Longwood University Personal Finance Scott Wentland Longwood University 201 High Street Farmville, VA 23901

Longwood University The Economics of Labor A Brief Introduction

Longwood University Economics and the Labor Market What can economics teach us about getting a job and getting paid more? What determines my wage in a market economy? – How do I get paid more?

Longwood University Employer sets your wage? Your wage seems to be determined by your employer – You get a job – They tell you what the job pays – You get raises based on your performance and whether your employer is doing well Is this the real story?

Longwood University Employer sets your wage? Your employer sets your wage no more than a gas station sets gas prices or an airline sets airfares – If the price (or wage) is out of line with the market, then you go somewhere else If the gas station sets too high of a price, most people won’t stop there for gas – People go to another gas station for gas If the wage they offer is too low, you don’t take the job (or you take the job and for another job soon) – You go somewhere else  People take the best offer

Longwood University Wages & Prices A wage or salary is a market price for your labor Like any other market – Sellers of labor = workers – Buyers of labor = employers

Longwood University Sellers of Labor First, you need to get the job Recognize that you are a seller (of labor) The same rules that apply to sellers in a market apply to you – Sellers face competition from other sellers – More competition means: Lower price (in this case, wage) Less bargaining power Less likely that you will find a “buyer” (or employer) if the market doesn’t clear

Longwood University Sellers of Labor How can a seller handle competition? – If you are the same as everyone else, you will have to settle for the competitive outcome Differentiate yourself from the competition – The more unique you are, the more you stand out, the less competition will matter In economics, this is called monopoly power – Acquire unique, valuable skills – Show employers something different On your application and in the interview

Longwood University Income and Productivity Employers are rational decision-makers – Think at the margin  marginal (or cost-benefit) analysis Wage + Benefits – Employer’s marginal cost of employing you Productivity * Price or value of what you produce – Employer’s marginal benefit of employing you Productivity is sometimes call “marginal product” or “marginal physical product” in economics jargon

Longwood University Income and Productivity marginal cost=marginal benefit Wage + Benefits=Productivity * Value Example: tax accountant – Productivity: 2 tax returns / hour – Market Price or Value: $50 per tax return Productivity * Value = 2 * $50 = $100 – Wage: $75 – Benefits:$25 Wage + Benefits = $75 + $25 = $100

Longwood University Income and Productivity marginal cost=marginal benefit Wage + Benefits =Productivity * Value $75 + $25= 2 * $50 Employer can compensate you up to $100 per hour Total compensation = wage + benefits Cannot pay any more than that, otherwise they would lose money (or have to let you go) NOTE: YOU PAY FOR YOUR BENEFITS

Longwood University Income and Productivity Can an employer pay you whatever they want? What if they pay you: Wage + Benefits = $75 marginal cost=marginal benefit Wage + Benefits =Productivity * Value $75 + $25= 2 * $50

Longwood University Income and Productivity Competition prevents employers from: Paying their employees too little Or not providing them with the right amount of benefits Free markets, with many employers, help employees get paid what they are worth In a free market, your income is determined by how productive you are What if you become more productive? With more experience, you become faster, more efficient at filing tax returns

Longwood University Income and Productivity marginal cost=marginal benefit Wage + Benefits =Productivity * Value $75 $125 + $25= 2 3 * $50 Employer can compensate you up to $150 per hour Higher productivity means an employer can pay you more!

Longwood University Income and Productivity How do you raise your productivity? Training and education Experience – Education and experience is sometimes called human capital – Raising your productivity is a win-win The employer’s production cost has gone up, but the benefit of that production has gone up too! Employers want more productive workers with more human capital They are happy to pay more if they get more value – What if the price of tax returns falls?

Longwood University Income and Productivity marginal cost=marginal benefit Wage + Benefits =Productivity * Value $75 $45 + $25= 2 * $35 If the market price or value of tax returns fall, then tax accountants will be compensated less Technology and other competition may lower your wage

Longwood University Income and Productivity marginal cost=marginal benefit Wage + Benefits =Productivity * Value ?= 2 * $50 $5 Employer can compensate you up to $10 per hour Lower market value of what you produce means lower compensation

Longwood University Income and Productivity Tax accountants are highly skilled professionals who also have a very valuable service A tax return has much greater market value than a friendship bracelet A lousy accountant may still earn a lot more than some of the best friendship bracelet makers in the world! – Keep this in mind when choosing a major or an area for future employment The price or market value of what you do matters Even if you are the best, it may not pay what you want

Longwood University Conclusions The labor market is like any other market Buyers and sellers Demand and supply If you can differentiate yourself, you can have some market power Your compensation (wage + benefits) will be determined by: Productivity  human capital, education, experience, skills Value  the market value or price of what you produce

Longwood University Thank You