Chapter 6:Determination of Wages

• Importance of wages: wage structure at point in time and changes over time serve to efficiently allocate labor and to keep S and D in balance.

• Why care? – Implications for well-being;– inequality; – L market trends over time.– Policy relevance.

Wages

• Use term “wage” loosely!– 1) price of labor per hour of work– 2) use: average hourly earnings.

• Two data sources:– 1) CPS:– 2) BLS:– Both published in Employment

and Earnings.– See Table 6.1:

Wage Determination in Competitive Markets

• 5 Assumptions in P.C. Model

• 1) firm’s goal:

• worker’s goal:

• 2) information.:

• 3) homogeneity:

• 4) no mkt power:

• 5) no barriers/no mobility costs.

• Result: Law of One Wage.

Market Imperfections

• 1) Nonmaximizing behavior:

• 2) Imperfect information

• 3) Heterogeneity:

• 4) Collusion:

• 5) Costly mobility:

Minimum Wage Laws

• First established in 1938 by the Fair Labor Standards Act (FLSA).

• See movement over time.

• Without legislative adjustment, real value falls over time.

More on Wmin

• Evaluating effectiveness of Wmin laws.

• Policy’s goal: “..maintenance of minimum standards of living..”

• Who holds Wmin jobs?

– 1) 1999: about 3.3 million workers (4.6% of workforce)

– 2)

– 3)

Effect of Minimum Wage

• On living standard:

• 2001 poverty line for family of four = $18,022.

• FT work at Wmin = $10,300.

• Effect of Wmin on labor market:

– 1)

– 2)

– 3)

Labor Market Segmentation

• Allows for violation of one of the assumptions of p.c.: – Violated assumption: All jobs in market

are open to competition.

– Allows for strong barriers to entry.

• Forms of barriers to entry: – 1)

– 2)

– 3)

– 4)

• Barrier can cause segmented labor market.

Dual Labor Market Theory

• Labor market stratified into: primary labor market; secondary labor market. Little/no mobility between sectors.

• Primary sector: good jobs:

• Typically found in large firms, union jobs, or high tech jobs.– 1)

– 2)

– 3)

More on Theory

• Secondary sector: bad jobs:

• Good work habits not rewarded.

• Therefore, bad work habits can be created or reinforced.

• May result in self-perpetuating cycle that reinforces the segmentation into the 2 markets.

More on Segmentation

• Empirical evidence in favor of dual labor market theory:

• Segmented workforce within single employer: permanent workers versus contingent workers (temp workers, out-sourcing, etc.)– Percent contingent has .– Microsoft case: “permanent”

temps.