Wage Structure

1. Wage Structure • Law of One Price? • Observed wage differentials • Occupational • Industry • Geographic • Reasons • Heterogeneous jobs • Heterogeneous workers • Labor market imperfections

2. Of the following occupational groups, average hourly earnings in 2003 were greatest among • service workers • installation, maintenance, and repair workers • sales workers • managerial, business, and financial workers

3. Hourly Earnings By Occupational Group, 2003

4. Hourly Earnings By Industry Group, 2003

5. Private Manufacturing Worker’s Hourly Earnings By State, 2003

6. Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium: • the wage at Ajax will be higher than at Acme • the wage at Ajax will be lower than at Acme • workers will have lower net utility at Acme • employment will be higher at Ajax if demand is the same in both markets

7. Heterogeneous Jobs • Compensating differentials • risky jobs • fringe benefits • job status • job security • Differing skill requirements • Differences based on efficiency wages • Other factors • Union status • Discrimination • Firm size

8. Which of the following research findings would support an efficiency wage explanation of pay differentials? • Firms with higher turnover costs pay lower than average wages • Firms with higher costs of detecting shirking pay higher than average wages • Pay is positively correlated with human capital investments in a given industry • Differences in observable worker characteristics explain most of the variance in pay across industries

9. Which of the following research findings would support an efficiency wage explanation of pay differentials? • Firms with higher turnover costs pay lower than average wages • Firms with higher costs of detecting shirking pay higher than average wages • Pay is positively correlated with human capital investments in a given industry • Differences in observable worker characteristics explain most of the variance in pay across industries

10. Differing human capital Non-competing groups Differing individual preferences Time preferences Tastes for nonwage aspects Married vs Single Males Married men received 8-40% higher wages Differing personal attributes Differing incentives to accumulate HK Differing costs of acquiring HK Heterogeneous Workers

11. 6.00 6.20 6.40 6.60 6.80 7.00 7.20 7.40 7.60 7.80 Wage rates Labor Market Imperfections • Imperfect information • Wage rate distributions • Lengthy adjustment periods

12. Labor Market Imperfections • Immobilities • Geographic • Transportation costs • Family concerns • Institutional • Licensing • Pension plans • Health insurance • Sociological • Discrimination

13. Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium: • the wage at Ajax will be higher than at Acme • the wage at Ajax will be lower than at Acme • workers will have lower net utility at Acme • employment will be higher at Ajax if demand is the same in both markets D is good also

14. Government Regulation • Minimum Wage Laws • Occupational Health and Safety Regulation • Occupational Licensing

15. Minimum Wage Law • Fair Labor Standards Act (1938) • Established federal minimum wage • 1938: $0.25 • 2006: $5.15 • Established 1.5 overtime premium • Prohibited child labor Ohio’s minimum wage went up to $6.85 this January

16. The Minimum Wage, 1950-2006 9 8 7 6 minimum wage in 2006 dollars 5 Dollars per hour 4 3 minimum wage in current dollars 2 1 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

17. Minimum Wage Relative to the Average Private Non-supervisory Wage, 1950 - 2005

18. A majority of the workers earning the minimum wage: • are males • are females • work full-time • are teenagers

20. Competitive Model Covered Sector • Free Market: W1, Q1 • no unemployment • Gov’t imposes min. wage at W2 • at W2: QD < QS • Unemployment occurs • How can employers offset impact? • Reduce hours of work • Reduce fringe benefits • Raise price • Reduce quality • Hire illegal aliens unemployment Wage S1 W2 = $7 W1= $5 D1 QD Q1 QS Labor B W layoffs new entrants What happens in the uncovered sector?

22. Monopsony Model • Monopsony hiring rule: MRP = MWC • Monopsony outcome: W1, Q1 • Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve • Monopsonist will hire Q2 workers at W* • Minimum wage increases employment! MWC1 Wage S1 W* W1 D1 Q1 Q2 Labor

23. MWC $ S W* W2 W1 MRP Q4 Q1 Q2 Q3 Labor 0 Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market: • will rise • will fall • remain the same • may or may not change; more info is required

24. MWC $ S W* W2 W1 MRP Q4 Q1 Q2 Q3 Labor 0 Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market: • will rise • will fall • remain the same • may or may not change; more info is required

25. MWC $ S W* W2 W1 MRP Q4 Q1 Q2 Q3 Labor 0 Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market: • will rise to Q2 • will rise to Q4 • will fall • Remain the same

26. MWC $ S W* W2 W1 MRP Q4 Q1 Q2 Q3 Labor 0 Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market: • will rise to Q2 • will rise to Q4 • will fall • Remain the same

27. Empirical Evidence • Brown (1982) • 10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3% • Card and Krueger (1994) • MW had no effect on employment at fast food restaurants in NJ surveyed before and after the increase • Neumark and Wascher (1995) • Rexamined payroll data from NJ fastfood restaurants • MW had negative effects on employment consistent with conventional wisdom New research is looking at impact on Human Capital and Poverty

