micro econ 5 - principles of microeconomics: part 2.pdf (Micro ECON 5)

Find more at www.downloadslide.com Mathew Hayward/Alamy 12 Labor Markets and Labor Unions Learning OutcOmes After studying this chapter, you will be able to… 12-1 Explain why the quantity of labor supplied increases with the wage, other things remain constant 12-2 Describe why some workers earn higher wages than other workers 12-3 Summarize the objectives of labor unions and outline strategies used to achieve these objectives After finishing this chapter go to PAGE 213 for STUDY TOOLS Topics discussed in Chapter 12 include: ●● ●● ●● 12-4 Give reasons why unionization rates have declined in recent decades ●● ●● ●● ●● ●● 196 Theory of time allocation Backward-bending labor supply curve Nonwage determinants of labor supply Why wages differ Winner-take-all labor markets Unions and collective bargaining Union wages and employment Trends in union membership PART FOUR: Resource Markets Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com ▸ How do you divide your time between work and leisure? ▸ What determines the wage structure in the economy? ▸ Why do some people work less if the wage increases enough? ▸ What else besides the wage affects your labor supply? ▸ For example, why do unknown rock bands play hours for peanuts, while famous bands play much less for much more? ▸ In what sense have labor unions become the victims of their own success? ▸ Why are butchers more likely than surgeons to mow their own lawns? b This chapter digs deeper into labor markets and wage determination. ecause of the division of labor and comparative advantage, the U.S. workforce is becoming more specialized. For example, the U.S. Census of 1850 identified 324 job titles. The 2010 Census identified about 100 times more. Differences in pay across job specialties can be huge. These differences should interest anyone deciding on a career. You can be sure of one thing: demand and supply play a central role in all this. You have already considered the demand for resources. Demand depends on a resource’s marginal revenue product. The first half of this chapter focuses on the supply of labor, then brings demand and supply together to arrive at the market wage. The second half considers the role of labor unions. We examine the economic impact of unions and review recent trends in union membership. Why do unknown rock “bands play hours for peanuts while famous bands play much less for much more? ” 12-1 LAbOr SUPPLY As a resource supplier, you have a labor supply curve for each of the many possible uses of your labor. To some markets, your quantity supplied is zero over the realistic range of wages. The qualifier “over the realistic range” is added because, for a high enough wage (say, $1 million per hour), you might supply labor to just about any activity. In most labor markets, your quantity supplied may be zero either because you are willing but unable to perform the job (professional golfer, airline pilot, novelist) or because you are able but unwilling to do so (soldier of fortune, prison guard, taxi driver). You have as many individual supply curves as there are labor markets, just as you have as many individual demand curves as there are markets for goods and services. Your labor supply to each market depends, among other things, on your abilities, your taste for the job, and the opportunity cost of your time. Your supply to a particular labor market assumes that wages in other markets are constant, just as your demand for a particular product assumes that other prices are constant. Labor Supply and Utility Maximization 12-1a Recall the definition of economics: the study of how people use their scarce resources in an attempt to satisfy their unlimited wants—that is, how people use their scarce resources to maximize their utility. Two sources of utility are of special interest in this chapter: the consumption of goods and services and the enjoyment of leisure. The utility derived from consumption serves as the foundation of demand. Another valuable source of utility is leisure—time spent relaxing with friends, sleeping, eating, watching TV, gaming, reading for pleasure, and CHAPTER 12: Labor Markets and Labor Unions 197 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com Monkey Business Images/Shutterstock.com Work and Utility in other recreation. Leisure is a normal good that, like other goods, is subject to the law of diminishing marginal utility. Thus, the more leisure time you have, the less you value an additional hour of it. Sometimes you may have so much leisure that you “have time on your hands” and are “just killing time.” As that sage of the comic page Garfield the cat once lamented, “Spare time would be more fun if I had less to spare.” Or as Shakespeare wrote, “If all the year were playing holidays, to sport would be as tedious as to work.” Leisure’s diminishing marginal utility explains why some of the “idle rich” grow bored of their idleness. Three Uses of Time Some of you are at a point in your careers when you have few resources