Outlines

OUTLINE CHAPTER 15

Labor Market Models and Efficiency

I. Introduction

A. Eight Labor Market Models

Competitive Model

Imperfect Competition in Product Market

Monopsony

Union Model increasing demand for labor

Union Model craft (exclusive) union

Union Model industrial (inclusive) union

Union Model bilateral monopoly

Minimum Wage FOR and AGAINST

B. For EACH model know the following:

1. assumptions, characteristics, and example
2. graph

3. find the profit maximizing quantity of labor
(this is the quantity that WILL BE HIRED)

4. find the allocatively efficient quantity of labor

II. Competitive Model and Allocative Efficiency

A. Assumptions / Examples
1. perfect competition in the product market
2. perfect competition in the resource market

3. examples

4. Quick Review Quiz

B. Allocative Efficiency: where MSB = MSC

1. MSB = P x MP
2. MSC = Wages

3. Allocative Efficiency where: P x MP = W
(MSB = MSC)

III. Imperfect Competition in the Product Market (pp. 265-266)

A. Assumptions / Examples
1. imperfect competition in the product market
2. perfect competition in the resource market

3. examples

B. Profit Maximizing Quantity of Labor: MRP = MRC

C. Allocative Inefficiency

IV. Monopsony

A. Assumptions / Examples
B. Upsloping Supply Curve to the Firm therefore MRC > W

B. Profit Maximizing Quantity of Labor: MRP = MRC

C. Allocative Inefficiency

V. Union Models

A. Increasing the Demand for Labor
1. increasing product demand (Pe, Pog, Y, N, T)
2. increasing labor productivity

3. increasing the price of substitutes

4. decreasing the price of complements

B. Craft (exclusive) Unions

1. examples / explanation
2. reducing the supply of labor

a. legislation to reduce labor supply
b. exclusive unionism

c. occupational licensing

3. effect on wages and employment

4. Allocative inefficiency

C. Industrial (inclusive) Union

1. examples / explanation
2. effect on wages and employment

3. Allocative inefficiency

D. Bilateral Monopoly Model

1. examples / explanation
2. indeterminate effect on wages and employment

3. Allocative efficiency?

VI. Minimum Wage

A. The Case AGAINST the Minimum Wage
1. unemployment

2. Allocative inefficiency

B. The Cast FOR the Minimum Wage

1. monopsony and employment

a) increases employment

b) improves Allocative efficiency

2. increases labor productivity

a) shock effect
b) health effect

3. minimum wage and the price elasticity of demand for labor: how much unemployment?

OUTLINE CHAPTER 22

Equity: Income Inequality and Poverty

I. Wages (pp. 278-81)

A. Meaning of Wages

B. General Level of Wages

I. Wage Differentials (pp. 290-293)

A. Wage Differentials in Selected Industries

B. Why Wages Differ supply and demand differences

1. all workers would receive the same wage if:

a. all workers were homogeneous

b. all jobs were equally attractive

c. labor markets were perfectly competitive

2. wages differ because:

a. non competing groups

(workers not homogeneous)

1) ability

2) investing in human capital: education

b. compensating differences

(all jobs not equally attractive)

c. market imperfections

(imperfectly competitive labor markets)

1) different market models

2) geographic immobilities

3) institutional immobilities

4) sociological immobilities

III. Income Inequality

A. Income Inequality: Some Facts

1. United States

a. personal income distribution

b. trends in income inequality

c. causes of growing inequality

2. international comparisons

3. Lorenze Curves

4. two adjustments

a. broadened income concept

b. income mobility: the time dimension

B. Government and Redistribution

1. federal government

a. taxation

b. transfer payments

2. redistribution

C. Income Inequality: Causes

1. ability differences (noncompeting groups)

2. education and training (noncompeting groups)

3. discrimination (market imperfections)

4. job tastes and risks (compensating differ.)

5. distrib. of wealth (market imperfections)

6. market power (market imperfections)

7. luck, connections, misfortune (market imperfections)

IV. Equality vs. Efficiency

A. The Case for EQUALITY -- maximizing utility

1. define economics

2. the 4 E's

3. Benefit Cost Analysis

a. assumptions

1) diminishing MU of income

2) rational behavior

3) given amount of income to distribute

b. maximizing utility: gains and losses

B. The Case for INEQUALITY -- incentives and efficiency

1. income distribution affects the amount of income

2. inequality provides incentives

C. The Equality -- Efficiency Tradeoff

1. the tradeoff

2. how to redistribute: the leaky bucket analogy

a. loss of incentives to work

b. bureaucracy costs

3. what is an acceptable efficiency loss?

