Transcript The Labor Market and The Distribution of Income

Economics
NINTH EDITION
Insert Cover
Picture
Chapter 32
The Labor Market
and
The Distribution of
Income
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Learning Objectives
32.1 Explain why competition generates wages equal to
marginal revenue product.
32.2 Explain why an increase in the wage could increase,
decrease, or not change hours worked.
32.3 Explain why wages differ across occupations and levels
of human capital.
32.4 Describe recent changes in the distribution of income.
32.5 Describe the effects of government policies on poverty
and the distribution of income.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (1 of 8)
Labor Demand by an Individual Firm in the Short Run
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit exceeds its marginal
cost. Choose the level at which the marginal benefit equals the marginal cost.
The firm will pick the quantity of labor at which the marginal benefit of labor equals the
marginal cost of labor.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (2 of 8)
Labor Demand by an Individual Firm in the Short Run
TABLE 32.1 Using the Marginal Principle to make a Lobor Decision
(1)
Workers
(2)
Balls
(3)
Marginal
Product of Labour
(4)
Price
(5)
Marginal Revenue
Product of Labour (MRP)
(6)
Marginal Cost
When Wage = $8
1
26
26
$0.50
$13
$8
2
50
24
0.50
12
8
3
72
22
0.50
11
8
4
92
20
0.50
10
8
5
108
16
0.50
8
8
6
120
12
0.50
6
8
7
128
8
0.50
4
8
8
130
2
0.50
1
8
PRINCIPLE OF DIMINISHING RETURNS
Suppose output is produced with two or more inputs and we increase one input
while holding the other input or inputs fixed. Beyond some point—called the point of
diminishing returns —output will increase at a decreasing rate.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (3 of 8)
Labor Demand by an Individual Firm in the Short Run
• Marginal product of labor
The change in output from one additional unit of labor.
• Marginal-revenue product of labor (MRP)
The extra revenue generated from one additional unit of labor; MRP is equal to the price
of output times the marginal product of labor.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (4 of 8)
Labor Demand by an Individual
Firm in the Short Run
Using the marginal principle, the firm
picks the quantity of workers at which the
marginal benefit (the marginal revenue
product of labor) equals the marginal cost
(the wage).
The firm’s short-run demand curve for
labor is the marginal revenue product
curve.
• Short-run demand curve for
labor
A curve showing the relationship
between the wage and the quantity of
labor demanded over the short run,
when the firm cannot change its
production facility.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (5 of 8)
Labor Demand by an
Individual Firm in the
Short Run
An increase in the price of the good
produced by workers increases the
marginal revenue product at each
quantity of workers, shifting the
demand curve to the right.
At each wage, the firm will demand
more workers. For example, at a
wage of $8, the demand for labor
increases from five workers (point b)
to seven workers (point d).
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (6 of 8)
Market Demand for Labor in the Short Run
• To draw the short-run market demand curve for labor, we add the labor demands of all
the firms that use a particular type of labor.
• If there were 100 firms and each hired 5 workers at a wage of $8, the market demand
for labor would be 500 workers.
• Similarly, if the typical firm hired 3 workers at a wage of $11, the market demand would
be 300 workers.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (7 of 8)
Labor Demand in the Long Run
• Long-run demand curve for labor
A curve showing the relationship between the wage and the quantity of labor demanded
over the long run, when the number of firms in the market can change and firms can
modify their production facilities.
• Output effect
The change in the quantity of labor demanded resulting from a change in the quantity of
output produced.
• Input-substitution effect
The change in the quantity of labor demanded resulting from an increase in the price of
labor relative to the price of other inputs.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.1 THE DEMAND FOR LABOR (8 of 8)
Labor Demand in the Long Run
• In less-developed countries, labor is less costly relative to machinery
and equipment, so labor is substituted for these other inputs.
Examples:
• Mining. Firms in some less-developed countries use thousands of workers digging by
hand.
• Furniture. Firms in some less-developed countries make furniture by hand.
• Accounting. Some accountants in less-developed countries use simple calculators and
ledger paper.
Short-Run versus Long-Run Demand
• There is less flexibility in the short run because firms cannot enter or leave the market
and they cannot modify their production facilities. As a result, the demand for labor is
less elastic in the short run. That means the short-run demand curve is steeper than the
long-run demand curve.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
APPLICATION 1
MARGINAL REVENUE PRODUCT IN MAJOR LEAGUE BASEBALL
APPLYING THE CONCEPTS #1: Are workers paid their Marginal Revenue Product
(MRP)?
