ECON 4009 Labor Economics I 2013 Fall Elliott Fan Economics, NTU Lecture 4 Labor market equilibrium Lecture 4 Economics of Labor, 2013 Fall Elliott Fan

ECON 4009

Labor Economics I2013 Fall

Elliott FanEconomics, NTU

Lecture 4Labor market equilibrium

Lecture 4Economics of Labor, 2013 FallElliott Fan

Economics of Labor, 2013 FallElliott Fan Lecture 4 slide 2

Dispatched workers


• 鄭麗君• Yesterday at 7:00pm · Edited• 【假派遣，真僱傭！政府不能帶頭剝削勞工！】• 今天與勞陣孫友聯秘書長及段宜康委員召開「政府黑心派

遣－亂象大公開」記者會。目前政府大量濫用派遣，核心業務派遣化，許多派遣人員實質做的是公務員的工作。台灣政府去年採用 1 萬 1 千名派遣工，碩士生就佔超過 1成，有２０％在政府工作超過五年，但卻無法享有平等的勞動待遇，沒有特休、加班費等福利，有的甚至缺乏最低工資的保障及退休金提撥。更離譜的是還發生違法任意解職派遣人力，傷害勞動權益。這樣漠視自己派遣人員的政府，如何有能力來制定派遣勞動保護專法 ...See More

• — with 段宜康 and 孫友聯 .


My comments

• How many are taking the jobs?• Who is taking the job?• The effects of banning dispatched workers• Professor Luoh’s comments: 派遣工待遇這麼差，願

意被派遣表示其他選項更糟，禁止政府派遣會提高派遣工其他選項的待遇？

• Let’s watch a video: Top 3 Ways Sweatshops Help The Poor Escape Poverty

https://www.youtube.com/watch?v=NxBzKkWo0mo

https://www.youtube.com/watch?v=NxBzKkWo0mo


Introduction

• Labor market equilibrium coordinates the desires of firms and workers, determining the wage and employment observed in the labor market.

• Market types:– Monopsony: one buyer of labor– Monopoly: one seller of labor

• These market structures generate unique labor market equilibria.


Equilibrium in a Single Competitive Labor Market

• Competitive equilibrium occurs when supply equals demand, generating a competitive wage and employment level.

• It is unlikely that the labor market is ever in an equilibrium, since supply and demand are dynamic.

• The model suggests that the market is always moving toward equilibrium.


Efficiency

• Pareto efficiency exists when all possible gains from trade have been exhausted.

• When the state of the world is (Pareto) Efficient, to improve one person’s welfare necessarily requires decreasing another person’s welfare.

• In policy applications, ask whether a change can make any one better off without harming anyone else. If the answer is yes, then the proposed change is said to be “Pareto-improving”.


Equilibrium in a Competitive Labor Market

The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*. In equilibrium, all persons who are looking for work at the going wage can find a job. The triangle P gives the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains from trade, or the sum P + Q.

S

D0

w*

P

Q

E* EHEL

Dollars

Employment


Competitive Equilibrium Across Labor Markets

• If workers were mobile and entry and exit of workers to the labor market was free, then there would be a single wage paid to all workers.

• The allocation of workers to firms equating the wage to the value of marginal product is also the allocation that maximizes national income (this is known as allocative efficiency).

• The “invisible hand” process: self-interested workers and firms accomplish a social goal that no one had in mind, i.e., allocative efficiency.


Efficiency Revisited

• The “single wage” property of a competitive equilibrium has important implications for economic efficiency.– Recall that in a competitive equilibrium the wage equals

the value of marginal product of labor. As firms and workers move to the region that provides the best opportunities, they eliminate regional wage differentials. Therefore, workers of given skills have the same value of marginal product of labor in all markets.

• The allocation of workers to firms that equates the value of marginal product across markets is also the sorting that leads to an efficient allocation of labor resources.


Wages and International Trade: NAFTA

• NAFTA created a free trade zone in North America.

• Free trade reduces the income differential between the United States and other countries in the zone, such as Mexico.

