Labor Markets and Income

Introduction to Labor Markets and Income

• Determining Incomes: In the United States, income is primarily determined by an individual's value to an employer, which is heavily influenced by education level.
• The Increasing Value of a College Degree:
  • Historically, working through college was common; as of 2015, 40% of college students work $30$ hours or more per week.
  • Rising Costs: Between the 2000–2001 and 2019–2020 academic years, the cost of tuition, fees, room, and board doubled for private four-year colleges and increased by nearly $2.5$ times for public four-year colleges.
  • Earnings Gap: Working full-time ($40$ hours per week, $52$ weeks per year) at minimum wage earns approximately $15,080$, which is significantly less than the 2022 average cost of public university ($25,000$ per year).
  • Student Debt: Total student loan debt topped $1.3\text{ trillion}$ recently.
  • Economic Benefit: Despite costs, the value of a bachelor’s degree is at an all-time high. Adults with a bachelor’s degree earn an average of $2.8\text{ million}$ over their careers—$1.2\text{ million}$ more than high school graduates. They also face lower unemployment rates.
• Sources of Income: In a market economy, income comes from the ownership of resources or assets (means of production). This is a function of the quantity of resources owned and the value society places on them.
  • Labor Income: The most important resource for most individuals is labor, providing wages, salaries, commissions, and tips.
  • Non-Labor Income: Derived from real estate (rent) or financial assets like bank accounts, stocks, and bonds (interest, dividends).

The Theory of Labor Markets

• Labor Market Definition: Economists use this term for all different markets for labor. Markets vary by work type (e.g., retail vs. scientist), skill level (entry level vs. experienced), and location (local for administrative assistants vs. national/international for university presidents).
• First Rule of Labor Markets: A profit-maximizing employer will never pay a worker more than the value of their marginal productivity to the firm.
• Marginal Product of Labor ($MPL$): The additional output produced by adding one more worker-hour to the production process.
  • Assumptions: Workers in a specific market are assumed to be homogeneous (same background, skills, effort).
  • Dependencies: $MPL$ depends on the capital and technology available (e.g., a typist is more productive with a computer than a manual typewriter).
• Derived Demand: The demand for labor is derived from the demand for the product the firm produces. It is defined as $MPL \times P$ (where $P$ is the price of the output).
• Labor Demand in Perfectly Competitive Output Markets:
  • Firms can hire all the labor they want at the market wage ($W_{mkt}$).
  • Value of the Marginal Product of Labor ($VMPL$) = $MPL \times P$.
  • Profit maximization occurs where: $W_{mkt} = VMPL$.
• Labor Demand in Imperfectly Competitive Output Markets:
  • Firms (monopolies, oligopolies, etc.) face a downward-sloping demand curve for output; to sell more, they must lower the price.
  • Value of output is defined by Marginal Revenue ($MR$).
  • Marginal Revenue Product ($MRPL$) = $MPL \times MR$.
  • Profit maximization occurs where the market wage equals $MRPL$. Because $MR < P$, employment levels in imperfectly competitive industries are lower than in perfectly competitive ones.
• Market Wage Determination: Determined by the interaction of the market demand (horizontal sum of all firms' demands) and market supply (horizontal sum of all individuals' supplies).

Wages and Employment in Imperfectly Competitive Labor Markets

• Bargaining Power: Individual laborers are often at a disadvantage compared to employers. John Bates Clark noted in 1907 that employers can "reject single men with impunity."
• Monopsony: A market with only one employer (e.g., a single coal mining company in a town, or a single hospital seeking surgical nurses).
• Marginal Cost of Labor ($MCL$): The cost of hiring one additional worker.
  • For a monopsonist, $MCL$ is higher than the wage rate because hiring an additional worker requires paying a higher wage not just to the new hire, but to all existing workers previously hired at lower rates.
  • Example: 1 worker at $1 ($MCL = 1$); 2 workers at $2 ($MCL = 3$: $2 for the new worker + $1 increase for the first); 3 workers at $3 ($MCL = 5$).
• Outcomes Under Monopsony: Profit maximization occurs where $D_L (VMP \text{ or } MRP) = MCL$.
  • Result: Monopsonists hire fewer workers ($L_m < L_c$) and pay lower wages ($W_m < W_c$) than seen in perfectly competitive markets.

