MicroEconomics Notes Chapter 15 The Labor Market Individual Labor Supply Households supply labor people in the households allocate their time to work for pay or not to work leisure time this leads to individuals having to make a labor supply decision based upon the labor leisure tradeoff The backward bending labor supply curve results because a person is willing and able to work more hours as the wage rate increases until at some sufficiently high wage the person chooses to work fewer hours The person feels that he or she has enough income and would rather have At a high enough wage rate the person feels that he or she can afford to take more leisure time more leisure time Labor Market Supply If the labor supply curve for each individual slopes upward then the market supply curve the sum of all individual supply curves also slopes upward The labor market supply curve slopes up because the number of people willing and able to work rises as the wage rate rises and because the number of hours that each person is willing and able to work rises as the wage rate rises at least up to some high wage rate Wage Differentials If all workers jobs and information were identical there would be no wage differentials all workers would earn the same wage Reasons for wage differences compensating wage differentials differences in individual productivity Compensating Wage Differentials Compensating wage differentials wage differences that make up for the higher risk or poorer working conditions of one job over another Some jobs are more dangerous or more unpleasant Workers demand higher wages to be willing to supply their labor to these jobs The supply curve of labor for these jobs lies above the supply curve of labor for less desirable jobs This results in a higher equilibrium wage and an equilibrium differential the compensation the worker demands and gets for undertaking the riskier less desirable job Human Capital People differ with respect to their skills These difference influence the level of wages for two reasons o Skilled workers have higher marginal productivity than unskilled workers and the supply of skilled workers is smaller than the supply of unskilled workers As a result skilled workers will receive higher wages than unskilled workers The expectation of higher wages will induce people to acquire human capital skills and training acquired through education and on the job training Investment in Human Capital Just as firms invest in physical capital we say that individuals invest in human capital o These individuals are purchasing education and training in order to achieve higher output and income in the future As with all other economic decisions the decision to invest in human capital is made in terms of whether the expected benefits will exceed the costs Outsourcing o The knowledge economy makes it possible for many jobs to be performed anywhere in the world and then transmitted electronically wherever it is demanded o If the work can be done as well in India or China at a much lower price companies in the U S and other developed nations will purchase the work from these countries o As a result an increasing number of jobs are being done offshore This is called outsourcing or offshoring Offshoring Outsourcing the process of purchasing services from another firm rather than employing someone to do the service inside the firm Outsourcing is called offshoring when the jobs are purchased from a firm in another country Minimum Wage A minimum wage has existed in the United States since 1938 when it was 0 25 per hour In 2009 it was 7 25 per hour Not all firms and industries must pay the minimum wage Some are granted exemptions States may have their own minimum wage if their wages exceed the federal level Impact of Minimum Wage In a market such as the unskilled markets for agricultural workers construction workers and restaurant busboys the minimum wage would create a labor surplus as the quantity of jobs offered is reduced and the quantity of people wanting jobs increases While the minimum wage drives wages up for those who have a job it hurts the chances of employment for others Unskilled Labor Market and Illegal Immigration When the cost of labor declines the costs of doing business also decline As firms increase output and new firms enter the business the market supply of the products being produced by the unskilled labor will rise and the market price of the good or service will decline Discrimination Discrimination When factors unrelated to marginal revenue product affect the wages or jobs that are obtained It is another reason for wage differentials o Discrimination is costly in that less productive employees or more expensive but not more productive employees are used by the firm It is contrary to profit maximization o Discrimination may be personally based or statistical o Personal discrimination is based upon prejudices on the part of employers fellow workers or customers o Statistical discrimination results when an indicator of group performance is incorrectly applied to an individual member of that group Discrimination Wage Differentials and Government Policies Occupational Segregation is the separation of jobs by gender o When statistical discrimination and imperfect information lead to crowding or forcing some groups into certain kinds of occupations o Women pushed into Secretarial Clerical Support roles Civil Rights Act of 1964 unlawful for any employer to discriminate on the basis of race color religion sex or national origin o There are exceptions made if they are bona fide occupational qualifications for the job Legal Tests of Discrimination Disparate treatment treating individuals differently because of their race sex color religion or national origin Disparate impact it is the result of different treatment not the motivation that matters Comparable Worth pay for equal work Wage gap between men and women has led to another approach equal Comparable Worth the pay ought to be determined by the job characteristics rather than by supply and demand o Jobs with comparable requirements should receive comparable wages o Proponents of this approach argue that market determined wages are not appropriate because of the market s inability to assess marginal products o Opponents argue that interference with the function of the labor market will lead to shortages in some occupations and excess supplies in others