• Total income of the countries in the trade zone is maximized as a result of equalized economic opportunities across the countries in the zone.


Competitive Equilibrium in Two Labor Markets Linked by Migration

Suppose the wage in the northern region (wN) exceeds the wage in the southern region (wS). Southern workers want to move North, shifting the southern supply curve to the left and the northern supply curve to the right. In the end, wages are equated across regions at w*.

SS

Dollars

Employment

SS

w*

wS

DS

(b) The Southern Labor Market

Dollars

Employment

SN

wN

w*

DN

(a) The Northern Labor Market

s

A

B

C


Wage Convergence Across States

Per

cent

Ann

ual W

age

Gro

wth

Manufacturing Wage in 1950.9 1.1 1.3 1.5 1.7 1.9

4.5

4.7

4.9

5.1

5.3

5.5

5.7

AL

AZ

AR

CA

CO

CTDE

FL

GA

ID

ILIN

IA

KS

KY

LA

ME

MDMA

MI

MN

MS

MO

MT

NE

NV

NH

NJ

NM

NY

NC

ND

OH

OK

OR

PA

RI

SC

SD

TN

TX

UT

VTVA

WA

WVWI

WY

Source: Olivier Jean Blanchard and Lawrence F. Katz, “Regional Evolutions,” Brookings Papers on Economic Activity 1 (1992): 1-61.


Payroll Taxes and Subsidies• Payroll taxes assessed on employers lead to a

downward, parallel shift in the labor demand curve.– The new demand curve shows a wedge between the

amount the firm must pay to hire a worker and the amount that workers actually receive.

– Payroll taxes increase total costs of employment, so these taxes reduce employment in the economy.

– Firms and workers share the cost of payroll taxes, since the cost of hiring a worker rises and the wage received by workers declines.

– Payroll taxes result in deadweight losses.


Employment

The Impact of a Payroll Tax Assessed on Firms

A payroll tax of $1 assessed on employers shifts down the demand curve (from D0 to D1). The payroll tax decreases the wage that workers receive from w0 to w1, and increases the cost of hiring a worker from w0 to w1 + 1.

B

Dollars

w1 + 1

w0

S

D0

D1

w1

w0 1

E1 E0

A


The Impact of a Payroll Tax Assessed on Workers

Dollars

w1

w0

S0

D0

D1

E1 E0 Employment

S1

w0 + 1

w1 1

A payroll tax assessed on workers shifts the supply curve to the left (from S0 to S1). The payroll tax has the same impact on the equilibrium wage and employment regardless of who it is assessed on.


The Impact of a Payroll Tax put on Firms with Inelastic Supply

A payroll tax assessed on the firm is shifted completely to workers when the labor supply curve is perfectly inelastic. The wage is initially w0. The $1 payroll tax shifts the demand curve to D1, and the wage falls to w0 – 1.

Dollars

w0

D0

S

D0

D1

E0

A

B

Employment

w0 – 1


Payroll Subsidies• An employment subsidy lowers the cost of hiring for

firms.

• This means payroll subsidies shift the demand curve for labor to the right (up).

• Total employment will increase as the cost of hiring has fallen.


The Impact of an Employment Subsidy

An employment subsidy of $1 per worker hired shifts up the labor demand curve, increasing employment. The wage that workers receive rises from w0 to w1. The wage that firms actually pay falls from w0 to w1 – 1.

w1

S

D1

D0

w0

E0 E1

B

A

Employment

w0 + 1

w1 – 1


The Impact of a Mandated Benefit

Dollars

w0

S1

D0

D1

E1 E0

P

Q

Employment

S0

w1

w0 C

E*

w*

w* + B

R

Dollars

w0

S1

D0

D1

E0

P

Employment

S0

w* R

w* + C

(a) Cost of mandate exceeds worker’s valuation (b) Cost of mandate equals worker’s valuation


Immigration

• As immigrants enter the labor market, the labor supply curve shifts to the right.– Total employment increases.– Equilibrium wage decreases.


