Addison Wesley Longman, Inc. © 2000 Chapter 5 Quasi-Fixed Labor Costs and their Effects on Demand

Addison Wesley Longman, Inc. © 2000 Quasi-Fixed Labor Costs Non-wage costs –Hiring and training –Benefits: elective vs non-elective Quasi-fixed labor costs vary by worker but not by hour examples: – SS is not fixed or quasi-fixed –Training is quasi-fixed

Addison Wesley Longman, Inc. © 2000 Optimal solution MP M = Marginal Product / Worker MP H = Marginal Product / Hour ME M = Marginal Expense / Worker ME H = Marginal Expense / Hour Optimal: – ME M /MP M = ME H /MP H

Addison Wesley Longman, Inc. © 2000 The Predicted Relationship Between ME M /ME H and Overtime Hours Figure 5.1

Addison Wesley Longman, Inc. © 2000 Issues Suppose firm must pay double time for hours > 40 –Hire more workers (sub effect) –Hire more capital (sub effect) –Hire less of everything (scale effect) Part time vs. Full-time Specific / General Training

Addison Wesley Longman, Inc. © 2000 Effects of Training on Marginal Products SchedulesFigure 5.2

Addison Wesley Longman, Inc. © 2000 How to Pay/Train Choose W 0, W 1, Z MP 0 + MP 1 /(1+r) = W 0 + Z + W 1 /(1+r) –Profit Maximizing Condition W 0 +W 1 /(1+r) > W* + W*/(1+r) –Employee Would like to be trained W 1 > W* –Employee will not leave

Addison Wesley Longman, Inc. © 2000 Multiperiod Demand for LaborFigure 5.3

Addison Wesley Longman, Inc. © 2000 A Two-Period Wage Stream Associated with Specific TrainingFigure 5.4

Addison Wesley Longman, Inc. © 2000 Productivity and Wage Growth, First Two Years on Job, by Occupation and Initial Hours of Employer Training Figure 5.5

Addison Wesley Longman, Inc. © 2000 The Effect of a Decline in Demand on Employment with General and Specific Training Figure 5.6

Addison Wesley Longman, Inc. © 2000 Issues Recessions –Who is recession proof? Will general training occur? –Mobility Hiring Costs –Signals –Internal Markets