(the shrinking pie)

V. The Economics of Poverty

A. Defining Poverty

B. Who are the poor?

C. Poverty Trends

B. A "Black Underclass"?

E. The "Invisible" Poor

OUTLINE -- CHAPTER 23

Inefficiency: Unionism, Discrimination, and Immigration Laws

(only pp. 442-454, plus pp. 288-9)

I. The Economic Effects of Unions

A. The Union Wage Advantage

1. the three union models (figures 15-5, 15-6, 15-7)

2. "unions do raise the wages of their members relative to comparable nonunion members" (p. 442)

3. "unions have probably had little or no impact on the average level of real wages received by labor - both organized and unorganized - taken as a whole" (p. 442)

4. inconsistent? (see figure 15-1, pp. 257)

B. Efficiency and Productivity --

Do unions increase productivity?

1. negative view

a. featherbedding and work rules

b. strikes

c. labor misallocation (figure 23-2) !!!

2. positive view

a. managerial performance: the shock effect

b. reduced worker turnover

c. seniority and informal training

3. who is right? (mixed research findings)

C. Distribution of Earnings --

Do unions reduce income inequality?

1. increasing inequality (figure 23-2)

2. promoting equality

a. uniform wages within firms

b. uniform wages among firms

3. who is right? (net effect)

II. Discrimination

A. Definition - Economic discrimination occurs when people with the same abilities, education, training, and experience are accorded inferior treatment with respect to:

1. wage rate

2. hiring and promotion

3. access to educational opportunities

4. occupational access

B. Dimensions (types) of Discrimination

1. wage discrimination (wage rate)

2. employment discrimination (hiring and promotion)

4. human capital discrimination (access to education)

4. occupational discrimination (occupational access)

C. Efficiency and Occupational Discrimination:

The Crowding Model

1. define economics

2. assumptions (figure 23-3)

a. labor force equally divided

b. economy has 3 occupations

c. all workers are homogeneous

d. all women crowded into one occupation

3. the crowding model

a. effects of crowding: different wages

b. eliminating discrimination

1) labor movement

2) identical wages

3) SOCIETY GAINS

c. costs of discrimination

D. Other Aspects of Discrimination

1. the comparable worth doctrine

a) definition

b) mechanics

c) pros and cons

2. non discriminatory factors

III. Immigration

A. History and Policy

1. legal immigration

2. illegal immigration

3. Simpson-Rodino Act 1986

a. amnesty

b. employer sanctions

c. temporary farm labor

B. A Model of the Economics of Immigration (figure 23-4)

1. assumptions:

a. migration is costless

b. migration occurs solely in response to wage differentials

c. no laws against migration

d. full employment in both countries

e. static (non-growing economies)

2. results:

a. wage rates and world output

1) wage rates after migration

2) output gains in the U.S.

3) output loss in Mexico

4) net change in output from the same quantity of resources

2. income shares

a. U.S. business GAIN

b. Mexico business LOSES

3. complications and modifications

a. cost of migration

b. remittances and backflows

c. full employment vs. unemployment

1) if there is unemployment in Mexico:

Mexico GAINS from migration

2) if there is unemployment in the U.S.:

U.S. LOSES from migration

d. fiscal aspects (tax revenues and gov't spending)

e. employment is NOT a zero-sum game

C. Immigration: Two Views

1. PRO

2. CON

UNIT 4

Suggested Textbook Questions

A N S W E R S

Chapter 14: pp. 276-7 1, 2, 3, 4, 6

141 What is the significance of resource pricing? Explain in detail how the factors determining resource demand differ from those underlying product demand. Explain the meaning and significance of the notion that the demand for a resource is a derived demand. Why do resource demand curves slope downward?

All resources that enter into production are owned by someone, including the most important resource of all for most people, selfowned labor. The most basic significance of resource pricing is that it largely determines people's incomes. Resource pricing allocates scarce resources among alternative uses. Firms take account of the prices of resources in deciding how best to attain leastcost production.

Finally, resource pricing has a great deal to do with income inequality and the debate as to what government should or should not do to lessen this inequality. It is here that the factors that determine resource demand are most different from those that determine demand for products. Demand for products is a question of income and tastes. But resource demand is more passive in the sense that it is derived from the demand for the products the resource can produce. If a resource can't be used in production of a desired product, there will not be any demand for it. Additionally, resources are often less mobile than products, so their geographic location relative to demand for the output they produce may be an important factor determining demand for resources in particular geographic areas.

Resources, factors of production, are not hired or bought because their employer or buyer desires them for themselves. The demand for resources is entirely derived from what the firm believes the resources can produce. If there were no demand for output, there would be no demand for input.

The demand for a resource depends, then, on how productive it is in producing output and on the price of the output. The demand for a resource is downsloping because of the diminishing marginal product of the resource (because of the law of diminishing returns) and, in imperfectly competitive markets, also because the greater the output, the lower its price.

142 (Key Question) Complete the following labor demand table for a firm which is hiring labor competitively and selling its product in a competitive market.

Units Marginal

of Total Marginal Product Total revnue

labor product product price revenue product

1 17 $2 $_____

_____ $_____

2 31 2 _____

_____ _____

3 43 2 _____

_____ _____

4 53 2 _____

_____ _____

5 60 2 _____

_____ _____

6 65 2 _____

(a) How many workers will the firm hire if the going wage rate is $27.95? $19.95? Explain why the firm will not hire a larger or smaller number of workers at each of these wage rates.

(b) Show in schedule form and graphically the labor demand curve of this firm.

(c) Now redetermine the firm's demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive worker. Compare this demand curve with that derived in question 2b. Which curve is more elastic? Explain.

Answers to Key Questions appear in the text.

143 Distinguish between a change in resource demand and a change in the quantity of a resource demanded. What specific factors might lead to a change in resource demand? A change in the quantity of a resource demanded?

A change in resource demand is shown by the movement of the whole demand curve or schedule of the resource to the right or left. A change in the quantity of a resource demanded indicates the movement up or down a given resource demand schedule or curve. Its sole cause is a change in the price of the resource.

A change in resource demand is caused by (1) a change in the demand for the product for which the resource is an input; (2) a change in the productivity of the resource ; and (3) a change in the prices of other resources that are substitutes or complements of the resource in question.

144 (Key Question) What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used in the production of commodity X? Where there is any uncertainty as to the outcome, specify the causes of that uncertainty.

(a) An increase in the demand for product X.

(b) An increase in the price of substitute resource D.

(d) A technological improvement in the capital equipment with which resource C is combined.

(e) A decline in the price of complementary resource E.

(f) A decline in the elasticity of demand for product X due to a decline in the competitiveness of the product market.

Answers to Key Questions appear in the text.

14-6 Using the substitution and output effects, explain how a decline in the price of resource A might cause an increase in the demand for substitute resource B. If resources C and D are complementary and used in fixed proportions, what will be the impact of an increase in the price of C on the demand for D?

In itself, the substitution effect of a decline in the price of resource A will cause a decline in the demand for substitute resource B; the firm will substitute the now relatively cheaper A for B. But the output effect can outweigh the substitution effect. The decline in the price of resource A may so decrease the cost and price of the product that the quantity demanded of it may increase enough for the demand for B to increase. In other words, more of both A and B may be needed.

If resources C and D are complementary and used in fixed proportions, the impact of an increase in the price of C upon the demand for D will be to reduce the demand for D. Here there is no substitution effect, only an unfavorable output effect. The increase in the price of C will raise the cost of the output, leading to a decrease in the quantity demanded and, thus, to a decrease in the demand for all the resources used in producing the output.

Chapter 15: pp. 297-8 3, 4, 5, 6, 7, 8, 9

153 (Key Question) Describe wage determination in a labor market in which workers are unorganized and many firms actively compete for the services of labor. Show this situation graphically, using W1 to indicate the equilibrium wage rate and Q1 to show the number of workers hired by the firms as a group. Compare the labor supply curve of the individual firm with that of the total market and explain any differences. In the firm's diagram identify total revenue, total wage cost, and revenue available for the payment of nonlabor resources.

Answers to Key Questions appear in the text.

15-4 (Key Question) Complete the accompanying labor supply table for a firm hiring labor competitively.

Total

labor Marginal

Units cost resource

of Wage (wage (labor)

labor rate bill) cost

0 $14 $ ______

1 14 _____

_____

2 14 _____

_____

3 14 _____

_____

4 14 _____

_____

5 14 _____

_____

6 14 _____

(a) Show graphically the labor supply and marginal resource (labor) cost curves for this firm. Explain the relationships of these curves to one another.