29. Rate of Occupational Fatalities by Industry, 2002 Workplace Safety • Occupational Safety and Health Act (1970) • Permissable exposure levels • Protective equipment • Process safety management

30. Uninformed workers Model of Optimal Safety $ • MC slopes upward to reflect the rising opportunity cost of providing safety • MB slopes downward to reflect diminishing returns to safety • Permits paying lower wages • Reduced worker turnover • Lower worker comp rates • MB = MC determines optimal safety MC1 MB1 MB2 S2 S* Safety • If workers possess perfect information about potential risks, then S* is socially optimal • If workers underestimate potential risks, they won’t demand a proper wage premium: • Safety will be less than optimal: S2 < S*

31. The profit-maximizing level of job safety is a probability level of: • 0.65 • 0.75 • 0.80 • 0.85

32. The profit-maximizing level of job safety is a probability level of: • 0.65 • 0.75 • 0.80 • 0.85

33. OSHA Revisited • Case for OSHA • Imperfect information • Barriers to occupational mobility • Case against OSHA • Workers might overestimate potential risks • Workplace standards often bear no relationship to reductions to job injuries and illness • Empirical evidence • There is mixed evidence that OSHA has reduced occupational injuries. • If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.

35. Job Search • External search • Internal search • Why Search? • Workers search for the best job offer and firms search for employees to fill job vacancies. • Search occurs because: • Workers and jobs are highly heterogeneous. • Information about differences in jobs and workers is imperfect and takes time to obtain.

36. Job Search Model • Assumptions • Job searcher is unemployed and seeking work • Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage

37. Worker formulates an acceptance wage, wA If w > wA accept wage offer If w < wA reject wage offer Benefits of search Get additional wage offers Costs of search Explicit: employment agency fees + transportation Implicit: foregone earnings Job Search Model

38. Job Search Model: Implications • The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration) • Inflation will shift the distribution of wage offers to the right • Expected inflation will shift acceptance wage • Unexpected inflation will not shift the acceptance wage • Unemployment compensation increases acceptance wage If wA = $20,000, what is probability that first offer will be accepted? wA .30 Probability = 65% .20 .10 .05 ___ ___ ___ _____

39. If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable? • 0.25 • 0.30 • 0.50 • 0.70

40. If the rate of inflation increases but Sally mistakenly believes it has not, then: • both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged • the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration • the acceptance wage will shift to the right, thereby reducing excepted search duration • both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged

41. If the rate of inflation increases but Sally mistakenly believes it has not, then: • both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged • the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration • the acceptance wage will shift to the right, thereby reducing excepted search duration • both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged

42. Shipping Department Dispatcher Long-distance driver Local Driver Packer External Labor Market Loader Internal Labor Markets • A worker typically enters an internal labor market at the least-skilled port-of- entry job in the job ladder or mobility chain. • Wage rates and the allocation of workers within the internal labor market are governed primarily by administrative rules and procedures. Port of Entry

43. Reasons for Internal Labor Markets • Firms use job ladders as method to reduce worker turnover. • The lower turnover increases the return on firm investments in specific training. • Firms can lower recruiting and screening costs since they will have a lot of information about the existing workforce. • The job ladder also provides an incentive for workers to seek new skills and work hard. • Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market. • Also, the formal rules protect workers from arbitrary management decisions.

44. Government as Economic Rent Provider • Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment. • Government provides economic rents through occupational licensing and trade barriers.

45. Suppose that all other nonwage aspects of the jobs in these two markets are identical. We would expect labor supply in B to increase if: • the probability of job loss rises in B • earnings are more variable in A • job safety improves in A • there are better prospects for advancement in A

46. The wage rate paid workers at Flow, Inc. will most likely exceed that at otherwise identical Stock Co. if: • Flow, Inc. is a more prestigious firm than Stock Co • earnings are subject to greater variability at Stock, Co. • Stock Co. offers better pension and insurance benefits than Flow, Inc. • the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc.

47. Currently, the minimum wage law does not apply to about 12% of non-supervisory workers. Assuming that all consequently displaced workers find jobs in the uncovered sector, an increase in the minimum wage will: • make all workers better off • cause a migration of workers from the uncovered to the covered sector • create additional output in the uncovered sector of a lower value than the output lost in the covered sector • cause an increase in economic rent to original workers in the uncovered sector

48. Consider a proposed law to deregulate the hair-care industry. Barbers would be allowed to do work previously confined to stylists, and the latter would no longer be required to pass strict licensure exams. Which outcome would you expect to result from this deregulation? • A decrease in economic rent to current stylists • A decrease in economic rent to current barbers • An increase in economic rent to beauty school operators • An increase in economic rent to workers in occupations in which displaced stylists find jobs

49. In addition to their regular unemployment benefits, a recent Washington state program offered an average of $562 to any job loser who became reemployed within 13 weeks of filing for unemployment compensation. Economic theory suggests that such a “bounty” scheme should: • reduce job search duration by shifting the wage offer distribution to the left • reduce job search duration by decreasing the acceptance wage and intensifying job search • reduce job search duration by shifting the wage offer distribution to the right • have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution