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Wage Structure,Government Regulation,
and Job Search
Wage Structure Law of One Price? Observed wage differentials
Occupational Industry Geographic
Reasons Heterogeneous jobs Heterogeneous workers Labor market imperfections
Hourly Earnings By Occupational Group
2008
Occupational Group Hourly Wage
Management, Business, And Financial $31.50
Professional and related workers 27.16
Installation, Maintenance, And Repair 19.76
Construction and extraction workers 18.91
Sales Workers 17.58
Office and Administrative Support 15.78
Service Workers 12.74
Farming, Fishing, And Forestry 11.29
Industry Group Hourly Wage
Finance, Insurance, Real Estate $25.55
Public Administration 25.27
Mining 25.32
Transportation and Warehousing 22.88
Manufacturing 22.60
Construction 20.23
Services 19.63
Retail Trade 14.50
Agriculture, forestry, and fisheries 12.53
Hourly Earnings By Industry Group
2008
State Hourly Wage
Connecticut $29.30
New Jersey 29.69
California 27.16
Massachusetts 26.08
Michigan 24.30
Texas 22.79
New York 22.42
Pennsylvania 22.01
Florida 20.71
Ohio 20.40
Alabama 18.23
Arkansas 15.77
Mississippi 14.95
Private Manufacturing Hourly Earnings By State
2008
1.37
3.91
7.13
7.69
7.98
8.15
8.49
9.67
15.43
15.92
18.36
19.19
23.95
24.55
30.56
31.91
32.19
34.75
36.62
36.66
38.80
43.17
47.54
50.73
55.03
0 5 10 15 20 25 30 35 40 45 50 55 60
Philippines
Mexico
Brazil
Poland
Argentina
Taiwan
Slovakia
Czech Republic
Singapore
Israel
Republic of Korea
New Zealand
J apan
Spain
United States
Canada
Italy
Australia
Ireland
United Kingdom
Sweden
Austria
Denmark
Germany
Norway
Dollars per hour
Hourly Compensation Around the World, 2007
Reasons for Wage Differentials
Heterogeneous jobs Heterogeneous workers Labor market imperfections
Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium:
a) the wage at Ajax will be higher than at Acme
b) the wage at Ajax will be lower than at Acme
c) workers will have lower net utility at Acme
d) employment will be lower at Ajax if demand is the same in both markets
Heterogeneous Jobs Compensating differentials
risky jobs fringe benefits job status job security
Differing skill requirements Differences based on efficiency wages Other factors
Union status Discrimination Firm size
Beauty and the Labor Market
Hammermesh and Biddle (1994) Beauty premium: 10-15% higher wages
“Hire ugly. All other things being equal, I'd give the nod to an ugly candidate. It’s not charity: They have less value in the marketplace and can be hired less expensively, even though looks have, for most jobs, little or no bearing on job performance. I've found that, on average, ugly people are more likely to be kind and to work harder because they know they're working at a disadvantage. And unattractive people are more likely to stay with me because they tend to have a tough time getting hired, in part because they generally don’t network efficiently. If I treat unattractive employees well, they’re usually very loyal.” Marty Nemko, professional career advisor
Which of the following research findings would support an efficiency wage explanation of pay differentials?a) Firms with higher turnover costs
pay lower than average wages b) Firms with higher costs of
detecting shirking pay higher than average wages
c) Pay is positively correlated with human capital investments in a given industry
d) Differences in observable worker characteristics explain most of the variance in pay across industries
Heterogeneous Workers
Differing human capital Non-competing groups
Differing individual preferences Time preferences Tastes for nonwage aspects
Married vs Single Males Married men received 8-40% higher wages Differing personal attributes Differing incentives to accumulate HK Differing costs of acquiring HK
Labor Market Imperfections
Imperfect information Makes job search costly A distribution of wage rates result
0.05
0.08
0.12
0.15
0.20
0.15
0.12
0.08
0.05
0.00
0.05
0.10
0.15
0.20
0.25
Rela
tive f
req
uen
cy
8.00 8.20 8.40 8.60 8.80 9.00 9.20 9.40 9.60 9.80
Wage rates
Labor Market Imperfections
Immobilities Geographic
Transportation costs Family concerns
Institutional Licensing Pension plans Health insurance
Sociological Discrimination Cultural
Government Regulation
Minimum Wage Laws Occupational Health and Safety Regulation Occupational Licensing
Fair Labor Standards Act (1938) established: Federal minimum wage
1938: $0.25 2009: $7.25
Overtime premium Child labor restrictions
Minimum Wage Law
Ohio’s minimum wage went up to $7.30 this past January
States with minimum wage rates higher than the Federal rate
States with minimum wage rates the same as the Federal rate
States with minimum wage rates lower than the Federal rate
States with no minimum wage law
Federal Minimum Wage Rate1950-2009
