The Economics of Labor Markets

Transcription

1 F T H E D I T I O N The Economics of Labor Markets Bruce E. Kaufman Georgia State University Julie L. Hotchkiss Georgia State University THE DRYDEN PRESS A DIVISION OF HARCOURT COLLEGE PUBLISHERS FORT WORTH PHILADELPHIA SAN DIEGO NEW YORK AUSTIN ORLANDO SAN ANTONIO TORONTO MONTREAL LONDON SYDNEY TOKYO

2 C O N T E N T S Chapter 1 The Labor Market 1 The Labor Market and the Economy 2 Unique Features of the Labor Market 4 Labor Is Embodied in the Seller 4 The Long-Term Nature of the Employment Relationship 5 Heterogeneity of Workers and Jobs 6 The Multiplicity of Markets 7 Labor Market Outcomes 7 The Changing Level and Composition of Labor Supply 8 The Changing Level and Composition of Labor Demand 9 The Structure of Earnings 11 Labor-Management Relations and Collective Bargaining 12 Changes in the Level and Composition of Unemployment 14 The Labor Market Process 15 Market Forces 15 Institutional Forces 20 Sociological Forces 22 The Evolution of Labor Market Theory 26 The Neoclassical School 27 The Institutional School 29 The Importance of Theory and Hypothesis Testing 32 IN THE NEWS Different Views on the Merits of Ergonomics Standards 33 The Importance of Theory for Public Policy 35 EMPIRICAL EVIDENCE 1-1 The Market for Teachers 36 Summary 39 Review Questions 39 Additional Readings 40 Chapter 2 Hours of Work 43 The Pattern of Hours of Work 43 The Theory of the Labor/Leisure Choice 45

3 xviii Contents Preferences and Indifference Curves 46 Wages, Income, and the Budget Constraint 50 The Equilibrium Hours of Work 52 Hours of Work and Changes in Nonlabor Income 54 Hours of Work and Changes in Wage Rate 56 IN THE NEWS Institutions, Economics, and Preferences Determining Hours of Work 58 A Graphic Derivation of Income and Substitution Effects 59 The Supply Curve of Labor 61 Income Maintenance Programs and Labor Supply 62 Types of Income Transfer Programs 62 TANF: The Successor to AFDC 64 TANF and Hours of Work 64 Effect of TANF on Labor Supply 65 Income and Substitution Effects 67 Issues in Welfare Reform 67 IN THE NEWS The Transition from Welfare to Work Has Many Hurdles 68 Qualifications to the Labor/Leisure Model 70 Employer-Mandated Work Schedules 70 IN THE NEWS Are Americans Overworked?: Conflicting Evidence 73 Time and Money Costs of Working 75 Fixed Time Costs 75 Monetary Costs 76 The Time-Series Pattern of Hours of Work 77 The Process of Hours Reduction 79 The Role of Market Forces 79 The Role of Institutional Forces 80 The Slower Decline of Work Hours in the Postwar Period 81 The Growth of Paid Time Off 82 Increase in Leisure over the Life Cycle 82 Other Factors 83 The Recent Increase in Work Hours 83 Changing Age Profile 84 Decline in Real Wages and Changes in Consumption Patterns 84 Moonlighting 84 POLICY APPLICATION 2-1 Supply-Side Economics and Labor Supply 85 Graphic Analysis 85

4 Contents xix Income Taxes and Aggregate Labor Supply 88 EMPIRICAL EVIDENCE 2-1 Labor Supply Curves Estimated from Cross-Sectional Data 90 Summary 93 Review Questions 94 Additional Readings 95 APPENDIX 2A The Hours of Work Decision for Salaried Workers 97 Differences in Tastes 98 Difference in Reward Structures 100 APPENDIX 2B Constrained Optimization and the Labor/Leisure Choice Model 103 Equilibrium Hours of Work 103 The Slope of the Indifference Curve 105 The Income and Substitution Effects 105 APPENDDX 2C Estimating a Labor Supply Curve with Linear Regression 107 The Regression Line 107 The Standard Error of the Regression Coefficient 109 The Coefficient of Determination 110 Calculating Labor Supply Elasticities 110 An Example of a Labor Supply Function 112 Chapter 3 Labor Force Participation 115 Definition and Measurement of the Labor Force 115 IN THE NEWS The Work Force 2000+: The Challenge Facing Employers 118 Patterns in Labor Force Participation 118 The Decision to Work 120 Participation and Changes in the Market Wage Rate 121 Participation and Changes in Nonlabor Income 123 A Household Model of Labor Supply 124 The Division of Labor by Gender 128 The Convergence in Participation Rates 128 IN THE NEWS The Changing American Family 130 Time Allocation: An Extension to the Household Model 131

