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