(b) Compare these data with the labor demand data of question 2 in Chapter 27. What will the equilibrium wage rate and level of employment be? Explain.

Answers to Key Questions appear in the text.

15-5 Using the diagram you have drawn in answering question 3, suppose that the formerly competing firms form an employers' association which hires labor as a monopsonist would. Describe verbally the impact upon wage rates and employment. Adjust the market graph, showing the monopsonistic wage rate and employment level as W2 and Q2 respectively. Using this monopsony model, explain why hospital administrators frequently complain about a "shortage" of nurses. Do you have suggestions for correcting this shortage?

The equilibrium wage in the monopsonistic market declines from the competitive market's Wl rate to W2. The employment level in this market will decline from Q1 to Q2.

If there are only one or two hospitals in an area, there exists a monopsonistic market for nurses. Their wages have been found to be less than those for nurses where there is competition among employers (numerous hospitals and/or clinics). Because hospitals prefer to hire more nurses at a wage W2, they view the difference between Q3 and Q2 as a shortage. However, since their profits are maximized at W2, they are unwilling to raise wages voluntarily. One solution would be for nurses to organize and demand higher wages. This would allow nurses to earn wages closer to their MRP and as wages rise toward W1, the shortage would disappear.

15-6 (Key Question) Assume a firm is a monopsonist which can hire the first worker for $6, but must increase the wage rate by $3 to attract each successive worker. Show the labor supply and marginal labor cost curves graphically and explain their relationships to one another. Compare these data with the labor demand data of question 2 for Chapter 27. What will be the equilibrium wage rate and the level of employment? Why do these differ from your answer to question 4?

Answers to Key Questions appear in the text.

167 Describe the techniques which unions might employ to raise wages. Evaluate the desirability of each from the viewpoint of (a) the union, and (b) society as a whole. Explain: "Craft unionism directly restricts the supply of labor; industrial unionism relies upon the market to restrict the number of jobs."

Unions might use several techniques to raise wages. These include the following. (1) Increasing the demand for labor by (a) increasing the demand for the product through advocating "buying the union label"; (b) lobbying for more public spending; (c) pressing for higher tariffs on foreign goods; and (d) using makework rules, that is, by featherbedding. While society can be neutral on (a), it must oppose the other three means unions employ for increasing the demand for labor. (2) Increasing productivity--Labor often can help directly here by cooperating with management. Both unions and society can favor this-- Labor gets a higher real wage; society gets more production. (3) Increasing the price of substitutes --Labor supports increases in the minimum wage to make the use of nonunion lowwage workers less attractive to employers. Although this may be a desirable outcome from the union's perspective, it may not be desirable from an overall resource allocation perspective. (4) The other basic means for unions to raise their wages is to decrease the supply of labor. This brings us to the discussion of craft and industrial unionism, which follows.

Craft unionism directly restricts the supply of labor by supporting legislation that restricts immigration, reduces child labor, encourages compulsory retirement, and enforces a shorter workweek. More importantly, craft unions have been able in many instances to force employers to hire only union workers, thus giving the union complete control of the supply of labor. With this control, craft unions practice exclusive unionism: Membership in the union is rigorously restricted to the numbers the unions consider will give the members the wage rate they desire.

Industrial unionism relies on the market to restrict the number of jobs. The union, having forced the employer to hire only union members, demands an aboveequilibrium wage, which the employer grants rather than be shut down by a strike. However, the fact that the wage is above the equilibrium means that employment is below the level that would exist if the wage were at its lower equilibrium level.

158 (Key Question) Assume a monopsonistic employer is paying a wage rate of Wm and hiring Qm workers, as indicated in Figure 288. Now suppose that an industrial union is formed and that it forces the employer to accept a wage rate of Wc. Explain verbally and graphically why in this instance the higher wage rate will be accompanied by an increase in the number of workers hired.

Answers to Key Questions appear in the text.

159 A critic of the minimum wage has contended, "The effects of minimum wage legislation are precisely the opposite of those predicted by those who support them. Government can legislate a minimum wage, but cannot force employers to hire unprofitable workers. In fact, minimum wages cause unemployment among lowwage workers who can least afford to give up their small incomes." Do you agree? What bearing does the elasticity of labor demand have on this assessment? What factors might possibly offset the potential unemployment effects of a minimum wage?

