Chapter 5

Nonwage labor costs

Nonwage labor costs

Nonwage labor costs include:• hiring costs,

Nonwage labor costs

Nonwage labor costs include:• hiring costs,• training costs,

Nonwage labor costs

Nonwage labor costs include:• hiring costs,• training costs, and• employee benefits.

Hiring costs

Hiring costs include the costs associated with:• placing advertisements,

Hiring costs

Hiring costs include the costs associated with:• placing advertisements, • selecting candidates for interviews,

Hiring costs

Hiring costs include the costs associated with:• placing advertisements, • selecting candidates for interviews, • interviewing candidates,

Hiring costs

Hiring costs include the costs associated with:• placing advertisements, • selecting candidates for interviews, • interviewing candidates, • selecting candidates for job offers,

Hiring costs

Hiring costs include the costs associated with:• placing advertisements, • selecting candidates for interviews, • interviewing candidates, • selecting candidates for job offers, • negotiating job offers,

Hiring costs

Hiring costs include the costs associated with:• placing advertisements, • selecting candidates for interviews, • interviewing candidates, • selecting candidates for job offers, • negotiating job offers, and • processing the worker's employment (filling out

W4 forms, I9 forms, and adding the worker to the company's insurance and pension plans) in the human resources department of the firm.

Hiring costs differences across firms

• In the secondary labor market, hiring costs are generally relatively low.

Hiring costs differences across firms

• In the secondary labor market, hiring costs are generally relatively low.

• Hiring costs in the primary labor market, however, can be very substantial, particularly when a firm is operating in a national labor market.

Training costs

Training costs include:• the explicit cost of hiring trainers and using

materials (such as manuals, videotapes, and capital equipment) for training purposes,

Training costs

Training costs include:• the explicit cost of hiring trainers and using

materials (such as manuals, videotapes, and capital equipment) for training purposes,

• the implicit cost of using other workers, raw materials, and capital during informal on-the-job training,

Training costs

Training costs include:• the explicit cost of hiring trainers and using

materials (such as manuals, videotapes, and capital equipment) for training purposes,

• the implicit cost of using other workers, raw materials, and capital during informal on-the-job training, and

• the opportunity cost of the trainee's time during training.

Training costs and wage offers

• low wages - higher turnover rates and lower quality applicants, leading to higher training costs.

Training costs and wage offers

• low wages - higher turnover rates and lower quality applicants, leading to higher training costs.

• high wages - lower turnover rates and higher quality applicants, leading to lower training costs

Employee benefits

• legally mandated social insurance programs (such as social security and unemployment compensation),

Employee benefits

• legally mandated social insurance programs (such as social security and unemployment compensation), and

• privately provided benefits such as health insurance, vacation pay, and pension plans.

Quasi-fixed costs

• Quasi-fixed costs are costs that vary with the number of workers hired by the firm, but not with hours worked per employee.

Optimal mix of employment and hours

Firms may increase their use of labor by: • adding additional workers,

Optimal mix of employment and hours

Firms may increase their use of labor by: • adding additional workers, • increasing the length of the workweek,

Optimal mix of employment and hours

Firms may increase their use of labor by: • adding additional workers, • increasing the length of the workweek, or • some combination of increases in hours and

increases in the number of workers.

Production function

Q=f(M,H)

where: Q = quantity of outputM = number of workersH = length of average work week

Production function

Q=f(M,H)

where: Q = quantity of outputM = number of workersH = length of average work week

• MP of M declines as M increases

Production function

Q=f(M,H)

where: Q = quantity of outputM = number of workersH = length of average work week

• MP of M declines as M increases• MP of H declines as H increases

Optimal mix of M and H

Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH

Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH

• substitution effect: M increases and H decreases

Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH

• substitution effect: M increases and H decreases• scale effect: M and H both decrease

Effect of an increase in mandated overtime premiumIn a more complete model, other effects would occur:• a substitution of capital and other inputs for labor,

Effect of an increase in mandated overtime premiumIn a more complete model, other effects would occur:• a substitution of capital and other inputs for labor,• increased noncompliance,

Effect of an increase in mandated overtime premiumIn a more complete model, other effects would occur:• a substitution of capital and other inputs for labor,• increased noncompliance, • only limited substitution of less skilled unemployed

workers for the skilled workers who tend to work overtime hours,

Effect of an increase in mandated overtime premiumIn a more complete model, other effects would occur:• a substitution of capital and other inputs for labor,• increased noncompliance, • only limited substitution of less skilled unemployed

workers for the skilled workers who tend to work overtime hours,

• increased moonlighting,

Effect of an increase in mandated overtime premiumIn a more complete model, other effects would occur:• a substitution of capital and other inputs for labor,• increased noncompliance, • only limited substitution of less skilled unemployed

workers for the skilled workers who tend to work overtime hours,

• increased moonlighting, and • a decline in the base rate of compensation in those

industries that use significant amounts of overtime.

Part-time employment and mandated benefits• The quasi-fixed costs associated with full-time

employees is usually higher than the quasi-fixed costs associated with part-time employees.