• In 2011, the average salary in Major League Baseball (MLB) was $3.3 million. A team will pay $3.3
•
million for a player only if the player’s marginal revenue product (MRP) is at least $3.3 million. The
MRP of a player equals his contribution to the firm’s total revenue from ticket sales and television
contracts. For example, a player with a relatively high slugging percentage increases the team’s
winning percentage, increasing the revenue from ticket sales and TV.
A subset of MLB players are free agents, meaning that they are free to negotiate a contract with any
MLB team. Given the competition between teams for the services of free agents, their salaries are
close to their MRPs. In contrast, two types of players are not allowed to change teams.
•
•
Journeymen (3-6 years in the league) are restricted to a single team, but can enter salary arbitration
to change their salaries
Apprentices (up to 3 years in the league) are restricted to a single team and cannot change their
salaries.
• Given the immobility of journeymen and apprentices, we expect them to be paid less than their
MRPs. According to a recent study, the average MRP of journeymen is about $1.08 million, which is
about 17 percent higher than the average salary. For apprentices, the average MRP is about
$810,000, which is about 3.6 times the average salary.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.2 THE SUPPLY OF LABOR
(1 of 2)
The Individual Labor-Supply Decision: How Many Hours?
• Substitution effect for leisure demand
The change in leisure time resulting from a change in the wage (the price of leisure)
relative to the price of other goods.
• Income effect for leisure demand
The change in leisure time resulting from a change in real income caused by a change in
the wage.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.2 THE SUPPLY OF LABOR
(2 of 2)
The Market Supply Curve for Labor
An increase in the wage affects the quantity of nursing supplied in three ways:
• Hours worked per employee. When the wage increases, some nurses will work more
hours, some will work fewer hours, and some will work the same number of hours.
• Occupational choice. An increase in the nursing wage will cause some workers to
switch from other occupations to nursing and motivate more new workers to pick nursing
over other occupations.
• Migration. Some nurses in other cities will move to Florence to earn the higher wages
offered there.
• Market supply curve for labor
A curve showing the relationship between the wage and the quantity of labor supplied.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (1of 9)
At the market equilibrium shown by
point a, the wage is $15 per hour
and the quantity of labor is 16,000
hours.
The quantity supplied equals the
quantity demanded, so there is
neither excess demand for labor nor
excess supply of labor.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
APPLICATION 2
CABBIES RESPOND TO AN INCREASE IN THE WAGE
APPLYING THE CONCEPTS #2: When the wages increases, will the typical person
work more hours or fewer hours?
• Taxi drivers have a lot of flexibility in choosing their work hours, and we can readily
observe their response to an increase in the wage. An increase in the taxi fare, which is
regulated by cities, represents an increase in the wage earned by taxi drivers.
• A recent study of the taxi market in New York City shows that an increase in the
regulated fare (an increase in the wage) actually decreases the quantity of labor
supplied.
• In 2004 a 19 percent increase in the regulated fare decreased the miles driven per
cabbie by 5.6 percent. Overall, the elasticity of miles driven (quantity of labor supplied)
with respect to the fare per mile (the wage) is –0.22. In other words, a 10 percent
increase in the wage decreases the quantity of labor supplied by 2.2 percent.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (2 of 9)
Changes in Demand and
Supply
An increase in the demand for
nursing services shifts the demand
curve to the right, moving the
equilibrium from point a to point b.
The equilibrium wage increases from
$15 to $17 per hour, and the
equilibrium quantity increases from
16,000 hours to 19,000 hours.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (3 of 9)
The Markets Effects of
the Minimum Wage
The market equilibrium is shown by
point a: The wage is $5.45 per hour,
and the quantity of labor is 50,000
hours.
A minimum wage of $6.55 decreases
the quantity of labor demanded to
49,000 hours per day (point b).
Although some workers receive a
higher wage, others lose their jobs or
work fewer hours.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (4 of 9)
Why Do Wages Differ Across Occupations?
The supply of workers in a particular occupation could be small for four reasons:
• Few people with the required skills.
• High training costs.
• Undesirable working conditions.
