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Chapter 6: Determination of Wages

Chapter 6: Determination of Wages. Importance of wages : wage structure at point in time and changes over time serve to efficiently allocate labor and to keep S and D in balance. Why care? Implications for well-being; inequality; L market trends over time. Policy relevance. Wages.

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Chapter 6: Determination of Wages

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  1. Chapter 6:Determination of Wages • Importance of wages: wage structure at point in time and changes over time serve to efficiently allocate labor and to keep S and D in balance. • Why care? • Implications for well-being; • inequality; • L market trends over time. • Policy relevance.

  2. Wages • Use term “wage” loosely! • 1) price of labor per hour of work • 2) use: average hourly earnings. • Two data sources: • 1) CPS: • 2) BLS: • Both published in Employment and Earnings. • See Table 6.1:

  3. Wage Determination in Competitive Markets • 5 Assumptions in P.C. Model • 1) firm’s goal: • worker’s goal: • 2) information.: • 3) homogeneity: • 4) no mkt power: • 5) no barriers/no mobility costs. • Result: Law of One Wage.

  4. Market Imperfections • 1) Nonmaximizing behavior: • 2) Imperfect information • 3) Heterogeneity: • 4) Collusion: • 5) Costly mobility:

  5. Minimum Wage Laws • First established in 1938 by the Fair Labor Standards Act (FLSA). • See movement over time. • Without legislative adjustment, real value falls over time.

  6. More on Wmin • Evaluating effectiveness of Wmin laws. • Policy’s goal: “..maintenance of minimum standards of living..” • Who holds Wmin jobs? • 1) 1999: about 3.3 million workers (4.6% of workforce) • 2) • 3)

  7. Effect of Minimum Wage • On living standard: • 2001 poverty line for family of four = $18,022. • FT work at Wmin = $10,300. • Effect of Wmin on labor market: • 1) • 2) • 3)

  8. Labor Market Segmentation • Allows for violation of one of the assumptions of p.c.: • Violated assumption: All jobs in market are open to competition. • Allows for strong barriers to entry. • Forms of barriers to entry: • 1) • 2) • 3) • 4) • Barrier can cause segmented labor market.

  9. Dual Labor Market Theory • Labor market stratified into: primary labor market; secondary labor market. Little/no mobility between sectors. • Primary sector: good jobs: • Typically found in large firms, union jobs, or high tech jobs. • 1) • 2) • 3)

  10. More on Theory • Secondary sector: bad jobs: • Good work habits not rewarded. • Therefore, bad work habits can be created or reinforced. • May result in self-perpetuating cycle that reinforces the segmentation into the 2 markets.

  11. More on Segmentation • Empirical evidence in favor of dual labor market theory: • Segmented workforce within single employer: permanent workers versus contingent workers (temp workers, out-sourcing, etc.) • Percent contingent has . • Microsoft case: “permanent” temps.

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