Wage Determination: Unions, Discrimination, and Differentials

May 15, 2013

Announcements

• New homework assigned: Due a week from today, Wednesday, May 22

• No class / office hours Friday (have fun!)

Schedule for Remainder of CourseMon Wed Fri

May 13: Finish Info, start Labor 15 17: Class Cancelled

20 22 Start Environmental 24

27 29 Start Public Goods 31

June 3 5 Final Review 1 7 Final Review 2

June 12: Final

Last Class

• Labor demand– Firms take their production technology and price of the

good they produce as given.– Compute profit-maximizing level of labor demand

• Just mentioned to roll of human capital in distinguish a worker’s “marginal benefit” to the firm

Today

• How wages are determined:– Human capital– Union membership

• Labor market discrimination• Compensating wage differentials

Human Capital Theory• Human capital: a collection of factors such as education, training,

experience, intelligence, energy, work habits, trustworthiness, and initiative that affects a worker’s marginal productivity.

• Human capital theory: holds that a worker's wage is proportional to his or her stock of human capital

Human Capital Theory and Earnings Differences

• Some people have more human capital than others.– These people are paid more.– People with a college degree

• Some jobs require more human capital.– These jobs pay more.– Doctors

• There are differences in the relative supply and demand of different types of human capital.– People who possess the types of human capital that are in high

demand and short supply will earn more.

U.S. Industries with High/Low Expected Employment and Wage Growth

• High growth– Home healthcare services– Management scientific and technical consulting

services.– Junior colleges, colleges, universities and professional

schools.• Low growth:– Printing and related support activities.– Apparel knitting mills.– Postal service

Source: BLS Employment Projections

This leads us to a natural question…

• Do new technologies result in higher wages for people with those skills?

• Consider wages of computer programmers in 1999 versus wages of programmers now.

An increase in the popularity of technological goods will cause in increase in the wages of computer

programmers…

A. NeverB. In the short run and the long runC. In the short run but not in the long runD. Not in the short run but in the long run

How Do Labor Unions Affect Earnings?

• Labor union a group of workers who bargain collectively with employers for better wages and working conditions.

• Simple Model with Two Markets– Each market produces a different output (oranges and apples).– Both employ the same category of labor (meaning the skills of

the workers employed in both markets are identical).– There are 200 workers.

Market Equilibrium Without UnionsW

age

($/h

our) D1 = VMP1

125

9

Market 1

Employment

Wag

e ($

/hou

r)

D2 = VMP2

75

9

Market 2

Total employment(workers/day)

Wag

e ($

/hou

r)

S0

200

D = VMP1 + VMP2

9

Total Market

13

Market 1 Unionizes

• Workers in market 1 negotiate a wage of $12 => 25 workers lose their jobs.

• In market 2, labor increases by 25 workers and wage decreases to $6

• Net welfare loss to society because we could move workers from low VMPL market to high VMPL market and increase total surplus

Wag

e ($

/hou

r)

125

9

D1 = VMP1

Market 1

Employment

Wag

e ($

/hou

r)

75

9

D2 = VMP2

Market 2

12

100

6

100

Market 1 Unionizes

• Workers in market 1 negotiate a wage of $12 => 25 workers lose their jobs.

• In market 2, labor increases by 25 workers and wage decreases to $6

• Net welfare loss to society because we could move workers from low VMPL market to high VMPL market and increase total surplus

Wag

e ($

/hou

r)

125

9

D1 = VMP1

Market 1

Employment

Wag

e ($

/hou

r)

75

9

D2 = VMP2

Market 2

12

100

6

100

Initial Surplus: 9x125+9x75=1800

Market 1 Unionizes

• Workers in market 1 negotiate a wage of $12 => 25 workers lose their jobs.

