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 Large Traditional Corporate Model Scientific management Taylor)
(Frederick
Time and motion Professionalized foremen Kinked piece rates Records and systems of control
(Henry) Fordism Assembly line production Efficiency wages Paternalist welfare dept.
The Large Corporate Model -- continued
Great Depression Worker demand for job security Implicit contracts to provide security Alternatives to Taylorism
World War II Military model of management
Codification of system in labor law and practice Exempt/non-exempt in FLSA Supervisor/non-supervisor in TH Adversarial labor-mgmt. relations Layoff/recall systems by seniority in union contracts Tax-favored benefits which assume longtenure jobs
Widely-Cited Causes of the Weakening of the Model ď ° Uncertainty
in product market leads to uncertainty in labor market Deregulation New sources of world competition Flexible exchange rates New technology
ď ° Financial
approach vs. organizational approach
Financial approach vs. organizational approach ď °Firm
as a collection of assets (portfolio) ď °Market for corporate control
Franco Modigliani
Merton Miller
Contrasting view from Alfred P. Sloan, Jr.
“Take my assets, but leave me my organization and in five years I’ll have it all back.”
The Changing Employment Relationship
?
The Jack Welch Model
“At the end of the week we cut your paycheck… we start afresh on Monday.”
At least his wife loves him.
Or maybe not
Changing popular view of corporate policy
“Human Resources.�
An Alternative Contingent Model Traditional
Attachment Tying via benefits Loyalty to employer Provision of training Implicit contracts
Contingent
Turnover Cash and carry Self advancement Recruitment of skills Explicit contracts
“We expect little loyalty. In return, we offer little security.”
Temporary Help Services Employment
Seasonally adjusted
French students riot over govt. proposal to allow temp contracts for young people: Spring 2006
“Merry Christmas, folks. And I want to say that I wouldn’t be president of this great company without the support of each and everyone of you, or people very much like you.”
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
“Productivity” Has Increased Well Over 4-Fold Since the End of WW2
Interrelated Topics
Productivity Technology Education
and training
aka “human capital” Alternative
(again)
pay systems
Productivity production Productivity profitability Definition Average vs. marginal distinction Alternative measurements Labor productivity Total factor (multifactor) productivity Productivity
Basic Definition
Output
Input
Plant Firm Industry Country
Questions of Measurement What are the outputs?
What are the inputs?
What Are the Outputs? Coal
mine Automobile factory Airline Construction contractor Department store Advertising agency Possible solution Use value rather than quantities
Time series problem Meaning of nominal values changes over time Price index issues arise
What Are the Inputs? Labor Capital
Physical R&D Labor
and capital combined Labor, capital, and materials Possible problems regarding labor Is labor a homogeneous input? Variations in education and training (Adam Smith’s criterion for pay determination)
“…education of the common people requires attention from the state more than that of people of rank and means, whose parents can look after their interests.” Adam Smith Wealth of Nations
What is in the residual? Simple labor productivity Q/L If Q rises faster than L, it could be due to improved labor quality, more capital, more materials, “technology”
Multifactor productivity Q/index of combined K, L, and possibly M, perhaps with quality adjustment to L If Q rises faster than the combined index, the extra growth is due to “technology” Note: Technological innovation is anything that improves results relative to resources
“Technology� (Broadly Defined) Has Led Historically to Dominance
Who was Florence Nightingale?
1820-1910 Organized team of nurses during Crimean War (1854)
What is in the residual?
Florence Nightingale’s early “pie chart” (polar-area diagram) of 1858 helped to explain and reduce hospital mortality.
What is in the residual? “To understand God’s thoughts, we must study statistics.” Florence Nightingale
What is in the residual?
Labor Productivity An
average (not marginal) measure (Q/L) Do not confuse with wage = marginal revenue product of labor.
Cyclical
behavior Concept of unit labor costs
Cyclical Influence
Overhead Workers? Suggests need to adjust productivity for business cycle.
Walter Oi
Unit Labor Costs ď Ž
WL/Q W = wage L = labor input Q = output
ď Ž
Can be rewritten as W/(Q/L) Ratio of wage to productivity Suggests a wage vs. productivity balancing for competitiveness
W
Q/L
Rumpelstiltskin
Modern version: Ru-MBA-lstiltskin or: Ru-MPP-lstiltskin
Challenge: Spin straw into gold at competitive price. Reminder: ULC = WL/Q = W/(Q/L) Wage = $10/hour Productivity = 1 oz./40 hours Market price of gold = $360/oz. Assuming straw is free, is this competitive? ULC = $10/(1/40) = $400 NOT competitive!!!
Challenge: Spin straw into gold at competitive price. Try a wage cut. Wage = $8/hour Productivity = 1 oz./40 hours Market price of gold = $360/oz. Assuming straw is free, is this competitive? ULC = $8/(1/40) = $320 Competitive!!!
Challenge: Spin straw into gold at competitive price. Try a productivity increase. Wage = $10/hour Productivity = 1 oz./30 hours Market price of gold = $360/oz. Assuming straw is free, is this competitive? ULC = $10/(1/30) = $300 Competitive!!!
Question to contemplate at home: If straw sufficient for 1 oz. of gold had cost $45, how would the answers have been changed?
Common Assertion: Real Wages Rise with (Labor) Productivity W = Hourly Labor Compensation H = Labor Hours P = Price Index V = Value of National Output WH = Total Income of Labor s = Labor’s Relative Share of National Output = WH/V W/P = Real Wage V/P = Real Output (V/P)/H = Labor Productivity
Common Assertion: Real Wages Rise with (Labor) Productivity Since s = WH/V W = s(V/H) W/P = s([V/P]/H) or real wage = s (output per hour) or real wage = s (productivity) So real wage will rise with productivity IF... s is constant AND if... the price index used to deflate the wage is the same as the price index used to deflate national product
Official Indexes Productivity vs. Real Wage (CPI-U Measured): 1959=100 300.0 280.0 260.0
Output/Hour
240.0
Real Comp/Hour
220.0 200.0 180.0 160.0 140.0 120.0 2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
100.0
Using Output Deflator to Calculate Real Wage Productivity vs. Real Wage (Price Deflator Measured): 1959=100 300.0 280.0 260.0
Output/Hour
240.0
Real Comp/Hour
220.0 200.0 180.0 160.0 140.0 120.0
Lesson: Most of the real wage-productivity gap is due to difference between CPI and output deflator. Some is due to decline of labor’s share especially early 2000s.
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
100.0