Effect on Native-born Workers

• Immigration reduces the wages and employment of similarly-skilled native-born workers, but native-born workers may be able to increase their productivity by specializing in tasks better suited to their skills.

• Competing native workers will have lower wages; complementary native workers will have higher wages.


The Short-Run Impact of Immigration When Immigrants and Natives Are Perfect Substitutes

As immigrants and natives are perfect substitutes, the two groups are competing in the same labor market. Immigration shifts out the labor supply curve. As a result, the wage falls from w0 to w1, and total employment increases from N0 to E1. At the lower wage, the number of natives who work declines from N0 to N1.

Dollars

Supply

w0

w1

Demand

N0EmploymentE1N1


The Short-Run Impact of Immigration when Immigrants and Natives are Complements

If immigrants and natives are complements, they do not compete in the same labor market. The labor market here denotes the supply and demand for native workers. Immigration makes natives more productive, shifting out the labor demand curve. This leads to a higher native wage and to an increase in native employment.

w1

w0

Dollars

Supply

Demand

N1N0Employment


The Long-Run Impact of Immigration When Immigrants and Natives Are Perfect Substitutes

Immigration initially shifts out the labor supply curve so the wage falls from w0 to w1. Over time, capital expands as firms take advantage of the cheaper workforce, shifting out the labor demand curve and restoring the original wage and level of native employment.

Dollars

Supply

w0

w1

Demand

N0 EmploymentN0 + Immigrants


The Native Labor Market’s Response to Immigration

Dollars

PPT

w0

Demand

(b) Pittsburgh

Employment

S0 S3

w*

Dollars

w0

PLA

wLA

(a) Los Angeles

Employment

S0 S1

S2

Demand

w*

Originally, both markets pay equilibrium wages of w0. After immigration into Los Angeles, both markets eventually converge to a new equilibrium wage at w*, which is less than w0.


The Short-Run Labor Demand Curve Implied by

Different Natural Experiments

(a) The analysis of data resulting from the Mariel natural experiment implies that increased immigration does not affect the wage, so that the short-run labor demand curve is perfectly elastic. (b) The analysis of data resulting from the NJ-Pennsylvania minimum wage natural experiment implies that an increase in the minimum wage does not affect employment, so that the short-run labor demand curve is perfectly inelastic.

Dollars

Dollars

EmploymentE*Employment

(b) NJ-Pennsylvania minimum wage

(a) Mariel

w*

D

Demand curve implied by Mariel natural experiment

D

Demand curve implied by minimum wage natural experiment


California’s Population, 1950-1990(% U.S. Population Living in California)


Scatter Diagram Relating Wages and Immigration for Native Skill Groups


The Immigration Surplus

Prior to immigration, there are N native workers in the economy and national income is given by the trapezoid ABN0. Immigration increases the labor supply to M workers and national income is given by the trapezoid ACM0. Immigrants are paid a total of FCMN dollars as salary. The immigration surplus gives the increase in national income that accrues to natives and is given by the area in the triangle BCF.

Dollars

S¢S

0

C

B

N M

A

w0

w1

D

Dollars

Employment

S¢S

0

C

B

N M

A

w0

w1

D

F


The Cobweb Model

• Two assumptions of the cobweb model:– Time is needed to produce skilled workers.– Persons decide to become skilled workers by looking at conditions in the labor

market at the time they enter school.

• A “cobweb” pattern forms around the equilibrium.

• The cobweb pattern arises when people are misinformed.

• The model assumes naïve workers who do not form rational expectations.

• Rational expectations are formed if workers correctly perceive the future and understand the economic forces at work.


The Cobweb Model in the Market for New Engineers

The initial equilibrium wage in the engineering market is w0. The demand for engineers shifts to D, and the wage will eventually increase to w*. Because new engineers are not produced instantaneously and because students might mis-judge future opportunities in the market, a cobweb is created as the market adjusts to the increase in demand.

S

Dollars

w1

E*E2 E1

w3

w*

w2

w0

D

D

E0Employment


Policy Application: Hurricanes and the Labor Market

• Hurricanes generate exogenous economic shocks that affect labor market conditions.