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
1950 1960 1970 1980 1990 2000 2010
minimum wage in 2008 dollars
minimum wage in current dollars
0%
10%
20%
30%
40%
50%
60%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Minimum Wage Relative to the Average Hourly Wage Rate
1965-2008
Characteristics of Minimum Wage Workers, 2008
At or Below $6.55 Total
# Hourly Workers 2.2 million 75.3 million
% Employment 2.3% 100%
Gender Male Female
31.568.5
49.650.4
Race White Black Hispanic Asian
80.113.814.63.1
80.313.117.43.8
Age 16-19 20 +
24.575.5
6.893.2
Hours of Work Part-time Full-time
60.839.2
24.375.5
Occupation Sales Service
16.369.2
27.322.9
Industry Retail Leisure & Hospitality Manufacturing
11.756.02.8
14.211.512.7
Education Less than HS HS only Some college BA +
26.031.933.88.4
14.936.133.615.4
2009 Poverty Guidelines (48 Contiguous States and DC)
Persons in Family Poverty Threshold
1 $10,830
2 $14,570
3 $18,310
4 $22,050
5 $25,790
6 $29,530
7 $33,270
8 $37,010For families with more than 8 persons, add $3,740 for each additional person.
Source: http://aspe.hhs.gov/poverty/09poverty.shtml
Competitive Labor Market
Free Market: W1, Q1
no unemployment: QD = QS
Gov’t imposes min. wage at W2
at W2: QD < QS
Unemployment occurs
How can employers offset impact?
Reduce hours of work Reduce fringe benefits Raise price Reduce quality Hire illegal aliens
Labor
Wage
D1
S1
Q1
W2 = $7
unemployment
new entrantslayoffs
W1= $6
QD QSWB
DWL
What happens in the uncovered sector?
Covered sector
A majority of the workers earning the minimum wage:
a) are malesb) are femalesc) work full-timed) are teenagers
Suppose that the equilibrium wage in the low-skilled labor market is $8.00. Further, suppose the federal government raises the minimum wage to $7.25 an hour from its present level of $6.55. The government’s action of increasing the minimum wage will result in:
a) a decrease in unemployment b) an increase in unemployment c) a shortage of low-skilled labor.d) neither a shortage nor a surplus of
labor in the low-skilled labor market.
Monopsony Model
Monopsony hiring rule: MRP = MWC Monopsony outcome: W1, L1
Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
Monopsonist will hire L2 workers at W*
Minimum wage increases employment!
Labor
Wage
D1
S1
L2
W*
W1
L1
MWC1
Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:
Labor
$ MRP
S
MWC
W*
W2
W1
Q1 Q3 Q40 Q2
a) will riseb) will fallc) remain the samed) may or may not
change; more info is required
Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:
Labor
$ MRP
S
MWC
W*
W2
W1
Q1 Q3 Q40 Q2
a) will rise to Q2
b) will rise to Q4
c) will falld) Remain the same
Empirical Evidence Brown (1982)
10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3%
Card and Krueger (1994) MW had no negative effect on employment at
fast food restaurants in NJ surveyed before and after the increase
Neumark and Wascher (1995) Rexamined payroll data from NJ fastfood
restaurants MW had negative effects on employment
consistent with conventional wisdom
New research is looking at impact on Human Capital and Poverty
Workplace Safety
Occupational Safety and Health Act (1970) Permissable exposure levels Protective equipment Process safety management
Occupational Safety and Health Act (1970) Permissable exposure levels Protective equipment Process safety management
0 5 10 15 20 25
Rate per 100,000 Workers
Mining
Agriculture
Construction
Transportation
Manufacturing
Government
Retail Trade
Services Rate of Occupational Fatalities by Industry, 2002
Model of Optimal Safety MC slopes upward to reflect the
rising opportunity cost of providing safety
MB slopes downward to reflect diminishing returns to safety
Permits paying lower wages Reduced worker turnover Lower worker comp rates
MB = MC determines optimal safety
MC slopes upward to reflect the rising opportunity cost of providing safety
MB slopes downward to reflect diminishing returns to safety
Permits paying lower wages Reduced worker turnover Lower worker comp rates
MB = MC determines optimal safety
MC1
MB1
$
SafetyS*
MB2
S2
If workers possess perfect information about potential risks, then S* is socially optimal
If workers underestimate potential risks, they won’t demand a proper wage premium:
Safety will be less than optimal: S2 < S*
If workers possess perfect information about potential risks, then S* is socially optimal
If workers underestimate potential risks, they won’t demand a proper wage premium:
Safety will be less than optimal: S2 < S*
Uninformed workers
OSHA Revisited
Case for OSHA Imperfect information Barriers to occupational mobility
Case against OSHA Workers might overestimate potential risks Workplace standards often bear no relationship to
reductions to job injuries and illness Empirical evidence
There is mixed evidence that OSHA has reduced occupational injuries.