other than your time. Time is the raw material of life. You can use your time in three ways. First, you can undertake market work—selling your time in the labor market. In return for a wage, you surrender control of your time to the employer. Second, you can undertake nonmarket work—using time to produce your own goods and services. Nonmarket work includes the time you spend doing laundry, making a sandwich, or cleaning up after yourself. Nonmarket work also includes the time spent acquiring skills and education that enhance your productivity. Although studying and attending class may provide little immediate utility, you expect that the knowledge and perspective so gained will enrich your market work Time sold future. Third, you can spend as labor time in leisure—using your nonmarket work Time time in nonwork pursuits. You spent getting an education or may know people who appear on do-it-yourself production for personal consumption to specialize in leisure. After all, hard work pays off in the leisure Time spent on future, but laziness pays off nonwork activities right now. 198 Unless you are among the fortunate few, work is not a pure source of utility, as it’s often boring, uncomfortable, and aggravating. In short, time spent working can be “a real pain,” a source of disutility—the opposite of utility. And work is subject to increasing marginal disutility—the more you work, the greater the marginal disutility of working another hour. In the extreme, you can get burned out from overwork. You may work nonetheless, because your earnings buy goods and services. You expect the utility from these products to more than offset the disutility of work. Thus, the net utility of work—the utility of the additional consumption possibilities from earnings minus the disutility of the work itself—usually makes some amount of work an attractive use of your time. In the case of market work, your income buys goods and services. In the case of nonmarket work, either you produce goods and services directly, as in making yourself a sandwich, or you invest your time in education with an expectation of higher future earnings and higher future consumption possibilities. Utility Maximization Within the limits of a 24-hour day, seven days a week, you balance your time among market work, nonmarket work, and leisure to maximize utility. As a rational consumer, you attempt to maximize utility by allocating your time so that the expected marginal utility of the last unit of time spent in each activity is identical. Thus, in the course of a week or a month, the expected marginal utility of the last hour of leisure equals the expected net marginal utility of the last hour of market work, which equals the expected net marginal utility of the last hour of nonmarket work. In the case of time devoted to acquiring more human capital, you must consider the marginal utility expected from the future increase in earnings that result from your enhanced productivity. Maybe at this point you are saying, “Wait a minute. I don’t know what you’re talking about. I don’t allocate my time like that. I just sort of bump along, doing what feels good.” Economists do not claim that you are even aware of making these marginal calculations. But as a rational decision maker, you allocate your scarce time trying to satisfy your unlimited wants, or trying to maximize utility. And utility maximization, or “doing what feels good,” implies that you act as if you allocated your time to derive the same expected net marginal utility from the many possible uses of your time. You probably have settled into a rough plan for meals, work, entertainment, study, sleep, and so on—a plan that fits your immediate goals. This plan is probably PART FOUR: Resource Markets Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com in constant flux as you make expected and unexpected adjustments in your use of time. For example, last weekend you may have failed to crack a book, despite good intentions. This morning you may have overslept because you were up late. Over a week, a month, or a year, however, your use of time is roughly in line with an allocation that maximizes utility as you perceive it at the time. Put another way, if you could alter your use of time to increase your utility, you would do so. Nobody’s stopping you! You may emphasize immediate gratification over long-term goals, but, hey, that’s your choice and you bear the consequences. This time-allocation process ensures that at the margin, the expected net utilities from the last unit of time spent in each activity are equal. Because information is costly and because the future is uncertain, you sometimes make mistakes. You don’t always get what you expect. Some mistakes are minor, such as going to a movie that turns out to be a waste of time. But other mistakes can be costly. For example, some people are now studying for a field that will grow crowded by the time they graduate, while other people may be acquiring skills that new technology could soon make obsolete. Implications The theory of time allocation