Posted: September 13th, 2017

restricting the supply of labor to raise wages

restricting the supply of labor to raise wages

1. (4 pts.) If a union is going to restrict the supply of labor to raise wages, but is also concerned
about reducing employment, does the union prefer elastic or inelastic demand for labor from
firms? Use two supply and demand graphs to answer this question.

2. (4 pts.) Hotdog stand workers unionize, raise wages from $15 to $20, and Cause 40 workers
to be unemployed. The unemployed workers find jobs in the un-unionized banana stand
industry. Wages of banana stand workers fall from $12 to $10. What is the pure union
wage advantage? What is the spillover efiect? What is the estimated union advantage with
spillover effects?

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Figure 1: Union and non-union firms
3. (4 pts.) See figure 1. Firm A becomes unionized, while firm B remains non-union.
a) What is the increase in wages at firm B called?
b) Calculate the observed union advantage.
C) Identify on the graph the area of surplus lost (Assume the demand for labor is also
VMP).
EC 350: Labor Economics Spring 2014

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Economic E?ects of Unions and Collective Bargaining

What is the e?ect of unionisation on wages? What are the implications for productivity and allocative e?ciency? Do unions a?ect the pro?tability of ?rms? What is the impact of unions on the distribution of earnings?

The Union Wage Advantage

Unions attempt to raise wages. Are they successful? BLS reports that union members earned $26.88 per hour and non-union members earned $20.15 per hour Did union membership cause this increase in earnings? It’s complicated…

The Union Wage Advantage

Ex. GM factories are unionized, and Honda factories are not. The previous statistic is like saying that GM pays $25.35 per hour and Honda pays $20.76 per hour, and the ONLY reason they pay di?erent wages is because GM is unionized. Other possible explanations: GM was targeted for unionization because wages were higher GM could have a di?erent workforce: more experience ? higher wages

The Union Wage Advantage

Even if two industries are identical without unions, it can be di?cult to measure the true e?ect of unionization on wages

Labor Unions: Facts and Figures
Figure: Demand for Labor at GM

Measuring the Wage Advantage

Pure union wage advantage: is the amount by which the union wage exceeds the nonunion wage that would exist without the union. Ap = Ex: Wu – Wn x 100 Wn (1)

24 – 20 x 100 = 20% 20 Wu is the union wage and Wn is the non-union wage Ap =

(2)

In reality, we are unable to observe what the earnings of unionized workers would be if the union did not exist.

Spillover E?ects

Spillover E?ect refers to the decline in nonunion wages that results from displaced union workers supplying their services in nonunion labor markets.

Spillover E?ects

Figure: Demand for Labor at GM and Honda

Spillover E?ects
Figure: Demand for Labor at GM and Honda

We only observe a wage of $24 at GM and $16 at Honda.

Measuring the Wage Advantage

24 – 16 x 100 = 50% (3) 16 It seems like unions cause a 50 % increase in wages, but they only cause a 20 % increase! As =

Threat E?ects

Threat E?ect refers to an increase in nonunion wages that a nonunion employer o?ers as a response to the threat of unionization.

Threat E?ects

Figure: Demand for Labor at GM and Honda

Threat E?ects
Figure: Demand for Labor at GM and Honda

We only observe GM wages at $24 and Honda wages at $22.

Measuring the Wage Advantage

24 – 22 x 100 = 9.1% (4) 22 It seems like unions cause a 9.1 % increase in wages, but they actually cause a 20 % increase! At =

Measuring the Wage Advantage

The spillover e?ect will result in the measured union wage advantage to overestimate the pure union wage advantage. The threat e?ect will result in the measured union wage advantage to underestimate the pure union wage advantage.

Measuring the Wage Advantage
Some economists have argued that unions a?ect wages in other ways: Compensating wage di?erential (increase in union wages) Working in a union is annoying Requires a 1/5th increase in the wage to attract workers Product market e?ects (increase in non-union wages) Unions wages result in an increased costs which may cause ?rms to raise prices of their products The increase in price causes consumers to shift away from the union-made goods to nonunion-made goods The increase demand for nonunion-made goods result in a higher price for the good, which could result in a higher nonunion wage Wait unemployment Unemployed workers in the union sector may choose to wait for a job in the union sector rather than enter the nonunionzed sector, reducing the spillover e?ect

Measuring the Wage Advantage
Hirsch and Macpherson estimated the union wage advantage over the period 1983-2008
Figure: Union Wage Advantage

Between 1923-1958, the wage advantage was 10-15 percent. In 1970’s, the wage advantage was 20-30 percent.
Public employment and wage setting Military employment Nonpayroll spending and the impact on labor Publicly provided goods and labor markets Income tax and the labor market

Public Employment: Facts

Government jobs are a large fraction of U.S. employment Public sector goods: K-12 Education, postal services, road repair, etc. Monopsony: Nuclear reactors The government attempts to choose the wage and quantity of labor that maximizes society’s welfare.