5 xx Contents Changes in Participation over Time 132 The Decline in Male Participation Rates 132 The Life Cycle Allocation of Time 132 Social Security and Private Pension Plans 134 The Growth in Disability Benefits 137 Decreased Demand for Low-Skilled Workers 138 The Increase in Female Participation Rates 138 Fertility 140 Education 142 Advancement of Living Standards 143 Increased Job Opportunities for Women 145 Changing Social Attitudes 145 A Bargaining Model of Family Labor Supply 148 IN THE NEWS Dual-Earner Families and Labor Mobility 149 POLICY APPLICATION 3-1 Labor Force Growth during Recessions 151 The Added Worker Effect 152 The Discouraged Worker Effect 152 EMPIRICAL EVIDENCE 3-1 Age/Participation Profiles 155 Marital Status 157 Race 158 Summary 159 Review Questions 159 Additional Readings 161 APPENDIX 3A The Allocation of Time to Market Work, Home Work, and Leisure: A Graphic Exposition 163 APPENDIX 3B Constrained Optimization and the Participation Decision 168 Chapter 4 The Demand for Labor in the Short Run 171 The Pattern of Employment 172 The Marginal Productivity Theory of Labor Demand 174 The Model 174 The Production Function 175

6 Contents ' xxi The Marginal and Average Product of Labor 176 Marginal Revenue Product 178 The Marginal Cost of Labor 179 The Equilibrium Level of Employment 179 The Short-Run Demand Curve for Labor 179 An Increase in Product Demand 181 Imperfect Competition in the Product Market 181 The Market Demand Curve for Labor 183 Criticisms of the Theory of Labor Demand 185 Limits to Human Cognition 185 Nonmaximizing Behavior 186 Fixed Capital/Labor Proportions 186 Increasing Returns to Labor 187 IN THE NEWS 30 Hours of Work, 40 Hours of Output 188 Interdependence between the Wage and Worker Productivity 189 Conclusion 190 The Elasticity of Demand for Labor 191 Special Relationships 192 Estimates of the Elasticity of Labor Demand 195 The Relationship between Product Demand and Labor Demand 196 The Demand for Labor over the Business Cycle 196 Industry Sensitivity to the Business Cycle 197 IN THE NEWS The Squeeze on Middle-Class Jobs 199 Layoffs versus Cuts in Hours 200 Overtime Hours 201 Consumer Expenditure Patterns and the Demand for Labor 202 POLICY APPLICATION 4-1 Wage Subsidy Programs 204 The Employment Effect of a Wage Subsidy Program 204 Derivation of the After-Subsidy Demand Curve 206 Estimating the Benefits and Costs of a Wage Subsidy Program 208 POLICY APPLICATION 4-2 Imports and the Demand for Labor 209 Import Restrictions and Employment 209 NAFTA: The Jury Is Partially In 212 EMPIRICAL EVIDENCE 4-1 The Motivation behind Union Wage Concessions 213 Greater Elasticity of Demand for Labor 214 Leftward Shift in the Demand Curve 215

7 xxii Contents Summary 215 Review Questions 216 Additional Readings 217 APPENDIX 4A The Short-Run Equilibrium Level of Employment 219 Chapter 5 The Demand for Labor in the Long Run 221 The Pattern of Capital/Labor Substitution 221 The Theory of Labor Demand in the Long Run 223 The Technology of Production: Isoquants 223 Factor Prices: Isocost Lines 226 The Equilibrium Level of Employment 228 A Change in the Wage Rate 230 The Long-Run Demand Curve for Labor 232 The Determinants of the Elasticity of Labor Demand 234 Demand for the Final Product 234 The Share of Labor in Total Cost 236 Substitutablity of Other Factor Inputs 236 The Elasticity of Supply of Other Factor Inputs 238 Technological Change and Labor Demand 238 The Displacement of Labor by Technological Change 239 Technological Change and Product Demand 241 The Combined Effect 242 Productivity Growth and the Demand for Labor 244 IN THE NEWS The Productivity and Employment Impact of Organizational Re-engineering 245 POLICY APPLICATION 5-1 Employment Forecasting 247 The Input-Output Model 249 Forecasting with the Input-Output Model 250 POLICY APPLICATION 5-2 Displaced Workers 252 Impact of Displacement 253 Policies to Assist Displaced Workers 254

