MGT. M259C: Analysis of Labor Markets --PP CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs
Reminder
The 3 Wage-Equalizing Mechanisms Labor moves toward higher wage areas from lower wage areas Capital moves from higher wage areas toward lower wage areas Through goods trade, regions specialize according to “comparative advantage,” creating more demand for their abundant factors
Can International Trade Affect Wage Differentials? Low Skill Occupation
High Skill Occupation
W
SH
SL w2 w1 DL 0
DH 0
Suppose exports are “intensive” in skilled labor and imports in unskilled labor.
L
Assume economy becomes more open to trade Low Skill Occupation
High Skill Occupation
W SL
w4 w2
w1 w3
D’H
D’L 0
SH
0
Imports displace some derived demand for unskilled labor. Exports increase demand for skilled labor. Wage inequality widens.
L
MGT. M259C: Analysis of Labor Markets --PP CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs
What should a nuclear power reactor operator be paid?
Average annual pay in 2006:
$70,800 BLS Occupational Employment Statistics (Semi-annual survey of 200,000 establishments)
Average Annual Pay: 2006
Marketing manager Pest control worker Lawyer Dishwasher HR manager Flight attendant Computer programmer Accountant Teller Electrician Locomotive engineer
$107,610 $29,350 $113,660 $16,190 $94,910 $56,150 $69,500 $58,020 $22,810 $46,620 $61,850
BLS Occupational Employment Statistics
“People who work sitting down get paid more than people who work standing up.�
Ogden Nash
Conditions of Work Primary focus: How are these conditions reflected in compensation?
Conditions of Work: Examples Safety
and health Mandated benefits and social insurance – Pure tax “incidence” – Taxes with benefits Private
benefits
Adam Smith on “Compensating Wage Differentials”
Wealth of Nations,1776
Adam Smith on “Compensating Wage Differentials” Wages vary with the agreeableness of the employment Wages vary with the cost of learning the job Wages vary with the constancy of employment Wages vary with the trust to be reposed Wages vary with the probability of success
Wealth of Nations, Chapter X
Note: Compensating Wage Differentials are a form of “Hedonic Pricing�
Wage = f(X1, X2, X3, X4, X5) where: X1 = agreeableness X2 = learning cost X3 = constancy of employment X4 = trust X5 = probability of success
Often estimated through regression analysis
Note: Compensating Wage Differentials are a form of “Hedonic Pricing�
Wage = f(X1, X2, X3, X4, X5) where: X1 = agreeableness X2 = learning cost X3 = constancy of employment X4 = trust X5 = probability of success
Often estimated through regression analysis
Implications Agreeableness is desirable Workers value it Therefore, workers would be willing to “pay for” more agreeableness in the form of lower compensation than otherwise.
Cigar factory readers
Assumption: Workers understand risks
Market View of Determination of Safety Wage Differential
“Job Matching� of Relatively Risk-Averse Employees with Employers for Whom Safety is Relatively Cheap
Higher Wage for Risky Occupations
Zero Iso-Profit Lines for Employers Wage
Roofing contractor
Bank Safety
Indifference Curves of Workers Wage
Roofing contractor Daring worker becomes roofer at high pay and high risk Safetyminded worker becomes bank teller
Bank Safety
Fitted Regression Line Provides Estimate of the Wage-Safety Hedonic Relationship Wage
Roofing contractor Daring worker becomes roofer at high pay and high risk Safetyminded worker becomes bank teller
Bank Safety
?????????????
Question: If the labor market reflects risk with compensating wage differentials, why do we need a public policy on workplace safety and health? ?????????????
Processing asbestos, 1909
Can you identify this New York City building?
Home of Triangle Shirtwaist Co. in 1911
Concept of (Payroll) Tax “Incidence”
W
Legal vs. Economic: Who Really Pays the Tax? Case of Totally Inelastic Supply Supply
W1 Demand
0
L1
L
Impose an EmployerPaid Payroll Tax of Percentage Rate “t” W
Employer must pay W(1+t) for each unit of labor Effective demand with tax Supply
W1
W1= W2(1+t)
W2
0
Demand
L1
L
Lesson
With totally inelastic supply (substitution offsets income effect), labor bears entire burden of employer-paid payroll tax.
Case of Upward-Sloping Supply Employer
W
costs rise but by less than tax. Wage falls but by less than tax. Employment declines. Effective demand with tax Supply
W3 W1 W2
W3= W2(1+t)
Demand
0
L2 L1
L
Lessons With totally inelastic supply (substitution offsets income effect), labor bears entire burden of employer-paid payroll tax.
With elastic, upwardsloping supply curve (substitution eftect dominates income effect), labor and employers share tax burden.