Public Employment: Quantity

Public Employment: Quantity

Growth in state and local government employment Spikes in military, but declining No growth in federal (civilian) employment

Public Employment: Percent of Labor Force

Public Employment: Percent of Labor Force

Public employment at the state and local level has been rising faster than the rate of population growth. One in six workers are now public employees.

Percent of Government Jobs by Type

Growth in Labor Demand for Public Jobs

Reasons employment may have grown: Higher population ? greater need for state and local services Change in the type of services demanded. Ex. education and the baby boom Growth in real income increases demand for state and local services Public unions use political power to increase government spending (Courant, Gramlich, and Rubinfeld; 1979) Higher levels of regulation require more government workers

Public vs. Private Sector Pay

The government attempts to follow the prevailing wage rule and pay comparable wages to workers in private sectors. Is there a wage premium for public jobs?

Public vs. Private Sector Pay

Two ways to compare: Direct comparison: Private sector makes $20.03 per hour, public makes $24.03 No controls for education, experience, etc. Controlling for worker characteristics: Federal pay was 13 to 20 percent higher in 1975. State pay was 7 percent higher for women, but 3 to 11 percent lower for men.

Public vs. Private Sector Pay

The wage premium has fallen since 1977, and as of 2009, was about 3 percent. However, there are other bene?ts to government jobs: Fringe bene?ts tend to be better in government jobs (10-19 percent for local, 3-10 percent for state) Security from unemployment (government shutdown?)

Quitting and Government Jobs

Government workers are less likely to quit. Two interpretations: Evidence of a wage premium Pension e?ect reduces worker turnover

Military and the Labor Market

Military service in the U.S. is based on a voluntary system, but has occasionally used a draft.

Military and the Labor Market

Key points: Draft places the cost of the military largely on the draftee In general, voluntary will lead to a smaller army, higher tax costs, & fully compensated military personnel

Other Costs of Military Service

Many papers use drafts during the Vietnam War as random assignment to military service. Angrist and Chen, (2011): Lower earnings initially, but recovers after 20-30 years. Lindo and Stoecker (2013): Increases the probability of incarceration for violent crimes by 0.34 percent

Nonpayroll Spending by Government: Impact on Labor

Government spending impacts the labor market through purchases, transfer payments, and subsidies. $1,274 billion spent on private sector goods An increase in demand for a product will increase the ?rm’s demand for labor. Higher government spending will increase employment without the government hiring workers directly.

Transfer payments reallocate income from one individual to another. Examples: Social Security bene?ts Unemployment compensation

Subsidies are transfer payments for ?rms or households for a speci?c good. Examples: Farm subsidy; pay an additional $0.28 for each bundle of corn SUV tax write-o?: intended to encourage equipment investment

Transfers, Subsidies, and the Labor Market

E?ects of transfers on the demand for labor: Alter the total demand for products Ex. social security: less demand for PS4’s, higher demand for golf courses Employment would fall for production of PS4’s, but lead to more employment at golf courses

Transfers, Subsidies, and the Labor Market

E?ects of subsidies on the demand for labor: Higher demand for labor in some industries Ex. Farms produce more corn because of the subsidy, and need more workers Farm subsides cost $1.23 billion in 2009; money not spent by consumers…

Transfers, Subsidies, and the Labor Market

E?ects on the supply of labor Income e?ect: Receiving the transfer reduces hours worked Substitution e?ect: if the transfer has a reduction rate, the transfer will further reduce hours worked

Public Goods and the Labor Market

Public goods a?ect labor demand and supply independently of the public and private employment necessary to provide them

Public Goods and the Labor Market

Ex. Consider the construction of a dam (public good). The government employed people and purchased materials to build the dam. E?ects on demand: irrigation may increase farming employment demand for ?shing could decrease if ?sh can’t pass the dam E?ects on supply: Pure income e?ect suggests people will work less (ch. 2 work-leisure model)

Income Tax and the Labor Market

Income taxes are a major source of tax revenue for governments, and cause potentially large distortions in labor markets.

