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Wage Structure
Law of One Price? Observed wage differentials
Occupational Industry Geographic
Reasons Heterogeneous jobs Heterogeneous workers Labor market imperfections
Law of One Price? Observed wage differentials
Occupational Industry Geographic
Reasons Heterogeneous jobs Heterogeneous workers Labor market imperfections
Of the following occupational groups, average hourly earnings in 2003 were greatest among
ser
vice
work
ers
inst
alla
tion, m
ai...
sal
es w
orker
s
man
ager
ial,
bus.
..
0% 0%0%0%
a) service workers b) installation, maintenance, and
repair workers c) sales workers d) managerial, business, and
financial workers
a) service workers b) installation, maintenance, and
repair workers c) sales workers d) managerial, business, and
financial workers
1 2 3 4 5
Hourly Earnings By Occupational Group, 2003
Occupational Group Hourly Wage
Management, Business, And Financial
$26.24
Installation, Maintenance, And Repair
17.14
Sales Workers 15.89
Office and Administrative Support 13.73
Service Workers 10.96
Farming, Fishing, And Forestry 9.81
Hourly Earnings By Industry Group, 2003
Industry Group Hourly Wage
Finance, Insurance, Real Estate $20.99
Public Administration 20.22
Mining 19.81
Transportation and Warehousing 19.27
Manufacturing 18.51
Construction 17.31
Services 16.53
Retail Trade 13.21
Private Manufacturing Worker’s Hourly Earnings By State, 2003
State Hourly Wage
Connecticut $23.13
New Jersey 22.91
Massachusetts 21.44
New York 19.09
Pennsylvania 18.26
Ohio 18.12
Texas 17.53
Arkansas 14.77
Mississippi 13.80
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 higher at Ajax if demand is the same in both markets
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 higher at Ajax if demand is the same in both markets
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:
0% 0%0%0%
1 2 3 4 5
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
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
Which of the following research findings would support an efficiency wage explanation of pay differentials?
0% 0%0%0%
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
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
1 2 3 4 5
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
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
Which of the following research findings would support an efficiency wage explanation of pay differentials?
0% 0%0%0%
1 2 3 4 5
Heterogeneous Workers
Differing human capital Non-competing groups
Differing individual preferences Time preferences Tastes for nonwage aspects
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
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 Wage rate distributions Lengthy adjustment periods
Imperfect information Wage rate distributions Lengthy adjustment periods
0.05
0.08
0.12
0.15
0.2
0.15
0.12
0.08
0.05
0
0.05
0.1
0.15
0.2
0.25
Rela
tive f
req
uen
cy
6.00 6.20 6.40 6.60 6.80 7.00 7.20 7.40 7.60 7.80
Wage rates
Labor Market Imperfections
Immobilities Geographic
Transportation costs Family concerns
Institutional Licensing Pension plans Health insurance
Sociological Discrimination
Immobilities Geographic
Transportation costs Family concerns
Institutional Licensing Pension plans Health insurance
Sociological Discrimination
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 higher at Ajax if demand is the same in both markets
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 higher at Ajax if demand is the same in both markets
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:
0% 0%0%0%
D is good also
1 2 3 4 5
Government Regulation
Minimum Wage Laws Occupational Health and Safety
Regulation Occupational Licensing
Minimum Wage Law
Fair Labor Standards Act (1938) Established federal minimum wage
1938: $0.25 2006: $5.15
Established 1.5 overtime premium Prohibited child labor
Ohio’s minimum wage went up to $6.85 this January
Ohio’s minimum wage went up to $6.85 this January
The Minimum Wage, 1950-2006
0
1
2
3
4
5
6
7
8
9
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Dol
lars
per
hou
r
minimum wage in current dollars
minimum wage in 2006 dollars
0%
10%
20%
30%
40%
50%
60%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Minimum Wage Relative to the Average Private Non-supervisory Wage, 1950 - 2005
A majority of the workers earning the minimum wage:
0% 0%0%0%
a) are malesb) are femalesc) work full-timed) are teenagers
a) are malesb) are femalesc) work full-timed) are teenagers
1 2 3 4 5
Characteristics of Minimum Wage Workers, 2004
At or Below $5.15 Total
# Workers 2.0 million 139.2 million
% Employment 1.4% 100%
Gender Male Female
33.966.1
51.948.1
Race White Black Hispanic
83.911.312.5
69.611.113.4
Age 16-19 20 +
24.875.2
4.795.3
Hours of Work Part-time Full-time
61.937.9
18.681.4
Occupation Sales Service
12.674.6
10.916.8
Industry Retail Leisure & Hospitality Manufacturing
8.262.03.0
11.98.7
12.8
Education Less than HS HS only Some college BA +
28.931.632.66.9
9.930.227.532.3
Competitive Model
Free Market: W1, Q1
no unemployment
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
Free Market: W1, Q1
no unemployment
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= $5
QD QSWB
Covered Sector
What happens in the uncovered sector?
Monopsony Model
Monopsony hiring rule: MRP = MWC Monopsony outcome: W1, Q1
Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
Monopsonist will hire Q2 workers at W*
Minimum wage increases employment!
Monopsony hiring rule: MRP = MWC Monopsony outcome: W1, Q1
Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
Monopsonist will hire Q2 workers at W*
Minimum wage increases employment!
Labor
Wage
D1
S1
Q2
W*
W1
Q1
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
will
rise
will
fall
rem
ain t.
.
may
or m
..
0% 0%0%0%
a) will riseb) will fallc) remain the samed) may or may not
change; more info is required
a) will riseb) will fallc) remain the samed) may or may not
change; more info is required
1 2 3 4 5
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
will
rise
will
fall
rem
ain t.
.
may
or m
..