• Danger
• Artificial barriers to entry.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (5 of 9)
Why Do Wages Differ
Across Occupations?
If supply is low relative to demand—
because few people have the skills,
training costs are high, or the job is
undesirable—the equilibrium wage
will be high.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (6 of 9)
The Gender Pay Gap
A recent study explored several factors that contribute to the gender pay gap. The study
observed a gap of about 20 percent among workers aged 26 to 34, and identified four
factors that contribute to the gender gap:
• Difference in worker skills and productivity.
• Differences in occupational preferences.
• Occupational discrimination.
• Wage discrimination.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (7 of 9)
Racial Discrimination
• African American males who work full time earned 73 percent as much as their white
counterparts, while African American females earn 85 percent as much as their white
counterparts.
• Hispanic males earn 65 percent as much as white males, while Hispanic females earn
78 percent as much as white females.
• For both males and females, part of the earnings gap is caused by differences in
productivity:
• On average, whites have more education and work experience, so they are paid higher
wages. However, part of the wage gap is caused by racial discrimination.
• Earnings differences have decreased over the last few decades.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (8 of 9)
Why Do College Graduates Earn Higher Wages?
In 2009, the college premium—the increase in earnings from a college degree—was 74
percent.
• Learning effect
The increase in a person’s wage resulting from the learning of skills required for certain
occupations.
• Signaling effect
The information about a person’s work skills conveyed by completing college.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.3 LABOR MARKET EQUILIBRIUM (9 of 9)
Labor Unions and Wages
Labor union A group of workers organized to increase job security, improve working
conditions, and increase wages and fringe benefits.
Featherbedding Work rules that increase the amount of labor required to produce a given
quantity of output. Featherbedding may actually decrease the demand for labor.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
APPLICATION 3
THE BEAUTY PREMIUM
APPLYING THE CONCEPTS #3: What explains differences in wages?
• How does physical attractiveness affect earnings? Studies of the U.S. labor market show that
beautiful people earn more than people of average books, and unattractive people earn less.
• The beauty premium is 5 percent for the 33 percent of workers who are considered beautiful or
handsome, and the beauty premium is larger for men than for women. The penalty for bad looks
is about 8 percent for the 10 percent of workers who are considered plain or unattractive.
• Why do beautiful people earn more income? According to biologists, beauty is a marker for
underlying characteristics such as health and intelligence, and beautiful people start with a
slight edge in the labor market. Beautiful people get more opportunities to learn through
experience, and they also acquire better professional contacts. Because of these wider
opportunities, a small difference in innate characteristics can be amplified into a large difference
in earnings.
• Another factor in the beauty premium is that some workers and consumers simply like dealing
with attractive people, so there is a higher demand for beautiful workers, resulting in higher
wages.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.4 THE DISTRIBUTION OF INCOME (1 of 2)
Income Distribution in 2007
To compute the numbers in the second column of the table (Percent of Market Income), we take four
steps:
•
•
•
•
Rank the nation’s households according to market income.
Divide the households into five groups, or “quintiles.”
Compute each group’s income.
Compute each group’s share of market income.
TABLE 32.2 Distribution of Market Income, 1979-2007
Group
Share of Market
Income, 1979
Share of Market
Income, 2007
Percentage growth in
income, 1979-2007
Quintile 1 (percentiles 0-20)
2.9
2.5
18.3
Quintile 2 (percentiles 20-40)
10.1
7.3
27.5
Quintile 3 (percentiles 40-60)
15.3
12.2
35.2
Quintile 4 (percentiles 60-80)
22.4
19.0
43.3
Quintile 5 (percentiles 80-100)
49.6
59.9
75.6
Percentiles 80-99
39.1
38.6
65.0
Top 1 Percent
10.5
21.3
277.5
Source: Congressional Budget Office, Trends in the Distribution of Household Income between 1979 and 2007
(Washington, DC,2011).
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.4 THE DISTRIBUTION OF INCOME (2 of 2)
Income Distribution Facts
Three key factors explain these substantial differences in market income:
• Differences in labor skills and effort.
• Luck and misfortune.
• Discrimination.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
APPLICATION 4
TRADE-OFFS FROM IMMIGRATION
APPLYING THE CONCEPTS #4: Who benefits from immigration of low skill workers?