Part-time employment and mandated benefits• The quasi-fixed costs associated with full-time

employees is usually higher than the quasi-fixed costs associated with part-time employees.

• Mandatory health insurance would reduce the use of part-time employment.

Multi-period demand for labor

• firms may lose money during a training period if they can receive a sufficient return on the training investment in subsequent periods.

Present value

Present value

The present value of a future payment is lower when:

• the payment is received in the more-distant future,

Present value

The present value of a future payment is lower when:

• the payment is received in the more-distant future, and/or• the interest rate is relatively high.

Two period model: definitions

• Wo = wage during training• W1 = post-training wage• W* = wage if no training is received (the same in

each period)• Z = hiring and training cost (paid during the

training period)• MPo = marginal product during training• MP1 = marginal product after training• MP* = marginal product if no training is received

(assumed to be the same in each period)

Shifts in MP due to training

Optimal employment when training costs are present• PV(MRP) = PV(MFC)

Optimal employment when training costs are present• PV(MRP) = PV(MFC)Definitions:• PVP = MPo + MP1/(1+r),

Optimal employment when training costs are present• PV(MRP) = PV(MFC)Definitions:• PVP = MPo + MP1/(1+r), and • PVE = Wo + Z + W1/(1+r).

Optimal employment when training costs are present• PV(MRP) = PV(MFC)Definitions:• PVP = MPo + MP1/(1+r), and • PVE = Wo + Z + W1/(1+r).

Optimal employment: • PVP=PVE

Optimal employment when training costs are present• PV(MRP) = PV(MFC)Definitions:• PVP = MPo + MP1/(1+r), and • PVE = Wo + Z + W1/(1+r).

Optimal employment: • PVP=PVE• MPo + MP1/(1+r) = Wo + Z + W1/(1+r)

Optimal employment when training costs are present

Optimal employment when training costs are present• Wo + Z - MPo = (MP1 - W1) / (1 + r),

Optimal employment when training costs are present• Wo + Z - MPo = (MP1 - W1) / (1 + r), or• NCo = G

General and firm-specific training

• General training is training that raises a worker's productivity in more than one firm.

General and firm-specific training

• General training is training that raises a worker's productivity in more than one firm.

• Firm-specific training increases the worker's productivity only in the current firm.

Costs of general training

• Since general training raises the productivity of the worker in more than one firm, the costs (and benefits) of general training are expected to be borne by the worker.

Costs of general training

• Since general training raises the productivity of the worker in more than one firm, the costs (and benefits) of general training are expected to be borne by the worker.

• Wo = MPo - Z, and

Costs of general training

• Since general training raises the productivity of the worker in more than one firm, the costs (and benefits) of general training are expected to be borne by the worker.

• Wo = MPo - Z, and• W1 = MP1

Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the worker.

Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the worker.

• If firms bear the costs, there is no reason for workers to stay.

Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the worker.

• If firms bear the costs, there is no reason for workers to stay.

• It is expected that the costs of (and benefits from) firm-specific training will be shared.

Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the worker.

• If firms bear the costs, there is no reason for workers to stay.

• It is expected that the costs of (and benefits from) firm-specific training will be shared.

• MPo - Z < Wo < MP*

Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the worker.

• If firms bear the costs, there is no reason for workers to stay.

• It is expected that the costs of (and benefits from) firm-specific training will be shared.

• MPo - Z < Wo < MP*• MP* < W1 < MP1

Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,

Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,

• firms are more likely to rely on overtime rather than using additional employees in those markets in which firms pay a substantial share of training costs,

Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,

• firms are more likely to rely on overtime rather than using additional employees in those markets in which firms pay a substantial share of training costs,

• productivity falls during a recession,

Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,

• firms are more likely to rely on overtime rather than using additional employees in those markets in which firms pay a substantial share of training costs,

• productivity falls during a recession, and• rises during an expansion.

Minimum wage and training costs

• For workers to bear part or all of the cost of their training, they must be paid less during the training period.

Minimum wage and training costs

• For workers to bear part or all of the cost of their training, they must be paid less during the training period.

• The minimum wage sets a floor on this wage that limits the ability of workers to bear the costs of such training by accepting a lower wage.

Minimum wage and training costs

• For workers to bear part or all of the cost of their training, they must be paid less during the training period.

• The minimum wage sets a floor on this wage that limits the ability of workers to bear the costs of such training by accepting a lower wage.

• Firms faced with such a system may respond by providing less training, thereby limiting the rate of growth of earnings for minimum-wage workers.

Credentials, Signals, and statistical discrimination• Firms have imperfect information and may make

decisions based on observable worker characteristics.

Credentials, Signals, and statistical discrimination• Firms have imperfect information and may make

decisions based on observable worker characteristics.

• This may lead to statistical discrimination.

Credentials, Signals, and statistical discrimination• Firms have imperfect information and may make

decisions based on observable worker characteristics.

• This may lead to statistical discrimination.• Statistical discrimination is expected to be less

severe when internal labor markets are used.