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

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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

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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.