• In the first wave of immigration, from 1850 to 1913, over a million people migrated to the Americas
each year. Most were from European countries. After decades of war and depressions, immigration
resumed in 1945, and most of the immigrants were from less-developed countries. The most recent
wave of immigration started in 1990 and has increased the supply of labor to the U.S. economy by
about 10 percent per decade.
• Immigration creates winners and losers within the economy. The increase in the supply of labor
decreases wages for workers who have the same skill level as the immigrants. Because the average
U.S. immigrant has less education and earns less income than the average native, immigrants
compete with low-skill natives, decreasing their wages.
• On the benefit side, the decrease in the wages of low-skill labor decreases production costs and
product prices, so consumers benefit. In general, we expect low-skill workers to lose as a result of
immigration because the lower wages will dominate the benefits of lower consumer prices. In
contrast, we expect high-skill workers to benefit from lower prices. Economists have estimated the net
effect of immigration on the U.S. economy is a small positive effect.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.5 PUBLIC POLICY AND THE
DISTRIBUTION OF INCOME (1 of 3)
EFFECTS OF TAX AND TRANSFER POLICIES ON THE
DISTRIBUTION OF INCOME
TABLE 32.3 Government Policies and the Distribution of Income
Group
Share of Market
Income, 2007
Share of Income After
Federal Tax and
Transfers, 2007
Change in Share from
Federal Tax and
Transfers
Quintile 1 (percentiles 0-20)
2.5
5.1
+2.6
Quintile 2 (percentiles 20-40)
7.3
9.2
+1.9
Quintile 3 (percentiles 40-60)
12.2
14.0
+1.8
Quintile 4 (percentiles 60-80)
19.0
19.9
+0.9
Quintile 5 (percentiles 80-100)
59.9
52.7
-7.2
Percentiles 80-99
38.6
35.6
-3.0
Top 1 Percent
21.3
17.1
-4.2
Source: Congressional Budget Office, Trends in the Distribution of Household Income between 1979 and
2007 (Washington, DC,2011).
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.5 PUBLIC POLICY AND THE
DISTRIBUTION OF INCOME (2 of 3)
Poverty and Public Policy
TABLE 32.4 Poverty Rates For Different Groups, 2010
Characteristic
All Races
Poverty Rate in 2010
15.2%
White
13.1
Black
27.5
Hispanic
26.7
Asian
12.1
Type of Family
Married couple
7.6
Female-headed household
28.7
Age
Under 18 years
22.5
65 years and older
9.0
SOURCE: U.S. Census Bureau, Current Population Reports:. Report P60-241
(November 2011).
Poverty rates vary by:
1. Race.
2. Type of family.
3. Age.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
32.5 PUBLIC POLICY AND THE
DISTRIBUTION OF INCOME (3 of 3)
The Earned Income Tax Credit
EITC is an earnings subsidy for low-income households that is determined by the number
of children in the household.
Here is how the EITC works for a household with two children (roughly two fifths of EITC
recipients).
Phase in: For the first $12,590 of earnings, the subsidy rate is 0.40: for each $1 of
earnings, the government provides a subsidy of $0.40.
Flat spot: The credit reaches its maximum of $5,036, when household earnings reaches
$12,590. For the next $2,410 of income, the credit remains at the maximum.
Phase out. For income above $15,000, the phase-out rate is 0.21: for each additional dollar
of earnings, the credit decreases by $0.21. The earnings subsidy reaches zero at an
income of $40,363.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
APPLICATION 5
EXPANDING THE EITC
APPLYING THE CONCEPTS #5: How do government policies affect the distribution of
income?
• In response to stagnant wages for low-income workers, policy-makers have proposed
the expansion of wage subsidy programs.
• Under the President’s 2014 plan, EITC coverage would increase payments to 7.7 million
workers and extend coverage to 5.8 million additional workers.
• Most of the additional workers are either young (age 21-24) or old (age 65-67) and do
not have qualifying children.
• The expansion of EITC would lift about half a million people above the poverty line and
reduce poverty of an additional 10 million workers. It might also increase labor force
participation.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved
KEY TERMS
Income effect for leisure demand
Input-substitution effect
Learning effect
Long-run demand curve for labor
Marginal product of labor
Marginal-revenue product of labor (MRP)
Market supply curve for labor
Means-tested programs
Output effect
Short-run demand curve for labor
Signaling effect
Substitution effect for leisure demand
Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved