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
Another Common Assertion: If wages rise faster than productivity, we will have inflation. Since s = WH/V sP = WHP/V or P = (1/s) ([WH]/[V/P]) P = (1/s) (total labor comp/real output) which is another way of saying that if s is constant, “prices” will move with unit labor costs = wage/productivity = W/([V/P]/H) Assuming the share is constant is equivalent to assuming that there is a constant “markup” of prices over unit labor costs. Example: If labor’s share is 70%, the markup is 1/.70 or about 1.43 (43%).
Unit labor costs are highly variable due to short-term volatility of productivity and changes in labor’s “share”
Unit labor costs are highly variable due to short-term volatility of productivity and changes in labor’s “share”
But for 1947-2007: Annual Rate of Change:
ULC: 3.0% Price Deflator: 3.1%
Multifactor Productivity
Output
Two factor example
Edward Denison
Robert Solow
Capital
Labor
Simple 2-Factor Example Let Q = output, K = capital, L = labor, P = price of output Production function Q = F(K,L) DQ = MPKDK + MPLDL (DQ/Q)PQ = [(MPKP)K]DK/K + [(MPLP)L] DL/L Note that MPLP = marginal revenue product of labor = wage and MPKP = marginal revenue product of capital = rental cost of capital. Terms in brackets = absolute shares of labor and capital, respectively. PQ = value of output. Now divide through by PQ
(DQ/Q) = {[(MPKP)K]/PQ}(DK/K) + {[(MPLP)L]/PQ} (DL/L) translates into: (% change in Q) = {SK} (% change in K) + {SL} (% change in L) where SK = relative share of capital in value of output and SL = relative share of labor in value of output. Multifactor productivity gain is left-hand side/right-hand side. It tells you whether output rose faster than could be accounted for by capital and labor inputs.
(DQ/Q) = {[(MPKP)K]/PQ}(DK/K) + {[(MPLP)L]/PQ} (DL/L) translates into: (% change in Q) = {SK} (% change in K) + {SL} (% change in L) where SK = relative share of capital in value of output and SL = relative share of labor in value of output. Multifactor productivity gain is left-hand side/right-hand side. So we often attribute the gain in multifactor productivity to “technology.�
Changes in technology...
‌have been with us for a long time
Changes in technology...
Samuel F.B. Morse
‌have been with us for a long time
Changes in technology...
Alexander Graham Bell
‌have been with us for a long time
Changes in technology...
Guglielmo Marconi
‌have been with us for a long time
#1 on Billboard Chart for 16 weeks in 1962
Changes in technology...
‌have been with us for a long time
Changes in technology...
‌have been with us for a long time
Entrepreneurship and Technology Combine
Thomas Edison invents the phonograph (and creates the recording industry)
Who was Herman Hollerith?
Who was Herman Hollerith?
Who was Herman Hollerith?
A key concern 
Technology/displacement
% Change in Business Output/Hour vs. Unemployment Rate 12
Unemployment Rate
10 8 6 4 2 0 -4
-2
0
2
4
% Ch Output/Hour
6
8
10
% Change in Business Output/Hour vs. Change in Unemployment Rate Change in Unemployment Rate
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4
-2
0
2
4
% Ch Output/Hour
6
8
10
Key ingredients in rising productivity
Technology
Increase in physical capital Increase in R&D investment Increase in human capital
“Hi Dad. Investment banking wasn’t that great after all.”
Human Capital Model of Formal Education
Income
Upfront costs followed by lifetime benefits. Do the future benefits outweigh the initial costs?
Gary Becker THS
TCOL
Time
Human Capital Model of Formal Education
Income
Upfront costs followed by lifetime benefits. Do the future benefits outweigh the initial costs?
Gary Becker THS
TCOL
Time
If NPV of college stream of income > NPV of high school stream...
go to college $
Note:
Net present value (NPV)
i S[(bi-ci)/(1-ri) ] where i = time period running from THS until retirement, bi = benefit, ci = cost, and ri is the time period-appropriate interest rate. $
“Do you realize, young man, what C- can mean in terms of lifetime earnings?”
Education. Is it...
crude job rationing?
Education. Is it...
signaling?
Why might we need a signal?
Education. Is it...
skill/knowledge development?
Job rationing and signaling can lead to... “creeping credentialism” with rising educational hurdle Individual still benefits from investment in education.
Does “society”?
Benefits to Society?
Job rationing No social benefits
Signaling If signal is cheaper than other sources of information, may be beneficial
Skill/knowledge development Benefits
Human Capital Analysis Applied to Job Training
Human Capital Analysis Applied to Job Training ď ľGeneral
training
Human Capital Analysis Applied to Job Training General
training Specific training Who “pays”? What form does the payment take? Implicit contract modification
General vs. Specific Valuable across labor market
Valuable only to one firm
General vs. Specific Simple model says employee (or parent or govt.) pays
Simple model says employer pays
Forms of employee payment for training
Direct
payment to a
school Low or zero wage during training period on the job Note:
Employee pays does not necessarily mean off-the-job location
Example: Internship
Labor exchanged for valuable training
Question:
If the employment relationship is thought of as an ongoing implicit contract, what modification might that make to the analysis of general vs. specific training?
Question:
If the employment relationship is thought of as an ongoing implicit contract, what modification might that make to the analysis of general vs. specific training?
Note that seemingly-specific knowledge might have outside value. Implications for firm policy?
“McLaughlin came over to us from them because he felt things could be done better here, especially if we know what was going on there.�
Possible solution?
Interpreting the Return to Tenure on the Job ď Ž Not
an issue for job changers ď Ž For rewards on the job, is it... payment for increased productivity due to skill enhancement?
Learning by doing
Learning from other employees
Interpreting the Return to Tenure on the Job ď ŽNot an issue for job changers ď ŽFor rewards on the job, is it... payment for increased productivity due to skill enhancement? statistical effect caused by job matching?
Slogan: “We’re not the best because we’re the oldest. We’re the oldest because we’re the best.”
Preserving firm “investment in employees”
Simple job security guarantees Full employment guarantee Reverse seniority layoff with seniority-based recall Pay systems which give employees “voice” in decision making Cooperatives ESOPs Pay systems which absorb risk Profit sharing Gain sharing
Share Economy Preview Payroll = W x H x E “Standard” U.S. approach
Share Economy Preview Payroll = W x H x E “Standard” U.S. approach
– First vary H (overtime)
Share Economy Preview Payroll = W x H x E “Standard” U.S. approach
– First vary H (overtime) – Then vary E
Share Economy Preview Payroll = W x H x E “Standard” U.S. approach
– First vary H (overtime) – Then vary E – Last resort, vary W
Share Economy Preview Payroll = W x H x E “Standard” U.S. approach
– First vary H (overtime) – Then vary E – Last resort, vary W
Share Economy approach is to vary W initially and thereby insulate E.
Lincoln Stock Price History