Case of Backward-Bending Supply Wage
W
falls by more than tax. Employer costs fall. Employment rises. Effective demand with tax Supply
W1 W3
W3= W2(1+t)
W2
Demand
0
L1 L2
L
Lessons With totally inelastic supply (substitution offsets income effect), labor bears entire burden of employer-paid payroll tax. With elastic, upward-sloping supply curve (substitution eftect dominates income effect), labor and employers share tax burden.
With backward-bending supply curve (income effect dominates substitution effect), wage falls by more than tax.
Overall Moral:
For every $1 of payroll tax imposed on employers, employer costs will rise by less than $1 and possibly not at all. Employees pay at least part of tax despite legal assessment. Any lessons for “competitiveness� debates?
Question: What if the payroll tax entitles workers to a benefit they value? Less than cash amount of tax More than amount of tax Equal to amount of tax
Case of Upward-Sloping Supply With Benefit Perceived to Be Just Equal to Cash Amount of Tax
W
Pre-tax situation Supply
W1
Demand 0
L1
L
Case of Upward-Sloping Supply With Benefit Perceived to Be Just Equal to Cash Amount of Tax
W Effective demand with tax Supply
W1
Demand 0
L1
L
Case of Upward-Sloping Supply With Benefit Perceived to Be Just Equal to Cash Amount of Tax Effective supply with entitlement W Effective demand with tax Supply
W1
W1= W2(1+t)
W2 Demand 0
L1
L
Case of Upward-Sloping Supply With Benefit Perceived to Be Just Equal to Cash Amount of Tax Effective supply with entitlement W Effective demand with tax Supply
W1
W1= Cost to Employer
W2
W2 = Wage Demand
0
L1
L
Question: Can you extend this analysis to the cases where the entitlement is valued less than or more than the tax? Effective supply with entitlement W Effective demand with tax Supply
W1 W2 Demand 0
L1
L
Social Insurance Nominally Financed by Employer Contributions
Workers’ Compensation – Compensation for work injuries and illness – Employer pays premium
Unemployment Insurance – Temporary payments for laid-off workers – Employer pays payroll tax
Social Security, Disability, and Medicare – Old age pensions, disability support, health care for elderly – Payroll tax nominally split between employer and employee
Private Benefit Analysis
Private Benefit Analysis Question: Absent a legal mandate, why should employer buy worker a benefit the worker could purchase in the outside market place? More generally, why provide “nice� conditions?
Absent a legal mandate, why should employer buy worker a benefit the worker could purchase in the outside market place? More generally, why provide “nice” conditions?
Social uplift? Motivational effect? Sorting effect? Save/make money for employer?
Early Benefits
Early Benefits
Note the Options
Employer offers Employer requires
Example: Health Insurance Dollars for other goods
0
Slope is -P where P is price of health insurance Worker consumption point absent employer offer or requirement
Quantity of health insurance
Could Employer, by Offering or Requiring Health Insurance, Lower its Price?
Could Employer, by Offering or Requiring Health Insurance, Lower its Price? Administrative
efficiency Avoidance of “adverse selection” Allow purchase in pre-tax dollars
Example: Health Insurance Dollars for other goods
0
Worker consumption point absent employer offer or requirement
Employer can offer lower wages and health insurance and still give worker same utility
Quantity of health insurance
Could Employer, by Offering or Requiring Health Insurance, Lower its Price? Administrative
efficiency Avoidance of “adverse selection” Allow purchase in pre-tax dollars Employer has incentive to control “moral hazard” by patients and providers
Odd Incentives from JobBased Health Insurance?
More pointedly: Is it in the employer’s interest to make jobs at the enterprise particularly attractive to people with health problems?
Complicated!
The Special Case of Defined Benefit Pensions Sorting of job applicants Motivation for employees Impact on quits Connection with incentives to retire
– (Now illegal) mandatory retirement – Formulas which favor retirement at a specific age
Relation to trends in career employment – Contingent employment – Downsizing
Stylized Characteristics of DB Plans
Amount of pension
Formula based on age, service, and terminal earnings with vesting at five years
0
5
Job tenure
Amount of pension
Stylized Characteristics of DB Plans
0
5
Job tenure
Stylized Characteristics of DB Plans
Amount of pension
Unique math of DB plans: 15+15 < 30 4 + 21 = 21
0
5
Job tenure
Cash Balance Alternative?
Amount of pension
Unique math of DB plans: 15+15 < 30 4 + 21 = 21
CB
0
5
Job tenure
Social Security as a Mandated DB Plan Effect
on labor force participation Relation to private DB plans – Job changing – Inflation protection
Relationship
to change in career employment