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Page 1: Next page Chapter 13: Government and the Labor Market II

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Chapter 13: Government and the Labor Market II

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1. Labor Law

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Pre-1930 period Prior to the 1930s, union organizers and

members were unprotected against retaliation by employers and the government.

Employers used: Discriminatory discharge Blacklists which denied workers chances to

get employed elsewhere Yellow-dog contracts which prohibited

workers from joining a union as a condition of employment.

Labor Law and Union Membership

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Lockouts or plant closedowns to stop organizing efforts.

Strikebreakers Injunctions or court orders to stop strikes,

picketing, or boycotts. Union membership was low during this

period. Post-1930 period

Many labor relations laws were passed in the 1930s.

Labor Law and Union Membership

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Norris-LaGuardia Act Outlawed yellow-dog contracts and limited

injunctions. Wagner Act

Gave unions the right to be free from interference from employers.

Gave unions right to bargain as a unit with employers

Outlawed “unfair” labor practices. Labor union membership soared in 1930s.

Labor Law and Union Membership

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Limitation on use of injunction This made union threats of a strike more

credible and increased management’s costs of disagreeing. Union bargaining power rose.

Prohibition of secondary boycotts Secondary boycotts are actions by a union

to refuse to handle, or get one’s employer to refuse to buy, products made by a party to a labor dispute.

Labor Law and Bargaining Power

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Example: Unionized truckers would refuse to haul steel made by firms involved in a labor dispute.

Taft-Hartley Act of 1947 made these boycotts partly illegal and the Landrum-Griffin Act of 1959 eliminated the remaining exceptions.

The elimination of secondary boycotts increased management’s bargaining power since the union’s cost of disagreeing rose.

Labor Law and Bargaining Power

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2. Minimum-Wage Law

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The minimum wage is $5.15 and was last increased in October 1997.

Characteristics of minimum wage workers: 39% teenagers 61% female 19% black 84% service producing industries 71% part-time workers

Facts

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Proponents argue the minimum wage: Is needed to provide a “living wage.” Stop exploitation by monopsonistic firms. “Shocks” employers into greater efficiency.

Opponents argue the minimum wage: Increases unemployment. Reduces wages in sectors not covered by

the law. Encourages teenagers to dropout of school. Most minimum wage workers don’t live in

poverty.

Controversy

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Basic Model• At a minimum wage of Wm,

employers will hire only Qd rather than Q0 workers.

• The higher minimum wage will encourage Qs workers to look for employment.

• The impact on employment (ab) will be smaller than the impact on unemployment (ac).

• The minimum wage will cause an efficiency loss of fae.

Q0Qd

W0

Wm

Quantity of Labor Hours

Wage rateSL

DL

• The more elastic is SL and DL, the larger is the

unemployment consequences.

e

f

Qs

ca b

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• The minimum wage Wm imposed on the covered

sector reduces employment from C0 to C1.

• The displaced workers from the covered sector will seek employment in the uncovered sector and thus increase the supply of

labor in the sector.

• Though total employment in the economy will remain unchanged, the wage in the uncovered sector will fall from W0 to Wu.

Quantity of Labor

Wag

e ra

te

DC

C1

Wm

C0

W0

Covered

Du

Quantity of Labor

Wag

e ra

teU0

W0

Uncovered

U1

Wu

• Society will suffer an efficiency loss due to themisallocation of labor.

Incomplete Coverage

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Wage and Employment for a Monopsonist

• Without the minimum wage, this monopsonist will choose to hire Q0 and pay a wage equal to W0.

• Any legal minimum wage above W0 and below W2, will transform the firm into a “wage-taker,” and the firm will choose to increase its level of employment.

• For example, if the minimum wage is W1, this firm will hire the same number of workers as if competition existed in this labor market.

Q1

W1

Quantity of Labor Hours

Wage rate

SL=PL

DL=MRP=VMP

MWC

Q0

W0

W2

• Thus, it is possible that a minimum wage might cause employment to increase in some industries.

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Union support Unions lobby for higher minimum wages. Higher minimum wages help unions by

raising the cost of nonunion of labor. The higher cost of nonunion goods will

increase the demand for union products. Efficiency wage considerations

Higher minimum wage will increase the unemployment rate and thus increase the penalty for shirking.

Other Considerations

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Firms could lower their efficiency wage payments and thus decrease the unemployment rate.

Other Considerations

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Employment and unemployment A higher minimum wage reduces the

employment of teenagers more than those of adults. Teenagers are more likely to earn the minimum.

Human capital A higher minimum wage reduces on-the-job

training and increases the dropout rate from high school.

Poverty The minimum wage has little effect on the

poverty rate.