described thus far has several implications for individual choice. First, consider the choices among market work, nonmarket work, and leisure. The higher your market wage, other things constant, the higher your opportunity cost of leisure and nonmarket work. For example, those who earn a high wage spend less time in nonmarket work, other things constant. Surgeons are less likely to mow their lawns than are butchers. And among those earning the same wage, those more productive in nonmarket work—handy around the house, good cooks—do more for themselves. Conversely, those who are all thumbs around the house and have trouble boiling water hire more household services and eat out more. By the same logic, the higher the expected earnings right out of high school, other things constant, the higher the opportunity cost of attending college. Most young, successful movie stars do not go to college, and many even drop out of high school, as noted in an earlier chapter. Promising athletes often turn professional as soon as they can. But the vast majority of people, including female basketball stars, do not face such a high opportunity cost of higher education. As one poor soul lamented, “Since my wife left me, my kids joined a cult, my job is history, and my dog died, I think now might be a good time to go back for an MBA.” Wages and Individual Labor Supply 12-1b To breathe life into the time-allocation problem, consider your choices for the summer. If you can afford to, you can take the summer off, spending it entirely on leisure, perhaps as a fitting reward for a rough academic year. Or you can get a job. Or you can undertake nonmarket work, such as cleaning the garage, painting the house, or attending summer school. As a rational decision maker, you select the mix of leisure, market work, and nonmarket work that you expect will maximize your utility. And the optimal combination is likely to involve spending some time on each activity. For example, even if you work, you might still squeeze in one or two summer courses. Suppose the only summer job available is some form of unskilled labor, such as working in a fast-food restaurant or for the municipal parks department. For simplicity, let’s assume that you view all these as equally attractive (or unattractive) in terms of their nonmonetary aspects, such as working conditions, working hours, job prospects, and so on. (These nonmonetary aspects are discussed in the next section.) If there is no difference among these unskilled jobs, the most important question for you in deciding how much market labor to supply is this one: What’s the market wage? Suppose the wage is $7 per hour, not even the legal minimum. Rather than working for a wage that low, you might decide to work around the house, attend summer school, take a really long nap, travel across the country to find yourself, or perhaps pursue some combination of these. In any case, you supply no market labor at such a low wage. The market wage must rise to $8 before you supply any market labor. Suppose at a wage of $8, you supply 20 hours per week, perhaps taking fewer summer courses and shorter naps. As the wage increases, your opportunity cost of time spent in other activities rises, so you substitute market work for other uses of your time. You decide to work 30 hours per week at a wage of $9 per hour, 40 hours at $10, 48 hours at $11, and 55 hours at $12. At a wage of $13 you go to 60 hours per week; you are starting to earn serious money—$780 a week. If the wage hits $14 per hour, you decide to cut back a little to 58 hours per week. Despite the cutback, your weekly pay rises to $812. Finally, if the wage hits $15, you cut back to 55 per week, earning $825. To explain why you may eventually reduce the quantity of labor supplied, let’s consider the impact of wage increases on your time allocation. CHAPTER 12: Labor Markets and Labor Unions 199 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com Substitution and Income Effects Exhibit 1 Your Labor Supply Curve During the Summer Wage rate per hour A higher wage has two effects When the substitution effect of a wage increase outweighs the income effect, the quantity on your use of time. First, of labor you supply increases with the wage. Above some wage, shown here at $13 per because each hour of work now hour, the income effect dominates. Above that wage, your supply curve bends backward. Further increases in the wage reduce the quantity of labor you supply. buys more goods and services, a higher wage increases the opportunity cost of leisure and S nonmarket work. Thus, as the $15 wage increases, you substitute 14 market work for other activities. 