If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.
Case for OSHA Imperfect information Barriers to occupational mobility
Case against OSHA Workers might overestimate potential risks Workplace standards often bear no relationship to
reductions to job injuries and illness Empirical evidence
There is mixed evidence that OSHA has reduced occupational injuries.
If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.
Job Search
External search Internal search
Why Search? Workers search for the best job offer and firms
search for employees to fill job vacancies. Search occurs because:
Workers and jobs are highly heterogeneous. Information about differences in jobs and workers is
imperfect and takes time to obtain.
Why Search? Workers search for the best job offer and firms
search for employees to fill job vacancies. Search occurs because:
Workers and jobs are highly heterogeneous. Information about differences in jobs and workers is
imperfect and takes time to obtain.
Job Search Model Assumptions
Job searcher is unemployed and seeking work Job seeker knows distribution of wage offers
(mean and variance), but does not know which employer is offering which wage
Assumptions Job searcher is unemployed and seeking work Job seeker knows distribution of wage offers
(mean and variance), but does not know which employer is offering which wage
Figure 1
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0 5 10 15 20 25 30 35 40 45 50
Earnings (000's $)
Pro
bab
ilit
y
Job Search Model
Worker formulates an acceptance wage, wA
If w > wA accept wage offer
If w < wA reject wage offer
Benefits of search Get additional wage offers
Costs of search Explicit: employment agency fees + transportation Implicit: foregone earnings
Benefits of search Get additional wage offers
Costs of search Explicit: employment agency fees + transportation Implicit: foregone earnings
The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration)
Inflation will shift the distribution of wage offers to the right Expected inflation will shift acceptance wage Unexpected inflation will not shift the acceptance wage
Unemployment compensation increases acceptance wage
The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration)
Inflation will shift the distribution of wage offers to the right Expected inflation will shift acceptance wage Unexpected inflation will not shift the acceptance wage
Unemployment compensation increases acceptance wage
Figure 1
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0 5 10 15 20 25 30 35 40 45 50
Earnings (000's $)
Pro
bab
ilit
y
Job Search Model: Implications
wA If wA = $20,000, what is probability that first offer will be accepted?
If wA = $20,000, what is probability that first offer will be accepted?
.30
.20
.10
.05
If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable?
a) 0.25b) 0.30c) 0.50d) 0.70
a) 0.25b) 0.30c) 0.50d) 0.70
0.000.050.100.150.200.250.300.35
$7 $8 $9 $10 $11
Wage
Fre
qu
ency
If the rate of inflation increases but Sally mistakenly believes it has not, then:
a) both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
b) the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
c) the acceptance wage will shift to the right, thereby reducing excepted search duration
d) both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged
a) both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
b) the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
c) the acceptance wage will shift to the right, thereby reducing excepted search duration
d) both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged
Internal Labor Markets
Port of
Entry
External
Labor
Market
• A worker typically enters an internal labor market at the least-skilled port-of-
entry job in the job ladder or mobility chain.
• Wage rates and the allocation of workers within the internal labor
market are governed primarily by administrative rules and procedures.
Shipping Department
Loader
Packer
Long-distance driver
Dispatcher
Local Driver
Firms use job ladders as method to reduce worker turnover. The lower turnover increases the return on firm
investments in specific training. Firms can lower recruiting and screening costs since
they will have a lot of information about the existing workforce.
The job ladder also provides an incentive for workers to seek new skills and work hard.
Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market.
Also, the formal rules protect workers from arbitrary management decisions.
Reasons for Internal Labor Markets
Government as Economic Rent Provider
Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment.
Government provides economic rents through occupational licensing and trade barriers.