1. The Role of Labor

2. Chapter 9 Section 1
How are wages determined?

3. Labor: Demand and Supply
Demand for Labor
Wages reflect productivity—value of product produced in set time
Producer’s demand for labor is a derived demand:
demand based on its contribution to the final product
Workers with higher productivity tend to earn higher wages
Demand curve is downward sloping: lower price means higher demand

4. Labor: Demand and Supply
Supply of Labor
More workers willing to work at higher wages
supply curve for labor is upward sloping

5. Labor: Demand and Supply
Equilibrium Wage
Wages gravitate toward equilibrium
price at which there is neither surplus nor shortage

6. Why Do Wage Rates Differ?
Factor 1: Human Capital
Unskilled: few skills; include house cleaning, sanitation workers
Semiskilled: some training; include construction, clerical workers
Skilled: specialized training; include plumbers, electricians
Professional: much specialized training; include doctors, lawyers
Skilled workers: high demand and productivity, low supply, high wages

7. Why Do Wage Rates Differ?
Factor 2: Working Conditions
High wages paid for dangerous or unpleasant occupations
examples: washing skyscraper windows, collecting garbage
Advantages may make up for low wages
examples: employee discounts, short commute

8. Why Do Wage Rates Differ?
Factor 3: Discrimination
Wage discrimination based on race, ethnicity, gender, other factors
Some low-paying jobs seen as realm of certain groups
workers trapped, unable to earn enough to invest in training
Equal Pay Act and Civil Rights Act try to break cycle
glass ceiling—unseen barriers preventing skilled workers from advancing

9. Why Do Wage Rates Differ?
Factor 4: Government Actions
Minimum wage—lowest wage legally allowed for one hour of work
acts as price floor for wages of low-income workers
businesses say would hire more workers if could pay less
In1933, Congress passed first minimum wage; has increased several times
Many states, local governments require higher minimum wage

10. Gary Becker: The Importance of Human Capital
Investing in Yourself
Says economic principle of rational choice can be used in other areas
The Economics of Discrimination studied how prejudice affected “the earnings, employment, and occupations of minorities”
Thinks human capital includes good work habits, good medical care
Helped quantify importance of education, on-the- job training

11. Chapter 9 Section 2
Trends in Today’s Labor Market

12. A Changing Labor Force Changes in the U.S. Labor Force
Since 1950s, many women have entered work force
more types of jobs have opened up; wages have risen
Work force is better educated
30 percent are college graduates; 30 percent have some college credits
High degree of human capital means high productivity and wages

13. Changing Occupations Technology and Change
Technology has eliminated or changed many jobs in all three sectors
Computers, Internet changed how information stored, transferred, used
About half of American workers use computer on the job
80 percent of managers and professionals
20 percent of machine operators, farmers, laborers

14. Changing Occupations Globalization and Jobs
Outsourcing—contracting with outside company for goods or services
most with United States companies; some in foreign countries where wages are lower
Insourcing—foreign companies establishing operations in U.S.
Both practices tied to trends toward service, technology-related jobs

15. Changes in the Way People Work
Working at the Office from Home
Workers get less stress, flexible work time, no commute
Employers get larger labor pool, more productivity; need less real estate
Society gets less pollution from fewer drivers
Workers find work spills into private life; miss social, network time
Number of telecommuters grew by about 20 percent from 2000 to 2005

16. Changes in the Way People Work
Alternatives to Permanent Employment
1990s fewer full-time, more contingent workers and contractors hired
today’s workforce: over 5 percent temps; over 7 percent contractors
Easier for businesses to adjust work force to fit production demands
discharging temps is less costly; no benefits means lower labor costs
Most temps want permanent jobs; many contractors want to be own boss

17. Changes in the Way People Work
Changing Careers More Often
New technologies create new jobs
older occupations become less in demand or obsolete
workers must learn and adapt to new technologies
Economy changing more quickly than in past
companies change their business plans constantly to maximize profits

18. Questions
Suppose you are the owner of a video store. Explain how you would decide what to pay your workers. Make reference to specific factors that influence wages.
If the equilibrium wage for bowling alley managers is $16/ hour, why would a wage of $20 / hour result in a labor surplus? Why would a wage of $12 / hour lead to a laborshortage?

19. Questions
3. Explain why working conditions can either justify higher wages or make up for lower wages.