0% 0%0%0%
a) will riseb) will fallc) remain the samed) may or may not
change; more info is required
a) will riseb) will fallc) remain the samed) may or may not
change; more info is required
1 2 3 4 5
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
will
rise
..
will
rise
..
will
fall
Rem
ain t.
.
0% 0%0%0%
a) will rise to Q2
b) will rise to Q4
c) will falld) Remain the same
a) will rise to Q2
b) will rise to Q4
c) will falld) Remain the same
1 2 3 4 5
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
will
rise
..
will
rise
..
will
fall
Rem
ain t.
.
0% 0%0%0%
a) will rise to Q2
b) will rise to Q4
c) will falld) Remain the same
a) will rise to Q2
b) will rise to Q4
c) will falld) Remain the same
1 2 3 4 5
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 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
The profit-maximizing level of job safety is a probability level of:
a) 0.65b) 0.75c) 0.80d) 0.85
a) 0.65b) 0.75c) 0.80d) 0.85
0% 0%0%0%
1 2 3 4 5
Ps MBs MCs
.65 25 8
.70 22 10
.75 19 12
.80 16 14
.85 13 16
.90 10 18
.95 7 20
The profit-maximizing level of job safety is a probability level of:
a) 0.65b) 0.75c) 0.80d) 0.85
a) 0.65b) 0.75c) 0.80d) 0.85
0% 0%0%0%
1 2 3 4 5
Ps MBs MCs
.65 25 8
.70 22 10
.75 19 12
.80 16 14
.85 13 16
.90 10 18
.95 7 20
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.
Session Base Run Search Costs
Unemp Insuranc
e
Recession Education
Variation None $100 per period
$200 per period for first 10 periods
Probability of receiving wage offer decreases
$1500 per period for two periods
Range $0-$1000
$0-$1000
$0-$1000
$0-$1000 $0-$1000 (no education)$0-$1500 (education)
Distribution Wage Frequency
Frequency
Frequency
Frequency Wage Frequency
0 10 10 10 20 0 10
100 1 1 1 1 100 1
200 2 2 2 2 200 2
300 3 3 3 3 300 3
400 4 4 4 4 400 2
600 1 1 1 1 500 1E
1000 1 1 1 1 600 1
800 2E
1000 2 (1E)
1500 1E
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?
Probability = 65%
___
___
_____
___
.30
.20
.10
.05
If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable?
0% 0%0%0%
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
1 2 3 4 5
If the rate of inflation increases but Sally mistakenly believes it has not, then:
0% 0%0%0%
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
1 2 3 4 5
If the rate of inflation increases but Sally mistakenly believes it has not, then:
0% 0%0%0%
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
1 2 3 4 5
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.
Suppose that all other nonwage aspects of the jobs in these two markets are identical. We would expect labor supply in B to increase if:
0% 0%0%0%
a) the probability of job loss rises in B b) earnings are more variable in A c) job safety improves in A d) there are better prospects for
advancement in A
a) the probability of job loss rises in B b) earnings are more variable in A c) job safety improves in A d) there are better prospects for
advancement in A
1 2 3 4 5
a) Flow, Inc. is a more prestigious firm than Stock Co
b) earnings are subject to greater variability at Stock, Co.
c) Stock Co. offers better pension and insurance benefits than Flow, Inc.
d) the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc.
a) Flow, Inc. is a more prestigious firm than Stock Co
b) earnings are subject to greater variability at Stock, Co.
c) Stock Co. offers better pension and insurance benefits than Flow, Inc.
d) the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc.
The wage rate paid workers at Flow, Inc. will most likely exceed that at otherwise identical Stock Co. if:
0% 0%0%0%
1 2 3 4 5
Currently, the minimum wage law does not apply to about 12% of non-supervisory workers. Assuming that all consequently displaced workers find jobs in the uncovered sector, an increase in the minimum wage will:
0% 0%0%0%
1 2 3 4 5
a) make all workers better offb) cause a migration of workers from
the uncovered to the covered sectorc) create additional output in the
uncovered sector of a lower value than the output lost in the covered sector
d) cause an increase in economic rent to original workers in the uncovered sector
a) make all workers better offb) cause a migration of workers from
the uncovered to the covered sectorc) create additional output in the
uncovered sector of a lower value than the output lost in the covered sector
d) cause an increase in economic rent to original workers in the uncovered sector
Consider a proposed law to deregulate the hair-care industry. Barbers would be allowed to do work previously confined to stylists, and the latter would no longer be required to pass strict licensure exams. Which outcome would you expect to result from this deregulation?
0% 0%0%0%
a) A decrease in economic rent to current stylists
b) A decrease in economic rent to current barbers
c) An increase in economic rent to beauty school operators
d) An increase in economic rent to workers in occupations in which displaced stylists find jobs
a) A decrease in economic rent to current stylists
b) A decrease in economic rent to current barbers
c) An increase in economic rent to beauty school operators
d) An increase in economic rent to workers in occupations in which displaced stylists find jobs
1 2 3 4 5
a) reduce job search duration by shifting the wage offer distribution to the left
b) reduce job search duration by decreasing the acceptance wage and intensifying job search
c) reduce job search duration by shifting the wage offer distribution to the right
d) have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution
a) reduce job search duration by shifting the wage offer distribution to the left
b) reduce job search duration by decreasing the acceptance wage and intensifying job search
c) reduce job search duration by shifting the wage offer distribution to the right
d) have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution
In addition to their regular unemployment benefits, a recent Washington state program offered an average of $562 to any job loser who became reemployed within 13 weeks of filing for unemployment compensation. Economic theory suggests that such a “bounty” scheme should:
redu
ce j.
.
redu
ce j.
.
redu
ce j.
.
hav
e no ..
.
0% 0%0%0%
1 2 3 4 5