1. MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 10 th Edition, Copyright 2009 PowerPoint prepared by Della L. Sue, Marist College Chapter 18: Using Input Market Analysis

2. Copyright 2009John Wiley & Sons, Inc. 2 Learning Objectives Analyze the effects of the minimum wage on the employment of unskilled workers. Determine the extent to which employers versus employees bear the burden of the Social Security program. Explore an important hidden cost of Social Security that results on account of the program’s long-run impact on saving and capital accumulation. (continued)

3. Copyright 2009John Wiley & Sons, Inc. 3 Learning Objectives (continued) Explain the benefits to firms from colluding in hiring some input through examining the NCAA cartel. Show how employment discrimination can affect wage rates and employment. Outline the benefits and costs of immigration.

4. Copyright 2009John Wiley & Sons, Inc. 4 The Minimum Wage Law Fair Labor Standards Act (1938) Disemployment effect – the tendency of employers to respond to a higher wage rate by hiring fewer workers Figure 18.1

5. Copyright 2009John Wiley & Sons, Inc. 5 Further Considerations of the Minimum Wage Law The reduction in employment can take the form of a reduction in hours each worker is employed rather than a reduction in the number of workers employed. When the government requires firms to pay a higher money wage, employers will respond, if possible, by reducing fringe benefits of employment. The minimum wage law does not cover all unskilled jobs. With a surplus of workers created by the minimum wage, employers can be more selective about whom they hire.

6. Copyright 2009John Wiley & Sons, Inc. 6 Does the Minimum Wage Harm the Poor? Cost: Net income change = Area W 1 GFW - Area FBL 1 L 2 in Figure 18.2 Higher prices due to higher wages (factor input price)

7. Copyright 2009John Wiley & Sons, Inc. 7 The Minimum Wage: An Example of an Efficiency Wage? Efficiency wage – a wage higher than the prevailing market-determined level that serves to increase firms’ profits by lowering the costs of searching for, selecting, and training new workers

8. Copyright 2009John Wiley & Sons, Inc. 8 Who Really Pays for Social Security? The real effects of the tax are the same whether the tax is collected from employers or employees. Figure 18.3

9. Copyright 2009John Wiley & Sons, Inc. 9 But Do Workers Bear All the Burden? If the aggregate supply of labor is highly (perfectly) inelastic, workers bear most (all) of the burden of the tax. Figure 18.4

10. Copyright 2009John Wiley & Sons, Inc. 10 The Hidden Cost of Social Security Pay-as-you-go (PAYGO) basis – retirement benefits are financed from payroll taxes collected from workers If workers save less for retirement, there is a reduction in investment and an increase in the interest rate. Figure 18.5

11. Copyright 2009John Wiley & Sons, Inc. 11 Long-Run Effect of PAYGO Social Security on GDP The level of GDP is lower in every subsequent year than it would have been had Social Security never been implemented. Figure 18.6

12. Copyright 2009John Wiley & Sons, Inc. 12 The Effect of PAYGO Social Security on Labor Markets Without Social Security, capital accumulation would be greater, the demand curve for labor would increase, and the before-tax wage rate would be higher. Figure 18.7

13. Copyright 2009John Wiley & Sons, Inc. 13 An Input Buyers’ Cartel [Figure 18.8]

14. Copyright 2009John Wiley & Sons, Inc. 14 Hindrances to Input Buyers’ Cartels Firms have an incentive to cheat on the cartel agreement. Participating firms will find it difficult to reach agreement on the levels of permitted employment and the wage rate. The lower wage rate invites entry into the market by other firms that are not parties to the cartel. Coordinating hiring decisions among a large number of firms within and across industries is difficult. A firm usually hires many different inputs, and the potential profit from reducing the price of only one input may be small.

15. Copyright 2009John Wiley & Sons, Inc. 15 The NCAA as a Cartel of Buyers National Collegiate Athletic Association (NCAA) – a private organization empowered to regulate various aspects of college athletics Determines the maximum financial reward a student- athlete can receive Determines the number of student-athletes who may be recruited with scholarships at each school Applies sanctions to punish cheaters who are caught sanctions have become increasingly severe

16. Copyright 2009John Wiley & Sons, Inc. 16 NCAA – Eliminate the Cartel Restriction on Pay? Should colleges be permitted to pay student- athletes? Arguments in favor of the current system: Some schools would have to drop their athlete programs if they had to pay their athletes a competitive “wage”. Paying college athletes would destroy their amateur status and turn college athletics into a business. Paying athletes might adversely affect the education they receive.

17. Copyright 2009John Wiley & Sons, Inc. 17 Discrimination in Employment [Figure 18.9]

18. Copyright 2009John Wiley & Sons, Inc. 18 What Causes Average Wage Rate to Differ? Incomes and earnings differ among groups Reasons Discrimination Differences in labor market productivity Differences in labor market participation

19. Copyright 2009John Wiley & Sons, Inc. 19 The Benefits and Costs of Immigration Assume labor supply is perfectly inelastic. Quantity of capital is constant. Marginal product of labor=height of demand curve Figure 18.10

20. Copyright 2009John Wiley & Sons, Inc. 20 More on Gains and Losses from Immigration Native workers lose Capital owners gain Compare taxes paid by immigrants with the government benefits that the receive Effect on distribution of income Figure 18.11

21. Copyright 2009John Wiley & Sons, Inc. 21 Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back- up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.