13 This is the substitution effect 12 of a wage increase. Second, 11 a higher wage means a higher 10 income for a given number 9 of hours. This higher income 8 increases your demand for all normal goods. Because leisure is a normal good, a higher income increases your demand for leisure, thereby reducing your allocation of time to market work. The income effect 0 20 30 40 48 55 60 of a wage increase tends to Hours of labor per week reduce the quantity of labor supplied to market work. As the Greek philosopher Aristotle observed, “The end of labor is to gain leisure.” reaches $13 per hour; then the curve bends backward. As your wage increases, The backward-bending supply curve gets its shape the substitution effect causes substitution effect if the income effect of a higher wage eventually domiyou to work more, but the of a wage increase A nates the substitution effect, reducing the quantity of income effect causes you to higher wage encourages more work because other labor supplied as the wage increases. We see evidence work less and demand more activities now have a higher of a backward-bending supply curve particularly among leisure. In our example, the opportunity cost high-wage individuals, who reduce their work hours substitution effect exceeds income effect of a and consume more leisure as their wage increases. For the income effect for wages wage increase A higher example, entertainers typically perform less as they up to $13 per hour, resulting wage raises a worker’s income, become more successful. Unknown musicians play for in more labor supplied as the increasing the demand for all hours for hardly any money; famous musicians play wage increases. When the normal goods, including leisure, so the quantity of labor supplied much less for much more. But the backward-bending wage reaches $14, however, to market work decreases supply curve may also apply to ordinary workers, such the income effect exceeds the as you during the summer or to New York City taxi substitution effect, causing backward-bending supply curve of labor drivers, who reduced their hours after an increase in you to reduce the quantity of As the wage rises, the quantity taxi fares.1 The income effect of rising real wages helps labor supplied. of labor supplied may eventually explain the decline in the U.S. workweek from an averdecline; the income effect of Backward-Bending age of 60 hours in 1900 to about 40 hours in 1960 to a higher wage increases the Labor Supply Curve about 34 hours today. demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage 200 The labor supply curve just described appears in Exhibit 1. As you can see, this slopes upward until the wage 1. Orley Ashenfelter, Kirk Doran, and Bruce Schaller, “A Shred of Credible Evidence on the Long-Run Elasticity of Labor Supply,” Economica, 77 (October 2010): 637–650. PART FOUR: Resource Markets Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com As your wage “ increases, the substitution effect causes you to work more, but the income effect causes you to work less and demand more leisure. ” On the other hand, a decrease in wealth would prompt some people to work more, thus increasing their supply of labor. For example, the stock market decline between 2008 and 2009 reduced the wealth that people planned to draw on during retirement. As a result, many had to put retirement plans on hold and instead worked more to rebuild their retirement nest eggs. This increased supply of labor is shown by the rightward shift of the labor supply curve. Nonmonetary Factors The supply of labor to a particular market depends on a variety of factors other than the wage, just as the demand for a particular good depends on factors other than the price. As we have already seen, the supply of labor to a particular market depends on wages in other labor markets. What nonwage factors shape a college student’s labor supply for the summer? Labor is a special kind of resource. Unlike capital or natural resources, which can be supplied regardless of the whereabouts of the resource owner, the supplier of labor must be where the work is performed. Because individuals must usually be physically present to supply labor, such nonmonetary factors as the difficulty of the job, the quality of the work environment, and the status of the position become important to labor suppliers. For example, deckhands on crab boats in the icy waters off Alaska can earn over $10,000 for five days of work, but the job is dangerous, winter temperatures seldom exceed zero, and daily shifts allow only three hours of sleep. Consider the different working conditions you might encounter. A campus job that lets you study on the job is more attractive than one with no study time. Some jobs offer flexible hours; other work schedules are rigid. Is the workplace air-conditioned, or do you have to sweat it out? The more attractive the working conditions, the more labor you supply to that market, other things constant. Finally, some jobs convey more status than others. For example, the president of the United States earns less than one-tenth that of corporate heads, but there is no shortage of applicants for the job. Similarly, U.S. Supreme Court justices typically take a huge pay cut to accept the job. Other Sources of Income The Value of Job Experience Although some jobs are rewarding in a variety of nonmonetary ways, the main reason people work is to earn money. Thus, your willingness to supply labor depends on income from other sources, including from family, savings, student loans, and scholarships. A student who receives a generous scholarship, for example, faces less pressure to work in the summer or during the college term. More generally, wealthy people have less incentive to work. For example, multimillion-dollar lottery winners often quit their jobs. And those who inherit a large sum are more likely to retire early.2 All else equal, you are more inclined to take a position that provides valuable job experience. Serving as the assistant treasurer for a local business during the summer provides better job experience and looks better on a résumé than serving mystery meat at the college cafeteria. Some people are willing to accept relatively low wages now for the promise of higher wages in the future. For example, new lawyers are eager to fill clerkships for judges, though the pay is low and the hours long, because these positions offer experience and contacts future employers value. Likewise, athletes who play in the minor leagues for little pay believe that experience will give them a shot at the major leagues. Thus, the more a job enhances future Flexibility of Hours Worked The model we have been discussing assumes that workers have some control over how much they work. Opportunities for part-time work and overtime allow workers to put together their preferred quantity of hours. Workers also have some control over the timing and length of their vacations. More generally, individuals usually have some control over how long to stay in school, when to enter or leave the workforce, and when to retire. Thus, most people actually have more control over the number of hours worked than you might think. Nonwage Determinants of Labor Supply 12-1c 2. As found in research by Jeffrey Brown, Courtney Coile, and Scott Weisbenner, “The Effect of Inheritance Receipt on Retirement,” Review of Economics and Statistics, 92 (August 2010): 425–434. CHAPTER 12: Labor Markets and Labor Unions 201 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com that tends to minimize the disutility of work. This is not to say that everyone ends up in his or her most preferred position. The transaction costs of job information and of changing jobs may prevent some matchups that might otherwise seem desirable. But in the long run, people tend to find jobs that suit them. We are not likely to find tour guides who hate to travel, zookeepers who are allergic to animals, or garage mechanics who hate getting their hands dirty. earning possibilities, the greater the supply of labor, other things constant. Consequently, the pay in such jobs is usually lower than for jobs that impart less valuable experience. Sometimes the pay is zero, as with some internships. Taste for Work Just as the taste for goods and services differs among consumers, the taste for work also differs among labor suppliers. Some people prefer physical labor and hate office work. Some become surgeons; others can’t stand the sight of blood. Some become airline pilots; others are afraid to fly. Teenagers prefer jobs at Starbucks and Gap to those at McDonald’s and Burger King. Many struggling writers, artists, actors, and dancers could earn more elsewhere, but prefer the creative process and the chance, albeit slim, of becoming rich and famous in the arts. For example, the 120,000 members of the Screen Actors Guild earn a median pay from acting of less than $10,000 a year, and among recent fine-arts graduates, two of the top three occupations are waiters and retail sales. Some people have such strong preferences for certain jobs that they expect no pay, such as auxiliary police officers or volunteer firefighters. Likewise, most computer hackers earn nothing beyond the twisted satisfaction they get from making other people suffer. And graffiti artists spend hours defacing property while risking arrest for whatever kicks they get from leaving their marks. As with the taste for goods and services, economists do not try to explain how work preferences develop. They simply argue that your preferences are relatively stable and, at a given wage, you supply more labor to jobs you like. Based on taste, workers seek jobs in a way 12-1d In the previous section, we considered those factors, both monetary and nonmonetary, that influence individual labor supply. The supply of labor to a particular market is the horizontal sum of all the individual supply curves. The horizontal sum at each particular wage is found by adding the quantities supplied by each worker. If an individual supply curve of labor bends backward, does this mean that the market supply curve for labor also bends backward? Not necessarily. Because different individuals have different opportunity costs and different tastes for work, the bend in the supply curve occurs at different wages for different individuals. And, for some individuals, the labor supply curve may not bend backward over the realistic range of wages. Exhibit 2 shows how just three individual labor supply curves sum to yield a market supply curve that slopes upward. How responsive is the quantity of labor supplied to changes in the wage? In other words, what is labor’s elasticity of supply with respect to the wage? Although that is a complicated question, an average of many studies suggests an elasticity of about 0.3, meaning that a 10 percent increase in the wage, other things constant, would increase the quantity of labor supplied by 3 percent.3 Aspen Photo/Shutterstock.com 12-2 While minor league baseball players get paid very little, they stick to it with the hope that the “job experience” they are receiving will pay off with a promotion to the major league. 