• Can use data to estimate difference-in-difference models that examine the economic impact on affected Florida counties relative to unaffected counties.

• Next slide data: 19 hurricanes that hit Florida between 1988 and 2005.


Changes in Employment and Wages in Florida Counties Hit by Hurricanes

Percent change in employment

Percent change in earnings

1. Effect of category 1-3 hurricane on county directly hit

-1.5 +1.3

2. Effect of category 4-5 hurricane on county directly hit

-4.5 +4.4

3. Effect of category 1-3 hurricane on neighboring county

+0.2 -4.5

4. Effect of Category 4-5 hurricane in neighboring county

+0.8 -3.3

Source: Ariel R. Belasen and Solomon W. Polachek, “How Disasters Affect Local Labor Markets: The Effects of Hurricanes in Florida,” Journal of Human Resources, forthcoming 2009, Table 4.


Policy Application: Hurricanes and the Labor Market

• How does the theory of labor market equilibrium gain support from this data?

– Labor supply decreases in counties directly hit, and more so in the more-affected counties. This increases wages and lowers employment.

– Labor supply increases in neighboring counties. This decreases wages and increases employment.


Noncompetitive Labor Markets: Monopsony

• Monopsony market exists when a firm is the only buyer of labor.

• Monopsonists must increase wages to attract more workers.

• Two types of monopsonist firms:– Perfectly discriminating– Nondiscriminating


Perfectly Discriminating Monopsonist

• Discriminating monopsonists are able to hire different workers at different wages.

• To maximize firm surplus (profits), a perfectly discriminating monopsonist “perfectly discriminates” by paying each worker his or her reservation wage.


Nondisriminating Monopsonist

• Must pay all workers the same wage, regardless of each worker’s reservation wage.

• Must raise the wage of all workers when attempting to attract more workers.

• Employs fewer workers than would be employed if the market were competitive.


The Hiring Decision of a Perfectly Discriminating Monopsonist

A perfectly discriminating monopsonist faces an upward-sloping labor supply curve and can hire different workers at different wages. Therefore the labor supply curve gives the marginal cost of hiring. Profit maximization occurs at point A. The monopsonist hires the same number of workers as a competitive market, but each worker is paid his or her reservation wage.

Dollars

S

VMPE

Employment

w*

w30

w10

3010 E*

A


The Hiring Decision of a Nondiscriminating Monopsonist

A nondiscriminating monopsonist pays the same wage to all workers. The marginal cost of hiring exceeds the wage, and the marginal cost curve lies above the supply curve. Profit maximization occurs at point A; the monopsonist hires EM workers and pays them all a wage of wM.


The Impact of the Minimum Wage on a Nondiscriminating Monopsonist

The minimum wage may increase both wages and employment when imposed on a nondiscriminating monopsonist. A minimum wage set at w increases employment to E.

MCE

Dollars

S

A

w

w*

wM

VMPE

EEMEmployment


Monopoly in the Product Market:A Review

• Firms that have monopoly power can influence the price of the product that they sell.

• Monopolist faces a downward sloped market demand curve for its output and an even lower downward sloped marginal revenue curve.


The Output Decision of a Monopolist

A monopolist faces a downward-sloping demand curve for her output. The marginal revenue from selling an additional unit of output is less than the price of the product. Profit maximization occurs at point A where the monopolist produces qM units of output and sells each unit of output at a price of pM dollars.


The Labor Demand Curve of a Monopolist

The marginal revenue product gives the worker’s contribution to a monopolist’s revenues (or the worker’s marginal product times marginal revenue), and is less than the worker’s value of marginal product. Profit maximization occurs at point A where the monopolist hires fewer workers (EM) than would be hired in a competitive market.


Training subsidy


My comments• The government needs to justify the subsidy for some

occupations, while not for other occupations.

• Enforceability is a serious concern in this case

Documents

ECON 4009 Labor Economics I 2013 Fall Elliott Fan Economics, NTU Lecture 4 Labor market equilibrium Lecture 4 Economics of Labor, 2013 Fall Elliott Fan