• In market 2, labor increases by 25 workers and wage decreases to $6

• Net welfare loss to society because we could move workers from low VMPL market to high VMPL market and increase total surplus

Wag

e ($

/hou

r)

125

9

D1 = VMP1

Market 1

Employment

Wag

e ($

/hou

r)

75

9

D2 = VMP2

Market 2

12

100

6

100

Unionized Surplus: 12x100+6x100=1800

Why is the latter outcome inefficient?

• Move one out of Market 2, lose about 6 in VMP

• Move that same one into Market 1, gain about 12 in VMP

Wag

e ($

/hou

r)

125

9

D1 = VMP1

Market 1

Employment

Wag

e ($

/hou

r)

75

9

D2 = VMP2

Market 2

12

100

6

100

Size of the Union Wage Advantage

• Our analysis of two markets resulted in union workers earning twice the non-union wage.

• How do unionized firms remain competitive?– Unions attract most productive workers

• Union worker are more skilled and experienced• Wage gap is ±10% for comparable human capital

– Unions increase productivity• Improved communications and motivation• Lower labor turnover means lower costs

– Big unions expand to many markets• TAs at UCSD are part of UAW (United Autoworkers Union – yes,

really)

19

Which state do you think suffers the most in terms of surplus from unionized labor?

A. CaliforniaB. FloridaC. MichiganD. New YorkE. Washington

Discrimination in the Labor Market

Median weekly earnings 2011

Men, 16 years and over 832

Women, 16 years and over 684

White 775Black or African American 615Asian 866Hispanic or Latino 549

Source: Bureau of Labor Statistics

People who identify as:

Discrimination in the Labor Market

• Are the differences because of differences in human capital?– Partly, but the earnings differences persist even after controlling for

differences in human capital.

• One way to explain the remaining differential is that some human capital differences are not measured in standard data sets– Cultural perspectives on work, etc. are hard to measure.

• Another view attributes the differential to discrimination.

Employer Discrimination• Employer discrimination is an arbitrary preference by an employer

for one group of workers over another.

• Simple model– Assume men and women are equally productive– Employers prefer to hire men and act as if there’s less marginal

benefit from hiring women (a “psychic misconception”).

The Labor Market Without Discrimination

w

L

D0

S0w

L

S0

Women Men

D0

w0

The Labor Market With Discrimination

w

L

D0

S0w

L

S0

Women Men

D0

w0

Employer Discrimination• Prediction 1

– Equilibrium wage differential between men and women even though they are equally productive.

• Prediction 2– Discriminatory firms are not maximizing profits because they are NOT

basing their decision about who to hire based solely on the VPML. That is, they are basing their decisions partly on the psychic cost of hiring women.

• Prediction 3– Competition should drive discriminatory firms out of business.

Other Sources of Discrimination• Customer discrimination: causes buyers to pay more for goods produced by

favored group for the same product– Attorneys: Some groups may be more credible with certain juries or

clients than others– May reduce the incentives for non-favored groups to enter the

profession.

• Statistical discrimination

• Social norms– In some countries, social norms may mean that women receive less

education than do men.– Or some groups may feel an expectation that they enter into specific

professions.

How many people do you personally know that are “underemployed” due to some type of discrimination?

A. 0B. 1C. 2D. 3E. 4+

Compensating Wage Differentials

• Suppose there are two summer jobs open to UCSD undergraduates in La Jolla.

Lifeguard

Garbage Collector

Compensating Wage Differentials• If both jobs offer to pay $15 per hour, where will most students

apply?

• If wages respond to supply and demand in the usual way, how will the equilibrium wages in the two jobs differ?

• The wage premium earned by garbage collectors is called a positive compensating wage differential.

• The wage disadvantage earned by lifeguards is a negative compensating wage differential.

Compensating Wage Differentials

• Compensating wage differentials: the difference in the wage rate (positive or negative) that reflects the attractiveness of a job’s working conditions.

• Can be based on workers’ preferences for – Type of work– Location of the work– Hours of work– Flexibility of work hours– Safety of work environment– Fringe benefits