202 Market Supply of Labor WhY WAGES DIffEr Just as both blades of scissors contribute equally to cutting paper, both labor demand and labor supply determine the market wage. Exhibit 3 shows average hourly wages for 135.1 million U.S. workers. Workers are sorted into 22 general occupations from the highest to the lowest wage as of May 2014. Management earned the highest average wage, at $54.08 an hour. The lowest is the $10.57 an hour averaged by workers preparing and serving food. Wage differences across labor markets trace to differences in labor demand and in labor 3. Michael Keane, “Labor Supply and Taxes: A Survey,” Journal of Economic Literature, 49 (December 2011): 961–1075. PART FOUR: Resource Markets Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com Exhibit 2 Deriving the Market Labor Supply Curve From Individual Labor Supply Curves The individual labor supply curve in panel (a) bends backward. The market supply curve, however, may still slope upward over the relevant range of wages. (a) Worker A (b) Worker B Labor 0 Labor Wage rate (d) Market supply SC SB SA 0 (c) Worker C S 0 supply, as you will see. The previous chapter discussed the elements that influence the demand for resources and examined labor in particular. In brief, a profit-maximizing firm hires labor up to the point where labor’s Labor 0 Labor marginal revenue product equals its marginal resource cost—that is, where the last unit employed increases total revenue enough to cover the added cost. Because we have already discussed what affects the demand for Exhibit 3 Average Hourly Wage by Occupation in the United States Management Legal Computer and mathematical Architecture and engineering Health care (provision) Business and finance Life, physical, and social sciences Art, design, and entertainment Education Construction and mining Social services Installation and repair Protective services Sales Office support Production Transport and moving Health care (support) Janitorial service Agriculture and fishing Personal care Food preparation and serving $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00 Source:Developed from “Occupational Employment and Wages, May 2014,” Bureau of Labor Statistics, U.S. Department of Labor News Release, Table 1, 25 March 2015, also available at http://www .bls.gov/news.release/pdf/ocwage.pdf. CHAPTER 12: Labor Markets and Labor Unions 203 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com labor—namely, labor’s marginal revenue product—let’s focus more on labor supply. axis and average annual earnings on the vertical axis. To standardize things, pay is for the highest level of education achieved. The relationship between income and education is clear. At every age, those with more educa12-2a tion earn more. For example, workers with professional degrees earned at least twice as much as those with Some jobs pay more because they require a long and bachelor’s degrees and at least five times those without expensive training period, which reduces market supply high school diplomas. because few are willing to incur the time and expense Age itself also has an important effect on income. required. But such training increases labor productivity, Earnings tend to increase as workers acquire job experithereby increasing demand for the skills. Reduced supence and get promoted. Among more educated workply and increased demand both raise the market wage. ers, experience pays more. For example, among those For example, certified public accountants (CPAs) earn with professional degrees, workers in the 55–64 age more than file clerks because the extensive training of group earned on average 73 percent more than those CPAs limits the supply to this field and because this in the 25–34 age group. But among those without training increases the productivity of CPAs compared to high school diplomas, workers in the 55–64 age group file clerks. earned on average only 26 percent more than those in Exhibit 4 shows how education and experience affect the 25–34 age group. Research suggests that, because of earnings. Age groups are indicated on the horizontal the greater physical demands of their jobs, blue-collar workers tend to wear out faster with age than Exhibit 4 do white-collar workers.4 Age, Education, and Pay Differences in earnings in For every age group, workers with more education earn more. The premium paid for years Exhibit 4 reflect the norof experience also increases more for those