LABOR WAGE DETERMINATION WAGE DETERMINATION – unskilled labor – equilibrium – semiskilled labor wage rate – skilled labor – theory of negotiated – professional labor wages – noncompeting labor – seniority grades – signaling theory – wage rate – labor mobility – traditional theory of • http://www.usnews.com/features/business/best- wage determination careers/best-careers-2008.html • BEST CAREERS IN 2008 Personal Investment • Investment in human capital is one of the more important investments we can make. • The extent to which we invest in our own level of skills, experience, and knowledge even affects the way we describe and classify labor. Categories of Labor • Unskilled laborers make some of the lowest wages. • Semiskilled workers do jobs that require a minimum amount of training. • Skilled workers hold jobs that require experience and training. • Professional workers do jobs that require a high level of knowledge-based education and managerial skills. Noncompeting Labor Grades • People must have the ability, the initiative, and the money to obtain additional education and training. • Sometimes people are faced with a lack of opportunity for additional training and education. • Sometimes people lack the initiative they need to get ahead. Wage Determination • The traditional theory of wage determination says that supply and demand together will determine the equilibrium wage rate. • The theory of negotiated wages uses organized labor’s bargaining strength to help explain wage differentials. • According to the signaling theory, employers are willing to pay more for those people with certain indicators of superior ability. TRADITIONAL WAGE DETERMINATION TRADITIONAL WAGE DETERMINATION Regional Wage Differences • Wages can vary when demand for certain skilled positions exceeds supply. • Employers tend to offer higher wages in areas where the cost of living is higher than normal. • People sometimes are willing to accept lower wages if the location of the job is attractive to them. SUPPLY BASED WAGE DETERMINATION The supply of workers in a particular occupation could be relatively small for several reasons: 1. Few People with the Required Skills The few people who have the required skills receive higher wages (i.e. Professional Athletes, Actors and Musicians). SUPPLY BASED WAGE DETERMINATION 2. High Training Costs The skill required for some occupations can only be acquired through education and training. Law School and Medical School are expensive to attend so a relatively small number of people will attend to become lawyers and doctors. The higher wage compensates workers for their training costs. SUPPLY BASED WAGE DETERMINATION 3. Undesirable Job Features Some occupations are dangerous, and a relatively small number of people are willing to work in dangerous occupations. The same logic applies to other undesirable job features (i.e. stressful, dirty or odd hours). EXAMPLES: Steel Workers, Air Traffic Controllers, Plumbers, Bartenders, etc… SUPPLY BASED WAGE DETERMINATION 4. Artificial Barriers to Entry Government and professional licensing boards restrict the number of people in certain occupations. Unions have membership restrictions. Supply restrictions increase wages. OCCUPATIONAL LICENSING In some occupations government-sanctioned licensing boards limit the number of workers. A person can be prohibited from working in an occupation unless he/she: – Completes a given education program – Passes an examination – Has a certain amount of work experience – Has lived in a particular area for a specified amount of time i.e. Physicians, Dentists, Plumbers, Beauticians, Pharmacists, etc… OCCUPATIONAL LICENSING • There are over 1,500 occupational licensing boards in the U.S. • In principle the licensing requirements are designed to protect consumers from incompetent workers. Criticisms against Licensing Boards • Weak link between performance and licensing requirements. The often arbitrary requirements are not strongly linked to the performance of the worker. • Alternative means of protection. The government could provide consumers with information about the past performance of workers. Consumers could also spread the word about their satisfaction with a particular worker. • Entry restrictions. The licensing requirements increase the cost of entering the occupation, decreasing the supply of workers and increasing the wage. Criticisms against Licensing Boards • The perceived protection against “unscrupulous workers” is paid for by the consumer through higher prices. There is often no great motivation for workers who are receiving these higher wages to change public policy. • Does some public policy benefit the few (i.e. special interest groups) at the expense of the general public? Minimum Wage The lowest wage that can legally be paid to a worker as determined by individual states. Minimum Wage is a price floor: • The artificially high price causes a surplus of labor supplied versus the quantity of labor demanded. Intentional unemployment is the result. EFFECTS OF MINIMUM WAGE From the perspective of the worker, there is good news and bad news. • Good news for the workers. Some workers keep their jobs and receive a higher wage ($8.00 per hour instead of $6.75). • Bad news for workers. Some workers will lose their jobs. If the typical work day is 5 hours, the loss of 1,000 hours equals the loss of 200 jobs. From the perspective of the consumer there is more bad news. • Bad news for consumers. The increase in wages/labor costs will mean prices will rise. Restaurants will eventually increase the price of meals. – Initially prices won’t increase due to the substitution effect, price elasticity and the competitive nature of such businesses. How does an increase in minimum wage affect the “working poor”? • The rule of thumb is that a 10% increase in minimum wage decreases minimum wage jobs by about 1%. • In 1996 Congress considered a 20% increase in the federal minimum wage ($4.25 to $5.15)—this decision would have eliminated 120,000 minimum wage jobs (about 2%). • The California Min. Wage increased 15.6% starting 2004. http://www.dol.gov/esa/minwage/america.htm An Alternative Argument… • Since September 1997, the cost of living has risen 26%, while the minimum wage has fallen in real value. After adjusting for inflation, the value of the minimum wage is at its lowest level since 1955. • Wage inequality has been increasing, in part, because of the declining real value of the minimum wage. Today, the minimum wage is 31% of the average hourly wage of American workers, the lowest level since the end of World War II. The Affects of Inflation The inflation-adjusted value of the minimum wage is 30% lower in 2006 than it was in 1979. • The effect of the last minimum wage increase in 1996-97 has been completely eroded by inflation. • $5.15 today is the equivalent of only $3.95 in 1995 — lower than the $4.25 minimum wage level before the 1996-97 increase. According to the Economic Policy Institute… • An estimated 13.0 million workers (10% of the workforce) would receive an increase in their hourly wage rate if the minimum wage were raised from $5.15 to $7.25 by 2009. • Of these workers, 5.6 million workers (4% of the workforce) currently earn less than $7.25 and would be directly affected by an increase. • The additional 7.4 million workers (6% of the workforce) earning slightly above the minimum would also be likely to benefit from an increase due to "spillover effects." (The Economic Policy Institute., “Facts at a Glance,” 2008) http://www.epi.org/content.cfm/issueguides_minwage_minwagefacts Employment Trends/Issues • Decline of Union Influence – Giveback (bankruptcy) – Two-tiered wage system (older high/newer low) • Lower Pay for Women – Comparable Worth (Price Floor) – Set Aside Contracts (Guaranteed Gov. contracts) • Part Time Workers • Minimum Wage Decline of Union Influence • Union membership has declined because of unfriendly businesses, new workers with little loyalty to organized labor, and cutbacks in production by unionized companies. • Businesses are using givebacks, bankruptcy claims, and two-tier wage systems to lower union-negotiated wages. Comparable Worth A policy under which the government specifies a minimum wage for some occupations. • Because gender discrimination contributes to differences in wage earnings, the government can specify a minimum wage for some occupations, typically those that have a high number of women. The effects of this price floor are the same as minimum wage. Traditional Wage Discrimination Issues • Traditionally it was believed that women, on the whole, had less experience and education to bring to the working world then their male counterparts. • Some higher paying jobs have a larger percentage of male workers, while some lower paying jobs have a larger percentage of female workers. • The glass ceiling is an example of the discrimination women face in the workplace (The Glass Ceiling Commission). • What will the increased number of female college graduates mean in the future job market?