There is truth in the quotation. The leastskilled workers, especially young workers, do suffer increased unemployment when the minimum wage is increased. Certainly, one cannot bring up a family decently with its only income earner getting the minimum wage. But this is not an argument in favor of increasing the minimum wage; it is an argument in favor of finding other means of increasing the incomes of the working poor (via retraining, grants, etc.).

If the demand for unskilled (minimumwage) workers were perfectly inelastic, the minimum wage could rise all the way to the top of this perfectly inelastic range without a single lowwage worker being put out of work. Unfortunately, demand for lowwage workers is not perfectly inelastic, though certainly inelastic; a 10 percent increase in the minimum wage, for instance, would decrease employment for young adults by about one or two percent.

In a monopsonistic market, a higher minimum wage can actually increase employment by eliminating the monopsonist's motive for restricting employment. Second, a higher minimum wage can increase productivity through (a) the shock effect --shocking employers to use labor more efficiently-- and (b) increasing the real incomes of the working poor and thus improving their health, vigor, and motivation, all of which improve productivity.

Chapter 21: pp. 416-7 1, 2, 3, 4, 5, 6, 7

pp. 297-8 1, 2, 12, 13

211 Using quintiles, briefly summarize the degree of income inequality in the United States. What criticisms have been made of standard Census Bureau data on income inequality? How and to what extent does government contribute to income equality?

The income share received by the highest 20 percent was 47 percent in 1993, which is more than ten times the 4.1 percent received by the lowest 20 percent. The middle three quintiles receive under 50 percent of the total before-tax income. The top two quintiles receive twice as much as the bottom three quintiles combined; in fact, the top 20 percent receives almost as much as the bottom 80 percent.

One common criticism of the bureau's data is that its definition of income is too narrow. While wages, salaries, dividends, interest, and government cash transfers are included in the census figures of household income, other possible sources are not included. One can argue that capital gains and government subsidies, such as inkind transfers and education, represent income to households just as much as wages or social security payments do. Another major criticism relates to the bureau's time specification of household income. It is argued that by measuring incomes annually the census figures conceal the significant variations that tend to occur over the lifetime of families. The distributions of total lifetime earnings are thus less unequal than the bureau's annual figures indicate.

The effect of government on the distribution of income occurs through both taxes and transfer payments. The total effect of federal, state, and local taxes on income distribution is mildly progressive in that highincome households pay a somewhat higher proportion of their incomes in taxes than lowincome families. But about 80 percent of government's contribution to income equality takes place through transfer programs. This contribution is particularly significant for those in the lowest quintile, for whom government transfer payments comprise over 75 percent of total income.

These statistics do not necessarily mean that the contribution of government in furthering equality is entirely positive. To the extent that transfer programs aimed at lowerincome households decrease the incentive to work, the earned incomes of these households will be less than otherwise. Also, some transfer programs go to the nonpoor. For example, most farm subsidies go to the wealthiest farmers, and higher education funding tends to benefit middle to highincome students. The Last Word illustrates some of these programs.

212 (Key Question) Assume Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50 respectively. Construct and interpret a Lorenz curve for this fiveperson economy. What percentage of total income is received by the richest and by the poorest quintiles?

Answers to Key Questions appear in the text.

21-3 What factors have contributed to increased income inequality in the past decade or so?

Several causes have contributed to the increase in income inequality in the past decade or so. Taxes and transfer payments are less progressive as a result of legislation in the 1980s which lowered the marginal tax rates and cut welfare benefits or didn't increase them to keep pace with inflation; demographic changes in the 1970s and 1980s led to more inexperienced younger people in the labor force proportionately and a rise in the number of single mothers with children; more import competition has reduced demand for and employment of less skilled workers who used to command high-paying jobs in manufacturing; and an increased demand for highly skilled workers has increased their incomes, adding to the growing inequality.

21-4 Why is the lifetime distribution of income more equal than the distribution in any given year?

The disparity of incomes in a single year reflects the income distribution at a point in time. Of course, the very young and very old will receive lower incomes, and the middle aged tend to receive higher incomes, giving a picture of great inequality. However, if we view these same groups over time, there is considerable mobility both up and down the income scale, suggesting that income is more equally distributed over a five-, ten-, or twenty-year period for these same households. A Treasury Department study confirmed that the longer the time period considered, the more equal the distribution of income because there is "significant household income mobility over time."

