Labor Market Equilibrium The Orthodox View Supply demand and compensating differentials Big ideas Workers accept work requiring more training or greater hazards only if they receive higher wages as compensating differential Higher wages for skilled or dangerous work encourages employers to economize on these workers Higher prices for products of skilled or dangerous work encourages consumers to economize Demand is one side of the labor market The other side is supply how much labor will be provided at any price Do Labor Supply curves slope up Higher wages raise the cost of not working for pay Higher wages allow workers to substitute market goods for home production the substitution effect Higher wages and income also discourage market work by making time at home more desirable the income effect If the substitution effect is greater than the income effect labor supply curves slope up If the income effect is greater labor wage Substitution effect income effect Labor Do Labor Supply curves slope up Or down Higher wages mean that you have more money to spend on having fun And you don t need to work as much to pay tuition Higher wages and higher income also make time at home more desirable the income effect If the income effect is greater than the substitution effect then labor supply curves are backward bending wage Substitution effect Income effect Higher wages less labor supplied Labor Is work part of life or punishment for Adam s original sin Left to their own devices would people work People have intrinsic need to feel useful They take joy in productive work What would we do without work People have intrinsic need to Be useful Work with others Have sense of accomplishment Otherwise people do regrettable things 11 22 09 09 17 PM Orthodox approach teaches that work is necessarily bad It denies that we can have productive and creative work People do their best work when they have opportunities for self expression are valued and in control of their time Like these guys 11 22 09 09 17 PM The most productive companies leave their workers alone Employers can monitor when you are present but they can t force creativity Google gives workers 20 of their time to work on their own projects The most successful have selfmanaged teams What is the slope of the labor supply curve Down From 1870 1940 male work week fell while wages rose Up Since 1880s American women do more market work with higher wages Flat Since 1940s male work week has stayed around 40 hours while wages have risen Down Men start working later retire at younger ages and fewer are in the labor force Maybe it doesn t matter Immigration is highly procyclical People come to America to work and stop coming when there are no jobs Why do we care Supply side economics assumes upward sloping supply curve Higher taxes will reduce work If we lower taxes people will work more If curve is backward bending income effect dominates then higher taxes will lead to more work and lower taxes to less 11 22 09 09 17 PM Others work much less than we do The French have 37 paid vacation days each year The Italians get 42 The Germans 35 The Brazilians get 34 The UK has 28 Canadians get 25 as do the Japanese and Koreans We get 13 Compared with other affluent economies Americans work more Annual Hours Worked Compared with US 0 50 ted i Un 100 150 200 250 300 350 400 450 500 tes Sta a ad n Ca A lia tra s u n pa Ja ce an r F y an m r Ge ly Ita r No y wa ain Sp n de e Sw d ite Un om gd n Ki The most productive workers Norway work the least Relative output hour worked 160 0 140 0 120 0 100 0 80 0 60 0 40 0 20 0 0 0 d ite Un tes Sta a ad n Ca A lia ts ra u n pa Ja ce an r F y an m r Ge ly Ita y wa r No ain Sp n de e Sw d ite n U K om gd n i Many workers are immigrants especially these days 11 22 09 09 17 PM Why Migrate Push factors War persecution genocide disaster 11 22 09 09 17 PM Economic distress is a push factor Free trade between the US and Mexico and lower corn prices in Mexico Attacks on the iron rice bowl and Chinese social security system Loss of communal property after Italian unification Recent collapse of Irish economy Why migrate Pull Economic opportunity in US Evidence for both 11 22 09 09 17 PM Does immigration lower wages How much does it shift supply curve out Does it also move demand curve Sergey Brin may move both Other immigrants increase our exports and make our industry more dynamic From another perspective it may reduce labor s bargaining power 11 22 09 09 17 PM Simple analytics of immigration Wage 11 22 09 09 17 PM Immigrants shift out the supply curve lowering wages Number of workers Both unskilled and skilled immigrants may increase demand for native born workers Unskilled e g dishwashers are complements to skilled native workers e g chefs and waitresses Skilled e g executives at Google and Sun Micro baseball shortstops are complements and substitutes for natives Complements to unskilled and skills who employ them e g gourmet chefs or baseball pitchers Substitutes for same skill e g native born shortstops Immigrants who created US businesses Shai Agassi Electric cars Sergey Brin Google Andy Grove Intel Steve Chen Youtube Vinod Khosla Sun Microsystems John Chen Sybase Arianna Huffington Huffington What if immigrants move demand curve also Wage Immigrants shift out demand curve raising wages by creating new businesses Immigrants shift out the supply curve lowering wages 11 22 09 09 17 PM Number of workers The Government says that it isn t work unless it is paid Government defines labor force as people with paid employment or looking for paid employment Volunteer work or family care work isn t counted 11 22 09 09 17 PM Labor supply curves may not slope up Substitution effect Higher market wages more labor offered substitute market wages for home production Example higher wages I ll do more paid work and eat takeout instead of cooking myself 11 22 09 09 17 PM Income effect With higher wages incomes are higher and who wants to work Really rich people don t work for wages Bill Gates retires Rich people have better things to do with their time than to work for pay Like run New York City give their money away play with their toys and act like idiots 11 22 09 09 17 PM We would expect that labor supply would increase at first and then fall with higher wages Substitution effect at low income but then the income effect dominates Above 100 or so people would rather have more time than work for more pay 11 22 09 09 17 PM Why should we care about