CH 5: Frictions in the Labor Market

1. CH 5: Frictions in the Labor Market • Monopsony • Source of monopsony power • Effects on wages & employment • Quasi-fixed labor costs • Types of QF costs • Effects of QF costs on hours/workers • Training as a QF cost & consequences of training investments for structure of pay.

2. Monopsony • The firm’s labor supply curve is upward sloping • Sources of monopsony: • Mobility costs • Job search costs • Information costs • Small # of competing employers

3. Quasi-fixed labor costs • Examples • Hiring costs • Maintenance of payroll records, issuing checks • Training costs • Explicit monetary costs • Implicit opportunity costs of trainer’s time and capital used • Implicit opportunity cost of trainee’s time

4. Quasi-fixed labor costs

5. Employee Benefits

6. Employee Benefits Based on table above, the percentage of compensation devoted to benefits is • 27% for all benefits • 8.8% for all legally required benefits • 6.3% for paid leave • 5.9% for insurance • 3.0% for retirement and savings

7. Quasi-fixed labor costs • Hiring and training costs are quasi-fixed • Some benefits are quasi-fixed, others are not. • pensions: • Are contributions a fixed dollar amount per employee, % of pay, or % of pay up to a maximum value? • legally required benefits: • many are % of pay up to a maximum. • health insurance: • typically, a worker is either covered or not and the employer contribution is independent of incremental hours worked.

8. Optimal Mix of Workers and Hours • MEm = marginal expense of an additional worker = W*H + Q where W =wage rate, H=hours per week, Q=QFC per worker • MEH = marginal expense of an additional hour of work for all its existing workforce. = W*N where W=wage rate and N=number of workers • MPm = MP of an additional worker for H hours. • MPh = MP of an additional hour of work for N workers.

9. Optimal Mix of Workers and Hours Optimal mix of M and H requires MEm /MPm = MEh /MPh What should firm do if • QFC rises? • Wage rate rises?

10. Optimal Mix of Workers and Hours • APPLICATIONS • raising the salary cap for payroll taxes • increasing the payroll tax rate on capped payroll taxes. • effect of training costs on likelihood of part-time work. • the over-time premium. • mandatory health insurance coverage • worker preferences for part-time as opposed to full-time work? • why do firms sometimes institute mandatory over-time rules? • would firms ever pay an over-time premium even in the absence of federal legislation?

11. Training Investments The firm's decision to invest in training a worker in a two-period model: Period 0: • pay Z to train the worker • pay W0 in wages to the worker • worker produces MP0 Period 1: • pay W1 in wages to the worker • worker produces MP1 • If worker is not trained, MP is fixed at MP* in both periods and the worker can receive a wage of W*=MP* at a competing firm.

12. Training Investments Optimal employment will be at E*

13. Training Investments • How are W0 & W1 determined? • Must offer a competitive PV of compensation • W0 + W1/(1+r) >= W* + W*/(1+r)

14. Training Investments • Examples: Suppose that W*=100 and r=6%. Alternative W0 W1 Present value (r=6%) • A 128 70 194 • B 100 100 194 • C 81 120 194 • D 62 140 194 • E 43 160 194 Why would the firm be reluctant to offer A or B? Why is worker reluctant to accept C, D, or E?

15. Training Investments • Firms that invest in training will want to • Defer pay • Find ways to restrict mobility of workers

16. Training Investments GENERAL VERSUS SPECIFIC TRAINING. • General training increases productivity at all firms. • Specific training increases productivity only at a specific firm (presumably the firm providing the training). • If training is general, a firm will have difficulty recouping its investment in training.

17. Training Investments • With general training, firm must pay W1>MP1 in 2ndperiod unless there is able retain worker after training. • Since W1>MP1, firm cannot recoup training investments by underpaying in second period • In equilibrium, • PVP=PVC  W0 + W1/(1+r) +Z = MP0 + MP1/(1+r)  W0=MP0-Z +(MP1-W1)/(1+r) • If general training requires, W1>MP1 • W0<MP0-Z • With specific training, firm can pay MP1*<W1<MP1 and recoup some of its training investments. Firms can recoup investment in specific training with restricting mobility.

18. Training Investments • How should training investments affect firm layoff behavior if product demand falls? • How does the above affect the cyclical nature of productivity? • If there are large training costs, firms should be concerned about screening out quitters. • Statistical discrimination • Fringe benefit packages • Discount rates

19. Investments in Training • Employer investments in general training • Armed forces • Sports contracts • Employer pays for night-time education