Wage Structure, Government Regulation, and Job Search

1. Wage Structure,Government Regulation, and Job Search

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

3. Hourly Earnings By Occupational Group 2008

4. Hourly Earnings By Industry Group 2008

5. Private Manufacturing Hourly Earnings By State 2008

6. Hourly Compensation Around the World, 2007

7. Reasons for Wage Differentials • Heterogeneous jobs • Heterogeneous workers • Labor market imperfections

8. 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 lower at Ajax if demand is the same in both markets

9. 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

10. Beauty and the Labor Market • Hammermesh and Biddle (1994) • Beauty premium: 10-15% higher wages “Hire ugly. All other things being equal, I'd give the nod to an ugly candidate. It’s not charity: They have less value in the marketplace and can be hired less expensively, even though looks have, for most jobs, little or no bearing on job performance. I've found that, on average, ugly people are more likely to be kind and to work harder because they know they're working at a disadvantage. And unattractive people are more likely to stay with me because they tend to have a tough time getting hired, in part because they generally don’t network efficiently. If I treat unattractive employees well, they’re usually very loyal.” Marty Nemko, professional career advisor

11. 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

12. 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

13. 8.00 8.20 8.40 8.60 8.80 9.00 9.20 9.40 9.60 9.80 Wage rates Labor Market Imperfections • Imperfect information • Makes job search costly • A distribution of wage rates result

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

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

16. Fair Labor Standards Act (1938) established: Federal minimum wage 1938: $0.25 2009: $7.25 Overtime premium Child labor restrictions Minimum Wage Law Ohio’s minimum wage went up to $7.30 this past January

17. States with minimum wage rates higher than the Federal rate States with minimum wage rates the same as the Federal rate States with minimum wage rates lower than the Federal rate States with no minimum wage law

18. minimum wage in 2008 dollars minimum wage in current dollars

19. Minimum Wage Relative to the Average Hourly Wage Rate 1965-2008

21. 2009 Poverty Guidelines (48 Contiguous States and DC) Source: http://aspe.hhs.gov/poverty/09poverty.shtml

22. Competitive Labor Market Free Market: W1, Q1 no unemployment: QD = QS 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 Covered sector unemployment Wage S1 W2 = $7 W1= $6 DWL D1 QD Q1 QS Labor B W layoffs new entrants What happens in the uncovered sector?

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

25. Suppose that the equilibrium wage in the low-skilled labor market is $8.00. Further, suppose the federal government raises the minimum wage to $7.25 an hour from its present level of $6.55. The government’s action of increasing the minimum wage will result in: a decrease in unemployment an increase in unemployment a shortage of low-skilled labor. neither a shortage nor a surplus of labor in the low-skilled labor market.

26. Monopsony Model • Monopsony hiring rule: MRP = MWC • Monopsony outcome: W1, L1 • Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve • Monopsonist will hire L2 workers at W* • Minimum wage increases employment! MWC1 Wage S1 W* W1 D1 L1 L2 Labor

28. 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

29. 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

30. 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 negative 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

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

32. 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*

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.

34. 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.

35. 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

36. 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

37. 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 .20 .10 .05

38. 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

39. 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

40. 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

41. 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.

42. 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.