Income Tax and the Labor Market

Income Tax and the Labor Market
Pre-tax wages are determined by D and post-tax wages are determined by Dt . L 5 6 7 8 9 10 11 12 13 D = MRP 20 18 16 14 12 10 8 6 4 Total Tax 4.50 3.60 2.80 2.10 1.50 1.00 0.60 0.30 0.10 Dt is (D – T) 15.50 14.40 13.20 11.90 10.50 9.00 7.40 5.70 3.90

Workers only care about Dt ; their after-tax earnings.

Income Tax and the Labor Market
Equilibrium is where S = Dt

Income Tax and the Labor Market

When S is inelastic, taxes cause no decrease in employment or increase in wages When S is elastic, taxes create a “dead-weight loss” by decreasing employment and increasing wages So, we want to know if supply is inelastic or not

Income Tax and Individual Labor Supply

Adding a income tax to the work-leisure model will “curve” the budget constraint. The decrease in slope causes a substitution e?ect that lowers hours worked The reduction in total income causes an increase in hours worked

Income Tax and Individual Labor Supply

Theoretically: labor supply could be inelastic or elastic depending on preferences
Government and the Labor Market: Legislation and Regulation Chapter 13

29 May, 2014

Overview

Minimum wage law Government as a rent provider Skip occupational health and safety regulation Skip labor law

Minimum Wage Law

Fair Labor Standards Act of 1938: Minimum wage of $0.25 per hour
Average wage in manufacturing was around $0.65 per hour Over time, congress has raised the minimum wage to keep up with in?ation

Minimum Wage Facts

Coverage: Originally covered 44 percent of workers Today, 88 percent of workers are covered Statistics: 52 percent are aged 16 to 24 67 percent work part-time

Minimum Wage Controversy

Pro: Support a “living wage” that ?rm’s won’t pay otherwise Helps negate ?rm’s market power Con: Increases unemployment Spillover e?ects on other markets Increases drop-out rates for high school students

Minimum Wage Model

Positive, not normative statements: e?ciency We will focus on: Impacts on unemployment Losses in e?ciency In?ation and minimum wage Inequality

The Model

1. Competitive standard supply and demand for labor ¯ 2. Minimum wage set at W

Impact on unemployment Dead weight loss area

Results

1. Creates unemployment (25 fewer workers employed, an additional 35 want to work but can’t ?nd employment) 2. Creates dead-weight loss (from the 25 fewer workers employed) 3. Transfers some surplus from ?rms to workers

In?ation and Minimum Wage

People should care about their real wage; Wage /P , in other words, the number of things they can actually buy. In?ation will reduce the e?ectiveness of a minimum wage: P ?? Wagemin /P ?

In?ation and Minimum Wage

Result: if we don’t raise minimum wage, eventually it will be irrelevant

Monopsony and Minimum Wage

When ?rms have market power in the labor market, a minimum wage law could increase employment.

Monopsony and Minimum Wage

However, the minimum wage law would have to be set perfectly; and the target (of a $7 wage) is not known!

Emperical Evidence on Minimum Wage
1. Employment
A 10 percent increase in the minimum wage causes a 1 to 3 percent decrease in jobs held by young workers Modern literature: No e?ect on employment? Very hotly debated…

2. Investment in Human Capital
May reduce on-the-job training Evidence that higher minimum wages encourages teenagers to drop out of school

3. No e?ect on income inequality or poverty
People earning a minimum wage are more likely to be members of middle to high income families 84 percent of workers are in families above the poverty line

Government as a Rent Provider

Economic Rent is the amount paid to a worker over and above their opportunity cost. I suppose I make $ 4.48 per hour, and my next best alternative job (running a hot dog cart) would earn me $3.00 per hour. My economic rent is the di?erence: $4.48 – $3.00 = $1.48

Government as a Rent Provider

Government o?cials may provide rents to get elected: Occupational licenses Tari?s and quotas on foreign goods

Licenses and Rents

Licensing has increased from less than 5 percent in 1950 to 29 percent in 2006 Examples: Accountants, Barbers, Boxers, Chiropractors, Librarians, Livestock dealers Restrictions on the number of licenses Restrictions on the number of licenses restrict the supply of workers…

Licenses and Rents

Results: Some workers earn the higher wage (W+) Some can’t ?nd work; dead-weight loss Less surplus for ?rms

Tari?s, Quotas, and Rents

The government can also provide rents by reducing foreign competition. Tari?s are taxes on foreign goods; quotas are limits on the total number of imported products. Both will reduce the demand for foreign goods, and increase the demand for domestic products.

Tari?s, Quotas, and Rents

Caveat: When we impose tari?s and quotas on other countries, they will impose them on us too… If trade is bene?cial, this makes us all worse o?.
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