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					     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?

				
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