Labor markets and income distributionToday: 5 mini-lectures about labor marketsValue of workSuppose a competitive labor marketSimple example with input and capital costsWhat is my worth to the company?Marginal product of laborSuppose that you could build two cabinets per hourBack to an old exampleRecall the following informationDifferent analysis, same result Produce as long as VMP > $100Recall this table from Lecture 6: We hire 4 workers either wayWhen analyzing labor problems…Summary: Value of workHuman capitalSome human capital qualitiesEducation sends many messages to a potential employerEducation and employmentSlide 19For more on educationSummary: Human capitalUnionsUnions and wagesWhen are unions effective?Quote from writers’ strike articleWhy can writers form a powerful union?What can networks do to combat the writers’ union?Summary: UnionsDiscriminationRecall human capital theoryThe wage gap, decliningWhat else explains the wage gap?Slide 33Does discrimination actually occur?Slide 35Slide 36Slide 37Slide 38Slide 39Summary: DiscriminationIncome distributionMean income table (families), from F/B, p. 411 (2000 dollars)The gap between rich and poor widensThe “veil of ignorance”Problems with income inequalityProblem: The “economic pie” will shrink with Rawls’ ideasIs there an optimal amount of income inequality?Some methods of income redistribution (& their problems)Slide 49A success story of income redistributionSummary: Income distributionLabor markets and income distributionToday: Value of work, human capital, unions, discrimination, and income distributionToday: 5 mini-lectures about labor marketsValue of workHow much is labor worth?Human capitalTraining, education, experience, etc.UnionsDirect effects and indirect effectsDiscriminationWhat does theory tell us about discrimination?Income distributionIs income inequality a bad thing?Value of workWill every person get the same wage for the same hour of work?MaybeIt depends what the structure of the market isIt depends on the marginal value of the hour of workSuppose a competitive labor marketIf each person’s hour of work results in $50 in additional output, should each worker get paid $50 per hour?Not quiteYou have to deduct the firm’s costsCapital costsInput costsTransaction and handling costsSimple example with input and capital costsI need $20 in supplies and one hour to build a small cabinetThe firm I work for also needs to rent a cubicle, at $8 per hourOnce I finish building the cabinet, the firm can sell it to a wholesaler for $50What is my worth to the company?What is my worth to the company?The company is willing to pay up to $22 per hour for my labor to build cabinetsCosts: $28 (supplies and cubicle)Benefits: $50In a competitive environment, if Firm X offers less then $22, Firm Y can offer me more than what Firm X doesThe battling between Firms X and Y will continue until one offers $22Marginal product of laborIn this example, my marginal product (MP) of an hour of labor is 1 cabinetThe value of my marginal product (VMP) of an hour of labor is the additional value my hour of work produces: $22All workers just like me will earn $22 per hour in a competitive labor marketSuppose that you could build two cabinets per hourShould you earn $22 per hour?NoCosts per hour: $48 (Supplies for two cabinets and one hour’s cubicle rental)Benefits per hour: $100 (two cabinets)You should earn $52 per hour for your workBack to an old example# of empl./dayPhones per day0 01 202 453 554 635 67Recall the following informationPhones sell for $18 eachVariable cost is $100 per workerOnly other costs are fixedDifferent analysis, same resultProduce as long as VMP > $100# of empl./day Phones per dayMP (extra phones per day)VMP ($ per day)0 020 3601 2025 4502 4510 1803 558 1444 634 725 67Hire?YesYesYesYesNoRecall this table from Lecture 6: We hire 4 workers either way# of empl./dayPhones per dayMB ($/phone) MC ($/phone)0 018.00 5.001 2018.00 4.002 4518.00 10.003 5518.00 12.504 6318.00 25.005 67When analyzing labor problems…You can often choose the method you use to maximize a firm’s benefitsNotice that we get the same answer either waySummary: Value of workIn a competitive labor market, the long-run equilibrium wage is a worker’s VMPMore productive workers will get paid more in a competitive environment equilibriumSome labor problems that were analyzed using the MB/MC approach can also be analyzed using a VMP approachHuman capitalHuman capital comprises of the characteristics that affect the value of the person’s work when hiredThe better the characteristics of human capital, the more a person is likely to earnSome human capital qualitiesEducationDirect knowledgeIntelligenceSignalingTrainingWork and life experiencesEnergy levelWork habitsTrustworthinessInitiativeEducation sends many messages to a potential employer“I have learned everything needed to finish this level of education”“I am intelligent enough to finish this education, which probably means I am smarter than those without my level of education”“I am using this level of education to send a signal that I have other good qualities that you are looking for; others that do not finish this level of education can say the same thing”Education and employmentMany jobs require a minimum level of education to be considered for a jobM.D. to be hired as a doctorLicense for many specialized fieldsReal estatePilotHigh school or college diploma for many entry-level jobsEducation and employmentThe more education you have, the higher you are in demand for your servicesExceptions: People that get a Ph.D. in the humanities often end up in the same type of job that they had beforeFor more on educationSee “Mandatory starting dates for kindergarten,” p. 367See Economic Naturalist 13.4, p. 387A new class is being developed in the Economics departmentSummary: Human capitalMany characteristics form human capitalEducation probably most important for most peopleHuman capital is valued by employers due to the fact that it increases a workers productivityUnionsUnions form so that workers can collectively bargainWagesWorking conditionsUnions and wagesCan anyone unionize and demand higher wages?In most cases, yesDemands