MicroEconomics theory and application 12th by browning an zupan chapter 18

Learning Objectives Analyze the effects of minimum wage on the employment of unskilled workers..  Show how employment discrimination can affect wage rates and employment.. 18.1 THE MI

MICROECONOMICS: Theory & Applications

By Edgar K Browning & Mark A Zupan

John Wiley & Sons, Inc.

12 th Edition, Copyright 2015

Chapter 18: Using Input Market Analysis

Prepared by Dr Della Lee Sue, Marist College

Learning Objectives

 Analyze the effects of 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 from the program's long-run impact on saving and social accumulation.

(continued)

Learning Objectives (continued)

 Explore the benefits to firms from colluding in hiring an input through examining the NCAA cartel.

 Show how employment discrimination can affect wage rates and

employment.

 Outline the benefits and costs of immigration.

18.1 THE MINIMUM WAGE

Analyze the effects of minimum wage on the employment of unskilled workers.

The Minimum Wage Law

 Fair Labor Standards Act

 Passed by Congress in 1938

 Minimum wage is periodically increased

 Consequences depend on magnitude of the legal minimum relative to the prevailing wage rate in the economy

 Disemployment effect – the tendency of employers to respond to a higher wage

rate by hiring fewer workers

 Magnitude of unemployment depends upon elasticity of demand and supply

 Who bears cost?

 Displaced workers

 Society – due to higher prices of products produced by covered labor

Figure 18.1 - The Minimum Wage

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.

Does the Minimum Wage Harm the

Poor?

 Objective of minimum wage: help the poor

 However:

 Low wage earners are in families that are not poor

 Most people in poor families who work are paid more than the minimum wage

 Most poor families are poor because they have no

earnings at all

 Most of the minimum wage earners live in households with incomes above the poverty line

Figure 18.2 – The Effects of an Increase

in the Minimum Wage

Cost:

 Net income change = Area

W1GFW - Area FBL1L2

 Higher prices due to

higher wages (factor input

price)

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

18.2 WHO REALLY PAYS FOR SOCIAL SECURITY?

Determine the extent to which employers versus employees bear the

burden of the Social Security program.

Who Really Pays for Social Security?

 The real effects of the tax are the same whether the tax is collected from employers or employees.

 Workers bear most, if not all, of the cost of the tax in the form of

Figure 18.3 – Tax on Employers versus Tax on Employees

Figure 18.4 – The Burden of the Social Security Tax

18.3 THE HIDDEN COSTS OF SOCIAL SECURITY

Explore an important hidden cost of Social Security that results from the program's long-run impact on saving and social accumulation.

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.

 Consequences:

 slower growth rate for the economy

 level of GDP is lower than it would have been had

Social Security never been implemented

Figure 18.5 – The Effect of Social Security

on Investment and the Interest Rate

Figure 18.6 – The Long-Run Effect of

Social Security on GDP

The Effect on Labor Markets

 In addition to the direct effect of paying payroll taxes on earnings due

to PAYGO Social Security:

 Capital stock is substantially lower.

 Worker productivity is lower.

 The demand curve for labor is lower.

 The before-tax wage rate is lower.

Figure 18.7 - The Effect of Social

Security on Before-Tax Wage Rates

18.4 THE NCAA CARTEL

Explore the benefits to firms from colluding in hiring an input through examining the NCAA cartel.

The NCAA Cartel

 Cartel incentives in input market:

 Limit input use

 Lower price paid for the input

 Monopsony power

 Example: National Collegiate Athletic Association (NCAA)

Figure 18.8 - An Input Buyers’ Cartel

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

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

Eliminate the Cartel Restrictions 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

18.5 DISCRIMINATION IN

EMPLOYMENT

Show how employment discrimination can affect wage rates and

employment.

Discrimination in Employment

 How can employment discrimination affect wage rates and

employment?

 Produce segregated employment patterns

 Have no effect on wage differentials between the two groups

 Discrimination bears a cost in the form of sacrificed profit

Figure 18.9 - Discrimination in Labor

Markets

What Causes Average Wage Rates to

Differ?

 Incomes and earnings differ among groups – Why?

 Reasons

 Discrimination

 Differences in labor market productivity

 Differences in labor market participation

18.6 THE BENEFITS AND COSTS OF IMMIGRATION

Outline the benefits and costs of immigration.

The Benefits and Costs of Immigration

 Immigration increases the labor supply.

 Assume labor supply is perfectly inelastic.

 Quantity of capital is constant.

 Marginal product of labor=height of demand curve.

 Workers lose: total earnings fall

 Capital owners gain: total income rises

 Additionally, immigration tends to increase inequality:

 Immigrants have lower incomes than U.S native residents

 Immigration lowers wages of U.S residents and increases the

Figure 18.10- The Effects of

Immigration on the U.S Labor Market

More on Gains and Losses

 Capital owners gain more than native workers lose but net gain is small

 Compare taxes paid by immigrants with the government benefits that they receive

 Effect is a redistribution of income

 Net gains from immigration could be increased with an emphasis on skill level in determining immigration:

 Skilled workers usually pay more in taxes than they receive in

government benefits

 Increasing the supply of skilled workers would decrease wages

among skilled workers which would reduce inequality

Figure 18.11 – A Further Look at the

Effects of Immigration