 4.00 4.00 3.00 3.00 2.00 2.00 MRP 10 12 Workers (millions) 14 16 MRP Workers (millions) 10 12 Eliminating the minimum wage raises employment only 0.4 million Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2935 A Summing Up • Will employment of unskilled and inexperienced workers rise if we eliminate the minimum wage? – Yes. But the question is by how much – It will rise very little if the demand for labor is very elastic • There is no question that teenagers, particular nonwhite teenagers are the last hired and the most poorly paid – Is this because they are relatively unskilled and inexperienced? – Is this because they are discriminated against? – Are older workers really more productive? – Would teenagers work for lower than minimum wage? Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2936 Wages Are Set Institutionally • Wages are set institutionally with little regard to marginal analysis • Because wages are set institutionally, it makes little sense to abolish the minimum wage law • On the other hand there is some truth to the contention that some teenagers are priced out of the labor market by the minimum wage. The question is, How many? • There is also one eternal truth that cannot be ignored – The price of labor, like the price of just about everything else, is affected by the law of supply and demand Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 2937 ... In 1997 it was raised to $5.15 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 29 29 The Minimum Wage and the Unemployment Rate Monthly Unemployment Rate, 1996, 1997, and 1998 ... The minimum wage dispute Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 29 2 Income Disparity • Why do some individuals make millions and millions of dollars a year while the ... line is supply and demand Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 29 3 The Supply of Labor • Noncompeting groups – There are three classes of labor • Skilled, semiskilled, and unskilled