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UMass Amherst ECON 103 - Class 21 Labor supply and demand Fall 2014

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Slide 1Slide 2Big ideasSlide 4Do Labor Supply curves slope up?Do Labor Supply curves slope up? Or down?Is work part of life, or punishment for Adam's original sin?What would we do without “work”?Orthodox approach teaches that work is necessarily badThe most productive companies leave their workers aloneWhat is the slope of the labor supply curve?Maybe it doesn’t matterWhy do we care?Others work much less than we doCompared with other affluent economies, Americans work moreThe most productive workers (Norway) work the leastSlide 17Slide 18Economic distress is a push factorSlide 20Slide 21Slide 22Slide 23Immigrants who created US businessesSlide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Who earns more? The pimp or the hooker?Slide 42Slide 43Slide 44Slide 45Slide 46Why it matters: If employers pass on higher wagesSlide 48Remember to do Quiz on Moodle!Labor Market Equilibrium: The Orthodox ViewSupply, demand, and compensating differentialsBig 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 marketThe 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 supply curves slope down.LaborwageSubstitution effect > income effect?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!LaborwageSubstitution effect < Income effect?Higher wages, less labor supplied!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 PMOrthodox approach teaches that work is necessarily badIt 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 PMThe most productive companies leave their workers aloneEmployers 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 self-managed 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 matterImmigration is highly procyclical. People come to America to work and stop coming when there are no jobsWhy 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 PMOthers 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 13Compared with other affluent economies, Americans work moreUnited StatesCanadaAustraliaJapanFranceGermanyItalyNorwaySpainSwedenUnited Kingdom-500-450-400-350-300-250-200-150-100-500Annual Hours Worked Compared with USThe most productive workers (Norway) work the leastUnited StatesCanadaAustraliaJapanFranceGermanyItalyNorwaySpainSwedenUnited Kingdom0.0%20.0%40.0%60.0%80.0%100.0%120.0%140.0%160.0%Relative output/hour workedMany workers are immigrants, especially these days11/22/09 09:17 PMWhy Migrate?Push factorsWar, persecution, genocide, disaster.11/22/09 09:17 PMEconomic 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 economyWhy migrate?Pull: Economic opportunity in USEvidence for both. 11/22/09 09:17 PMDoes 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 PMSimple analytics of immigration11/22/09 09:17 PMImmigrants shift out the supply curve, lowering wagesWageNumber of workersBoth 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 businessesVinod Khosla: Sun MicrosystemsSergey Brin: GoogleShai Agassi: Electric carsJohn Chen: SybaseSteve Chen: YoutubeAndy Grove: IntelArianna Huffington: Huffington PostWhat if immigrants move demand curve also?11/22/09 09:17 PMWageNumber of workersImmigrants shift out demand curve, raising wages, by creating new businessesImmigrants shift out the supply curve, lowering wagesThe Government says that


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