Labor Unions and Collective Bargaining

• Labor Union: An organization of workers that negotiates collectively with employers over wages and conditions. This is known as collective bargaining.
• Union Membership Facts (2021):
  • Total U.S. workforce: $10.3\%$.
  • Higher for men ($10.6\%$) than women ($9.9\%$).
  • Higher for Black workers ($12.3\%$) than White ($10.7\%$) or Hispanic ($9.8\%$).
  • Sectoral highs: Local government ($41.7\%$), State government ($29.9\%$), Federal government ($26.0\%$).
  • Sectoral lows: Agriculture ($1.7\%$), Financial services ($1.9\%$).
  • Large Unions: National Education Association (NEA) at $3.0\text{ million}$ members; Service Employees International Union (SEIU) at $2.0\text{ million}$.
• Union Wage Effects: Members earn about $20\%$ more than nonunion workers with similar education/experience. On a graph, unions act as a monopoly, pushing wages to $W_u$, which creates an excess supply of labor ($Q_s > Q_d$).
• Productivity and Technology:
  • Unionization can increase productivity via lower turnover and specialized training.
  • Firms may react to high union wages by investing more in physical capital (machinery), making the remaining workers more productive but reducing total hiring.
  • Example: West coast longshoremen (2015) initially opposed handheld scanners but eventually accepted them in exchange for high wages/benefits. The Taft-Hartley Act was used to threaten an 80-day "cooling-off period."
• Decline of U.S. Unions: Membership fell from roughly $25\%$ in the mid-1950s to $10.3\%$ in 2021. Reasons include:
  • Structural shift from manufacturing to service industries.
  • Globalization and competition from nonunionized international producers (e.g., auto/steel from Japan/Europe).
  • Passage of workplace protection laws making unions feel less necessary.
  • A legal climate less friendly to organizing (e.g., difference between Canada's card-signing and U.S. secret ballot elections).

Bilateral Monopoly

• Definition: A labor market with a monopsony on the demand side and a union on the supply side.
• Outcome: Employment ($L^*$) will be lower than in a competitive market. The equilibrium wage is indeterminate; it falls between the union's desired wage ($W_u$) and the monopsony's desired wage ($W_m$), depending on relative bargaining power.

Employment Discrimination

• Definition: Acting on the belief that a group is inferior solely based on race, gender, religion, etc. In labor markets, it occurs when workers with the same skills (education, experience) receive different pay or opportunities.
• Economic Impact: Lisa D. Cook estimated that U.S. GDP could be $4.4\%$ higher if women and minorities could fully participate in science and technology innovation.
• Earnings Gaps:
  • Black/White: The gap narrowed in the 1970s but has since grown; current differences are similar to 70 years ago.
  • Gender: Female wages as a ratio of male wages have improved since the 1980s but a gap remains.
  • Motherhood Penalty/Fatherhood Bonus: Women with children earn $7\%-14\%$ less than similar childless women; married men earn $10\%-15\%$ more than single men.
• Walmart Class-Action Case: In 2011, the Supreme Court threw out a suit by $1.2\text{ million}$ women on procedural grounds. In 2020, Walmart paid $20\text{ million}$ to settle an EEOC suit regarding a physical ability test (PAT) that discriminated against female applicants for grocery filler roles.
• Contributing Factors:
  • Housing: Redlining and housing discrimination lead to under-resourced schools for minority children (pre-labor market discrimination).
  • Unpaid Work: Globally, women perform more unpaid household labor even when working full-time.
• Public Policies:
  • Equal Pay Act of 1963: Equal pay for equal work.
  • Civil Rights Act of 1964: Prohibits discrimination based on race, color, religion, sex, or national origin; created the Equal Employment Opportunity Commission (EEOC).
  • Affirmative Action: Active efforts to give special rights to minorities. Currently, the Supreme Court limits this primarily to federal contractors who have lost a discrimination lawsuit.

Immigration

• Historical Patterns: Immigration rose through the 20th century, peaking in the 1990s-2000s. Early 1900s immigrants were over $90\%$ European; by the 2000s, half came from the Americas (Mexico) and a quarter from Asia.
• Economic Effects:
  • Overall: Real but small gains to the total economy.
  • Wages: A $10\%$ increase in low-skill immigrants reduces low-skill domestic worker hours by $3\%$ and wages by about $1\%$.
  • Fiscal Impact: Generally positive at the federal level (income/Social Security taxes) but can be negative at state and local levels (education, welfare costs) in areas with many low-skilled immigrants who may not pay property taxes.
• Reform Proposals:
  • Congressional Jordan Commission: Suggested prioritising high-skilled immigrants (similar to Canada/Australia).
  • DREAM Act: Proposed by the Obama administration to provide a path to citizenship for children brought illegally (failed at federal level).
  • H1B Visas: High-tech companies advocate for more permits for highly skilled workers.

Prominent U.S. Workplace Protection Laws

• National Labor-Management Relations Act of 1935 (Wagner Act): Procedures for unions; created NLRB.
• Social Security Act of 1935: Established unemployment insurance.
• Fair Labor Standards Act of 1938: Set minimum wage, child labor limits, and 40-hour overtime rules.
• Taft-Hartley Act of 1947: Allowed states to permit workers to opt out of unions; cooling-off periods for strikes.
• Occupational Health and Safety Act of 1970: Created OSHA.
• Employee Retirement and Income Security Act of 1974 (ERISA): Regulates pensions.
• Pregnancy Discrimination Act of 1978: Protects pregnant workers.
• Americans with Disabilities Act of 1990 (ADA): Prohibits discrimination and requires reasonable accommodations.
• Lily Ledbetter Fair Pay Act of 2009: Restores protections for pay discrimination claims.