215 (Key Question) Briefly discuss the major causes of income inequality. With respect to income inequality, is there any difference between inheriting property and inheriting a high IQ? Explain.

Answers to Key Questions appear in the text.

216 Use the "leakybucket analogy" to discuss the equalityefficiency tradeoff.

Most economists would argue that whenever incomes are redistributed from some members of society to others, economic efficiency will be adversely affected in two ways. Affluent individuals will have less reason to earn income, since they realize a portion will be taken from them, and the poor will have less reason to work because of the guarantee of government subsidies. The bucket used to effect this shift of resources therefore has two separate leaks. According to conservatives, both may be difficult, if not impossible, to plug. In addition, administrative costs involved in implementing the transfer constitute another leak.

While some economists concede the existence of the first problem associated with the incomeearning behavior of the affluent, they contend that in the long run redistribution programs will increase economic efficiency by providing the poor with sufficient resources to increase their own earning potential or that of their offspring. The need for the leaky bucket will therefore be decreased over time.

217 Should a nation's income be distributed to its members according to their contributions to the production of that total income or to members' needs? Should society attempt to equalize income or economic opportunities? Are the issues of "equity" and "equality" in the distribution of income synonymous? To what degree, if any, is income inequality equitable?

The answer to this question is inextricably tied to value judgments, but most of us probably favor a combination of the two types of income distribution. A purely capitalist system, in which incomes are determined exclusively by the market mechanism, would mean that those who, for whatever reason, are unable to contribute to production would have to depend exclusively on private charity for their livelihood. A (hypothetical) communist state also leads to a seemingly intractable problem --If income is to be distributed purely on the basis of need, why would anyone engage in production? Most modern societies represent attempts to seek a compromise of one sort or another between these two extremes. The compromise that is actually found often differs markedly from what prevailing political rhetoric in that society might suggest. Socialist economies historically exhibited large differences in income, and wideranging government transfer programs are a seemingly permanent fixture in most capitalist economies.

Conservatives contend that because of the tradeoff between equality and efficiency, society should content itself with attempting to ensure equality of opportunity. Liberals argue that income redistribution is essential since equality of economic opportunity is impossible in an economy with wide differences in income, especially when these differences are related to the inheritance of property.

Income equity refers to how fairly income is distributed. One can argue that some inequality of income is not only necessary for reasons of efficiency but is fairer than an equal distribution of income, since those who produce more deserve to be rewarded for their efforts. But unequal incomes are not necessarily related to differences in individual ability or effort. It is difficult to defend the inequalities that result from market power and discrimination as being equitable. The justness of inherited wealth is also questionable. Liberals argue that by creating inequality of opportunity, property inheritance is inherently unjust. Conservatives contend that allowing individuals to pass on wealth to whom they wish is much fairer than having wealth appropriated by the government.

pp. 297-8 1, 2, 12, 13

151 Explain why the general level of wages is higher in the United States than in most foreign nations. What is the most important single factor underlying the longrun increase in average real wage rates in the United States?

The general level of wages is higher in the United States than in most foreign nations because of the high demand for labor in the United States in relation to supply. Moreover, demand for American labor is high because of its high productivity, which has several causes: (1) capital per worker is very high; (2) natural resources are abundant relative to the size of the labor force; (3) technology is advanced in the United States relative to most of the rest of the world; (4) labor quality is high in the United States because of health, vigor, training, and work attitudes compared to labor in most other countries; (5) other factors contributing to high American productivity are the efficiency and flexibility of American management; the business, social, and political environment that greatly emphasizes production and productivity; and the vast domestic market, which facilitates the gaining of economies of scale.

The most important single factor underlying the longrun increase in average real wage rates in the United States is the increase in output per worker, that is, in productivity.

15-2 What factors might explain the stagnation of real wages in the past fifteen years?

The rate of capital accumulation has declined in recent years; labor has been reallocated from high-productivity manufacturing industries to lower-productivity service industries; labor force skills have declined due to lesser quality of education; and management strategies may have stressed short-term profitability at the expense of research and development and innovative labor relations programs. Competition from workers in other countries may also have pulled down the real wages of less skilled American workers according to the text.

1512 "Many of the lowestpaid people in society --for example, shortorder cooks-- also have relatively poor working conditions. Hence, the notion of compensating wage differentials is disproved." Do you agree? Explain.