Empirical Evidence

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Questions for Thought:1. Explain how an increase in the minimum wage could:

(a) Reduce teenage employment but leave the teenage unemployment rate unaffected.

(b) Reduce one type of investment in human capital but increase another.

(c) Reduce above-market clearing efficiency wages paid to some workers in the economy.

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3. Occupational Health and Safety Regulation

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Rate of Occupational Fatalities by Industry, 2002

0 5 10 15 20 25

Rate per 100,000 Workers

Mining

Agriculture

Construction

Transportation

Manufacturing

Government

Retail Trade

Services

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Optimal Level of Job Safety

• That is, it becomes increasingly costly to increase job safety and so they face a rising

marginal cost of job safety. • Increased job safety benefits

the firm by permitting them to pay lower wages, reduce worker turnover, and

have lower worker compensation rates. • The additional increase in

benefit to the firm declines as the level of job safety rises.

Quantity of Job Safety

MB

, MC

of

Job

Saf

ety

MCS

MBS

QS

• As firms try to increase job safety, they face diminishing returns.

• Thus, firms face a declining marginal benefit of job safety.

• The optimal amount of job safety is at QS, where the MBS = MCS.

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Imperfect Information

Quantity of Job Safety

MB

, MC

of

Job

Saf

ety

• If workers have full information about work hazards and

accurately assess job risks, QS level of job safety will optimize society’s well-being.

• Thus, the marginal benefit of each unit of job safety will be less (MB’S rather than MBS), and the firm will underprovide job safety from society’s viewpoint (Q’S rather than QS).

MCS

MB’S

Q’S

MBS

QS

• If workers are unaware of workplace danger or

underestimate it, they will not be proper wage premium, and the firm will not gain the benefit of lower wages as it provides more safety.

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In 1970, the Occupational Safety and Health Administration (OSHA) was given the task of developing and enforcing workplace safety standards.

Case for OSHA Imperfect information, underestimation of risk,

and barriers to occupational mobility prevent the labor market from providing the appropriate wage premiums for risk.

Government standards are necessary to force firms to provide the optimal amount of job safety

Occupational Safety and Health Act

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Case Against OSHA Though information is imperfect, it is not clear

that workers will underestimate the risks associated with job hazards. They could overestimate the risk and generate

too high a wage premium and no underallocation of job safety will occur.

Workplace standards often bear no relationship to reductions to job injuries and illness.

Occupational Safety and Health Act

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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.

Occupational Safety and Health Act

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Questions for Thought:1. Evaluate this statement: “Profit-maximizing

firms lack an incentive to provide job safety, and consequently, the federal government must intervene legislatively to protect workers against unsafe working conditions that surely will result.”

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4. Government as a Rent Provider

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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.

Economic Rent

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Economic Rent• At the market wage of $8,

employers will hire Q0 workers.• The labor supply curve indicates that these Q0 workers

collectively receive economic rent equal to the area abc.

• The Qj worker receives a $2 per hour rent ($8 minus the person’s opportunity cost of $6).

$6

Qj Quantity of Labor Hours

Wage rateS

D

Q0

$8 cb

a

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Rent Provision Through Occupational Licensure

• Governments restrict entry into some occupations by requiring licenses in order to enter the occupation.

• By setting a limit of 7,000 licenses in this labor market, government indirectly

increases the wage from $8 to $11, thereby providing licensees collectively with an increase in

economic rent of abce and creating an efficiency loss of efg.• The efficiency loss may be greater than efg since the occupational group may have to spend resources to secure the licensing law.

f

$11

7 Quantity of Labor (1,000s)

Wage rateS

D

10

$8b

S’

g

a c

e

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Rent Provision: Import Restrictions

• Governments can restrict imports through tariffs (taxes on foreign goods), quotas (limits on

imports), and domestic content laws (requirements that a portion of the good be domestically produced).

• These restrictions, therefore, cause increases in wages in these specific labor markets.

• In this case, the wage rises from $10 to $12, and economic rent increases by the amount bcef.

Quantity of Labor Hours

Wage rateS

D0

D1

• Import restrictions reduce labor demand in foreign nations and increase the demand for labor for specific types of labor in the protected country.

Q0

$10

Q1

$12c

b

e

f

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Questions for Thought:1. How might each of the following be interpreted to be an example

of “rent provision” by government?

(a) State laws the require out-of-state big-game hunters to be accompanied by one of a limited number of licensed in-state hunting guides.

(b) An increase in the minimum wage that increases the likelihood that firms will hire unionized labor rather than unskilled labor.

(c) A state law that requires that graduates of dental schools pass a stringent examination, established by a panel of dentists, in order to practice dentistry.

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EndChapter 13