with more education. mal workings of resource markets, whereby workers are rewarded accord$160 ing to their marginal Professional Degree productivity. Differences in Training, Education, Age, and Experience Average yearly earnings (thousands) 140 Differences in Ability 12-2b 120 Because they are more talented, some people earn more than others with the same training and education. For example, two lawyers may have identical educations, but earnings differ because of differences in underlying ability. Most executives have extensive training and business experience, but only a 100 Bachelor’s Degree 80 60 High School Diploma 40 20 No High School Diploma 0 25–34 35–44 45–54 55–64 651 Age group Source: Drawn from figures appearing in U.S. Bureau of the Census, Statistical Abstract of the United States: 2012 (U.S. Bureau of the Census, 2012), Table 232. 204 4. G. Brant Morefield, David Ribar, and Christopher Ruhm, “Occupational Status and Health Transitions,” The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, 11 (3), pages 8. PART FOUR: Resource Markets Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Find more at www.downloadslide.com Joshua Roper/Alamy 12-2d Crab fishermen in the Bering Sea off the coast of Alaska get paid quite well to accept the risk that the job entails. few get to head large corporations. In professional basketball, some players earn up to 50 times more than others even on the same team. From lawyers to executives to professional athletes, pay differences reflect differing abilities as expressed in different marginal productivities. Sometimes the wage for certain abilities gets bid up because of sharp increases in demand. For example, software coders have been much in demand lately, fueled by the information revolution.5 There is also evidence that taller and better looking people each more. Finally, it turns out that students who more popular in high school, as reflected by their number of friends, other things equal, earned more later in life.6 12-2c Differences in risk Research indicates that jobs with a higher probability of injury or death, such as coal mining, usually pay more than other jobs, other things constant. Russians working at the partially disabled Chernobyl nuclear power plant earned 10 times the national average, but workers there face continued health risk from radiation exposure. Sex workers in Mexico earn 23 percent more for unprotected sex.7 Truck drivers for American contractors in Iraq earned over $100,000 a year, but the job was dangerous. Workers also earn more, other things constant, in seasonal jobs such as construction, where the risk of unemployment is greater. 5. Andy Kessler, “Mothers, Tell Your Children to Be Software Coders,” Wall Street Journal, 26 September 2014. 6. Gabriella Conti et al., “Popularity,” Journal of Human Resources, 48 (Fall 2013): 1072–1094. 7. See Paul Gertler et al., “Risky Business: The Market for Unprotected Commercial Sex,” Journal of Political Economy, 113 (June 2005): 518–550. Geographic Differences People have a strong incentive to sell their resources in the market where they can earn the most. For example, the National Basketball Association attracts talent from around the world. About 20 percent of NBA players come from abroad. Likewise, thousands of foreign-trained physicians migrate to the United States each year for the high pay. The same goes for nurses (a nurse from the Philippines can earn six times more in the United States). The flow of labor is not all one way: Some Americans seek their fortune abroad, with baseball players going to Japan and basketball players going to Europe and China (incidentally, China limits each basketball team to no more than two foreign players). Workers often face migration hurdles. Any reduction in these hurdles would reduce wage differentials across countries. 12-2e Discrimination Sometimes wage differences stem from racial or gender discrimination in the job market. Although such discrimination is illegal, history shows that certain groups—including African Americans, Hispanics, and women—have systematically earned less than others of equal ability. For example, among all full-time, year-round U.S. workers, females in 1980 earned only 60 percent of what males earned. By 2015, females earned 80 percent of male pay. Because some women do more housework and childcare than men do, they may have less job experience and tend to seek more flexible positions, both of which reduce their pay. Discrimination is discussed more fully in a later chapter. Wage differences “ trace to training, education, age, experience, ability, risk of injury, risk of job loss, geography, and racial and gender discrimination. ” To Review: Wage differences trace to training, educa- tion, age, experience, ability, risk of injury, risk of job loss, geography, and racial and gender discrimination. CHAPTER 12: Labor Markets and Labor Unions 205 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

micro econ 5 - principles of microeconomics: part 2

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