Rightly or wrongly, shortorder cooks are considered to need little skill; practically anyone is thought capable of flippng burgers. Since the supply of unskilled workers is high relative to the demand for them, their wages are low. In this case, the concept of compensating wage differentials is swamped by the excess supply of lowwage workers.

15-13 What is meant by investment in human capital? Use this concept to explain (a) wage differentials, and (b) the long-run rise in real wage rates in the United States.

Investment in human capital is any action that improves the skills and abilities, the productivity, of workers. Expenditures on health and education are such investments as are any others that will shift workers from relatively low to relatively high-productivity jobs.

(a) Wage differentials are explainable to some extent through the concept of human capital investment. There is a strong positive correlation between time spent acquiring a formal education and lifetime earnings. Of course, it can be said that the brain surgeon who spent over twenty years in training, starting in grade 1, had the qualities to succeed in the labor market without spending over twenty years in school. Though this counter-argument has some merit, the point still is that this highly-skilled individual would never have become a brain surgeon without the over twenty years in school and might not have achieved the particular high income that goes with being a medical specialist.

(b) The long-run rise in real wage rates in the United States is positively correlated to investment in human capital. Without the increase in education and training of the American labor force that has occurred over the years, productivity (output per person per hour) would still have risen because of the investment in real capital, improved technology, and our abundant natural resource base. But the real wage would undoubtedly now be very much lower, because an unskilled labor force could not possibly have made efficient use of the material resources and advancing technology of the economy.

Chapter 23: pp. 456 5, 6, 7, 8, 9, 10, 11, 12, 13, 14

pp. 298 10

235 What is the estimated size of the union wage advantage? Explain: "Although unions get higher wages than nonunion workers, unions have not been successful in raising the average real wage of the American labor force."

The average union wage advantage is currently estimated to be between 10 and 15 percent. If fringe benefits are included, the difference increases significantly.

There is a close empirical correlation between productivity and average real wages for the total economy even as the relative importance of unions in the American economy has fluctuated widely. It seems, therefore, that unions have not appreciably increased average real wages for the labor force taken as a whole. In other words, wage increases in unionized sectors come at the expense of relative wage decreases in nonunionized sectors. This occurs because higher wages in the former cause a decrease in the quantity of labor demanded, which then leads to an increased labor supply and lower average wage levels in the latter.

236 Comment on each of the following statements:

(a) "By constraining the decisions of management, unions inhibit efficiency and productivity growth."

(b) "As collective voice institutions unions increase productivity by reducing worker turnover, inducing managerial efficiency, and enhancing worker security."

(a) Unions can and do inhibit efficiency in several ways. Featherbedding, regulations that force firms to promote on the basis of seniority rather than productivity, and rules barring particular employees from engaging in tasks they could perform most productively, all decrease productive efficiency. More generally, the existence of a union in the workplace can restrict the firm's use of productivityenhancing techniques. Furthermore, work stoppages decrease production directly and can adversely affect other industries or sectors, although such disruptions are relatively infrequent. Finally, the fact that wages in unionized sectors are higher than those in nonunionized sectors can mean that the marginal revenue products in these sectors differ. Total output would be increased if these wage differentials were eradicated.

(b) Unions can provide a convenient voice mechanism for workers, enhancing the resolution of worker grievances with management and decreasing employee turnover. Some empirical evidence suggests the presence of unions plays a significant role in reducing worker turnover. Managerial efficiency can be enhanced through the effects of wage increases and higher production costs brought on by unionization. Finally, by enhancing security of employment and decreasing competition for particular jobs, unions encourage informal onthejob training of newer workers by senior employees.

237 (Key Question) "There is an inherent cost to society that accompanies any union wage gain. That cost is the diminished efficiency with which labor resources are allocated." Explain this contention.

Answers to Key Questions appear in the text.

238 Describe the various avenues through which unions might alter the distribution of earnings. Evaluate: "Unions purport to be egalitarian institutions, but their effect is to increase earnings inequality among American workers."

Unions tend to increase the inequality of incomes between unionized and nonunionized occupations by restricting employment in the former and increasing labor supply in the latter. On the other hand, by focusing on setting wage rates for jobs rather than for particular workers they can standardize wages within a firm. Collective bargaining also tends to standardize wages across a unionized industry.

According to some empirical work, the net effect of unions on the distribution of income is to decrease inequality. Not all economists agree with these results, however.

23-9 Compare and account for differences in the economic status of whites and nonwhites. Distinguish between the various kinds of economic discrimination. Do you believe on balance that the distribution of education and training in our society alleviates, or contributes to, income inequality? Explain.

