LABOR MARKETS: UNIONS, DISCRIMINATION, AND IMMIGRATION DR. RICHARD GEARHART ENTERPRISE COLLEGE 6/16/2016

LABOR SUPPLY AND DEMAND

EQUILIBRIUM

UNIONS Unions are a collection of workers that negotiate wages, fringe benefits (health insurance, pension, …), and working conditions provided to them by the employee. This process is known as collective bargaining. The theory is that a group of workers has more power than each worker, individually, negotiating.

Before unionization, workers have no bargaining power. They are such a small part of the market, they can only receive w*. This is a perfectly competitive labor market. Assumes that each worker is replaceable by other workers (i.e., this is a job that doesn’t require significant education or skills).

With a union, the labor supply (LS) curve is upward sloping. Or, the more workers there are in the union, the more power they have, and the higher the wage that they can earn

There are some reasons why this may be the case: For unions, do higher wages lead to higher productivity (more produced by each worker)? There are some reasons why this may be the case: Workers shirk less with higher wages (less time spent on FaceBook, on Reddit, …). For fear of losing this job and going to a lower paying job. Less employee turnover (fewer workers leave the job for other jobs). Reduces training costs (how to use the computer system, …) for the employer. More experience at the job typically leads to higher productivity. With fewer employees, firms higher more capital (machines and technology) to pair with the workers. Capital is highly productive, which makes the workers paired with the capital highly productive.

Why has union membership, in the United States, declined over time? Increase in information. Because of salary websites like Glassdoor.com, perhaps individual employees are better able to negotiate what they think a fair wage is. Move away from manufacturing towards service. Manufacturing and resource extraction are dangerous, time consuming, unhealthy jobs. Service sector jobs (fast food, retail) are not, so the need for employee protection is less. Politicians enacting laws (minimum wage laws, OSHA laws, overtime laws) have decreased the need for these protections.

So, why is there such a large difference in union density between the U.S. and Europe? How unions are formed. In many other European countries, if workers want to unionize, they simply need to reach a threshold to unionize (i.e., they need 60% of workers to agree to be unionized, and they will have formed a union). In the United States, if workers want to form a union, there is an election. Workers lobby to vote “yes” for the union, while the firm lobbies to vote “no”. This may exert pressure.

How effective are modern day unions? The union wage premium (how much more you earn because you join a union) is 5-8%. Go from earning $100 a week to $108 a week. Unions compress the earnings distribution. Less wage differences between different workers (i.e., the wage difference between a CEO and a fry cook). Newer unions in the US have had no impact on employment, output, worker productivity, or wages. Much of the union wage premium is from unionized public sector workers.

LABOR MARKET DISCRIMINATION Labor market discrimination is when different workers are paid differently, but not based on education, skills, training, or length of experience on the job. In other words, discrimination occurs when people are NOT paid based on work-related factors. Discrimination occurs when some trait, that is largely not a choice by the individual, leads to lower pay (gender, race, sexual orientation, religion, …).

There are two types of discrimination. Statistical discrimination: when you discriminate based on the population average. Before you hire a worker, you do not know how productive they will be, or how good of a worker. You therefore base your expectations on observable features of that worker. While bad (this tends to prevent upward mobility by the “discriminated” groups), it is based on objective facts. How can I get an education, and raise the population average, if I cannot get the jobs that will pay for the college education?

Example 1: why are women paid less than men? The probability of a male getting pregnant is strictly 0. The probability of a female getting pregnant may be 0, but could be positive. At older ages, women are more likely to be in ill health than males (more hospitalizations, more sick leaves, etc.). Statistical discrimination would therefore say that, each year, the probability of a female missing work is higher than the probability of a male missing work. Pay them less.

Example 2: in terms of a college education, non-Hispanic whites are more likely to have a college education (29%) compared to both Hispanics (14%) and Blacks (17%). Suppose that you hire a worker at age 18, and your benefits include a paid college education. You would like this worker to achieve the college education by age 30. Based on statistical discrimination, you would be less likely to hire the Hispanic or Black individual, as they are less likely (ON AVERAGE) to achieve a college degree.

Biased Discrimination: discrimination that occurs because a particular individual does not like some non-choice attribute of a worker. I will not hire a female because I do not like women in the workforce. I will not hire a Methodist because those religious beliefs are antithetical to mine. THIS is the bad discrimination. This is not based on any belief OTHER than dislike/hatred. Statistical discrimination is, at the very least, based on a set of objective facts.

With both types of discrimination, workers in the disadvantaged group will be hired ONLY if they agree to be paid less.

Does discrimination pay in a competitive labor market. Based on a seminal article by Gary Becker. The only way that a discriminatory firm will hire workers they discriminate against is if they pay the workers less. HOWEVER, it is unlikely that all firms discriminate against these workers. They will therefore earn higher wages elsewhere, and will leave. Discriminatory firms therefore lose high productivity “minority” workers. BUT, they lose more than this. “Minority” shoppers will not want to shop at this firm, so they also lose business revenues.

“Are Emily and Brendan More Employable Than Lakisha and Jamal? …” A study of female lawyers found that 55% of the wage difference (between them and male lawyers) was due to the fact that women had worked less (childbirth, childcare, …). Childless women earn no more than women with children. Thus, other 45% is largely biased discrimination. “Are Emily and Brendan More Employable Than Lakisha and Jamal? …” Sent out IDENTICAL resumes to firms. Only difference was the name. White-sounding names received 1 call for every 10 resumes sent out. Black-sounding names received 1 call for every 15 resumes. White-sounding, high quality resumes, got more callbacks than white- sounding, low quality resumes. Black-sounding, high quality resumes got no more callbacks than black- sounding, low quality resumes. Found in EVERY industry (even for federal contractors and large employers). We have both statistical discrimination and biased discrimination.

ECONOMIC IMPACTS OF IMMIGRATION Immigration is the movement of peoples between countries (and where these peoples are not natives, nor do they possess citizenship). What are the economic impacts of immigration? Immigrants tend to lead to lower wages for natives that they compete, in the labor market, against. Immigrants tend to lead to lower product prices for ALL natives. Suppose that low skilled immigration happens (i.e., immigrants do not have a college education). They likely compete directly against low skill natives (natives without a college education).

The presence of immigration leads to more workers competing for jobs. This lowers the wages paid to workers. This COULD lead to lower wages for other native workers whose jobs are not being “replaced” by immigrants. Unlikely that this effect is large. Can lower wage, low skill (no college education) workers replace high skill (college education) workers?

Suppose that these low skill workers (both natives and immigrants) produce clothes. Because of immigration, the cost of producing a piece of clothing falls as the wage falls. What happens?

Immigrants are either high skilled or low skilled. Reduces the prices of low-skill products (agriculture, maid and janitorial services, telecommunications support, landscaping, …). Relieves pressures on not enough high skill workers. Healthcare professionals (doctors, nurses). STEM researchers. Information Technology (IT).

What does the evidence suggest? Immigrants add (after taking into account native job losses, loss in tax revenue, increases in welfare payments) $7 Billion to $25 Billion in GDP per year. These benefits would increase by attracting more high skill immigrants (nearly $55 Billion). Wage impacts of immigration on natives is small. Natives move to other cities. Immigrants tend to “cluster” in immigrant enclaves (large groupings of similar immigrant groups). 10% increase in # of immigrants leads to wages to fall by 3-4%. 140,000 more immigrants each year would lower average incomes from $35,000 per year to $34,000 per year.

Most of the impacts of lower wages from immigration are new immigrants replacing older (existing in the country) immigrants. Most of the native immigrant impact (i.e., lower wages) is felt by natives who have less than a high school diploma. High school educated, college educated, and more than college educated natives have a minimal impact of immigration. 10% more immigrants in an area lead to prices of low-skill services (maids, nannies, landscapers, farmworkers) to decrease by 2%. 2,000 more immigrant workers in Bakersfield would lead to a $20/year decrease in the price of landscaping services.