Average incomes for blacks are just over half those for whites, black households are three times as likely to be poor, and unemployment rates for blacks are over twice as high as for whites. These differences are largely the result of various forms of economic discrimination and a relative lack of educational opportunities for blacks.

Economic discrimination refers to inferior treatment of certain groups in the workplace. Occupational discrimination takes place when these groups face restrictions in entering certain occupations; wage discrimination occurs when minorities or women are paid less than white males for identical work; employment discrimination refers to the difficulty some groups have in acquiring and retaining jobs; discrimination also occurs in access to certain types of education and training.

The distribution of education and training worsens present income inequalities. In the case of blacks, the chances of graduating from high school are seven-eighths as high as for whites, while the chances of having a four-year college degree are about half those of whites. The reasons for these differences in education and training are varied, but include the lesser financial ability to invest in education for blacks and the lower economic motivation, since their salaries are less on average after graduation.

2310 (Key Question) Use supply and demand analysis to explain the impact of occupational segregation or "crowding" upon the relative wage rates and earnings of men and women. Who gains and who loses as a consequence of eliminating occupational segregation? Is there a net gain or loss to society as a whole? "Wage differences between men and women do not reflect discrimination, but rather differences in job continuity and rational decisions with respect to education and training." Do you agree?

Answers to Key Questions appear in the text.

23-11 (Key Question) Use a demand and supply model to determine the gains and losses associated with the migration of population from low to highincome countries. Explain how your conclusions are affected by (a) unemployment, (b) remittances from the host country, (c) backflows of migrants to their home countries, and (d) the personal characteristics of the migrants. If the migrants are highly skilled workers, is there any justification for the sending country to levy a "brain drain" tax on emigrants?

Answers to Key Questions appear in the text.

2312 If you favor the free movement of labor within the United States, are you being inconsistent in favoring restrictions upon the international movement of labor?

If one is just as concerned with the economic wellbeing of citizens of foreign countries as one is with the welfare of one's national compatriots, then to argue for free labor mobility nationally but not internation-ally is logically inconsistent. Arguments in favor of restrictions on international labor mobility take account of the fact that immigration can lead to a loss of income for some domestic residents. While total output in the host country is increased, wage rates will fall, hurting laborers already working in that country. The loss of economic welfare for these individuals is often considered to be more important than the benefits accruing to businesses and the migrants themselves, even though the total benefits exceed losses in the host country.

2313 Evaluate: "If we deported 1 million illegal aliens who are in America, our total national unemployment would decline by 1 million."

This statement is false. The presence of illegal aliens supplements aggregate expenditure in the economy. If 1 million were deported, total spending would fall, decreasing the demand for labor and creating less than 1 million available positions. Furthermore, it is possible that workers will not be found to fill all these jobs because of low wages or poor working conditions. Therefore national unemployment will decline by considerably less than 1 million.

23-14 Why did organized labor in the United States oppose the North American Free Trade Agreement (NAFTA) which is designed to remove trade barriers between the United States, Mexico, and Canada?

Unions opposed NAFTA out of fear that their members' jobs would be lost to lower-wage workers in Mexico. When trade barriers are lowered, imports compete with domestic products on an equal footing, and if real wages are lower in Mexico, then Mexican imports will be offered at a lower price than U.S. products. If this happens, U.S. producers will find decreased demand for their products, which, in turn, may cause union workers to lose their jobs. Another fear was that U.S. firms would shift production facilities to Mexico to employ the low-wage Mexican workers rather than the high-wage union members. This fear of losing jobs assumes that the union workers in this country must be earning a wage higher than the value of their marginal productivity, or that the Mexican workers are earning a wage below the value of their marginal productivity. If union wages and Mexican wages reflected the values of the respective labor productivity in each country, then there would be no incentive to shift jobs to Mexico, and Mexican import prices would not be lower than comparable U.S. product prices.

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1510 On the average do union workers receive higher wages than comparable nonunion workers?

On the average, it appears that union workers do receive wages 10 or 15 percent higher than nonunion workers. Moreover, it appears that this differential is not at the expense of the employers but rather at the expense of the nonunionized. This comes about by the unionized firm increasing its prices to the extent needed to pay the union members their higher wages. These higher prices have to be paid by the nonunionized, who, unlike the unionized, do not have the higher wages that caused the higher prices.