8 Contents * xxiii EMPIRICAL EVIDENCE 5-1 Productivity Growth and Employment in Agriculture and Telephone Communication Summary Review Questions Additional Readings APPENDIX SA The Long-Run Equilibrium Level of Employment The Slope of the Isoquant The Scale and Substitution Effects Chapter 6 The Determination of Wages 265 The Pattern of Wages 265 Wage Determination in Competitive Markets 268 The Law of One Wage 268 The Law of One Wage Put to the Test: Secretaries 270 Market Imperfections 272 Nonmaximizing Behavior 272 Imperfect Information 273 Heterogeneity of Workers and Jobs 275 Collusion 276 Costly Mobility 276 IN THE NEWS The Flap over Executive Compensation 277 A More Realistic Model 278 Wage Determination in a Monopsony Market 281 The Marginal Cost of Labor Schedule 283 The Equilibrium Level of Wages and Employment 284 The Minimum Wage and Market Adjustments 284 Market Adjustments to Changes in Demand and Supply 285 Excess Demand 285 Excess Supply 286 Market Adjustments to a Minimum Wage Law 286 History of the Minimum Wage 287 Purpose of the Minimum Wage 288 The Minimum Wage in a Perfectly Competitive Market 289

9 xxiv Contents IN THE NEWS Peg the Minimum Wage 291 The Minimum Wage in a Monopsony Market 293 The Minimum Wage and Efficiency Wage Theory 294 Research Findings 295 The Firm's Internal Wage Structure 299 Determining Job Rates 300 The Firm's Job Structure 300 The Internal Labor Market 302 Job Evaluation 303 Determining Individual Rates of Pay 304 Tournament Pay Structures 306 Segmentation and Dual Labor Market Theory 309 Primary and Secondary Jobs 310 IN THE NEWS Are Firms Developing Two-Tier Work Forces? 311 Limited Mobility 312 Implications and Evidence 313 Returns to Education 313 Firm Size and Wages 314 POLICY APPLICATION 6-1 Job-Lock 314 EMPIRICAL EVIDENCE 6-1 Monopsony in Baseball 316 EMPIRICAL EVIDENCE 6-2 Wages of Hospital and Electrical Workers 317 Hospital Workers 317 Electrical Workers 319 The Role of Relative Wage Adjustments 321 Summary 324 Review Questions 325 Additional Readings 327 APPENDDC 6A Data, Reference, and Internet Sources in Labor Economics 329 Indexes and Abstracts: Newspapers 329 Indexes and Abstract: Periodicals 329 Bibliographies 330 Academic Journals 330 Nonacademic Journals 331 Statistical Sources 331 Internet Sources 333

10 Contents xxv Chapter 7 Education, Training, and Earnings Differentials: The Theory of Human Capital 337 The Pattern of Education and Earnings 337 The Theory of Human Capital 339 The Investment Decision 340 Present Value 342 Two Investment Decision Rules 344 The Private and Social Rate of Return 345 Implications of Human Capital Theory 346 Costs 347 Age 347 Labor Force Continuity 347 Earnings Differentials 348 The Size of Earnings Differentials 348 Schooling and the Distribution of Individual Earnings 350 The Market for Human Capital 350 IN THE NEWS College Graduates: Too Many or Too Few? 351 The Demand Curve for Human Capital 352 The Supply Curve of Investable Funds 354 Equilibrium Investment in Human Capital 354 The Distribution of Earnings 355 Differences in Supply Curves 356 Differences in Demand Curves 358 Correlations between Demand and Supply Curves 360 Human Capital versus Screening 362 On-the-Job Training 365 IN THE NEWS The German Apprenticeship Program: A Model for the United States? 366 General versus Specific Training 367 Benefits and Costs of On-the-Job Training 368 IN THE NEWS General OJT: When the Employer Pays 371 Implications of On-the-Job Training 372 Employee Turnover 372 The Minimum Wage 372

11 xxvi Contents Internal Labor Markets 373 The Indeterminacy of Wages 373 Age/Earnings Profiles 373 Alternative Explanations 375 Seniority 375 Deferred Compensation as an Incentive Device 377 POLICY APPLICATION 7-1 Interrupted Work Careers and Women's Earnings 378 The Continuity of Labor Force Attachment of Men and Women 379 Research Evidence 382 EMPIRICAL EVIDENCE 7-1 Estimated Rates of Return to Formal Education 383 Private Versus Social Rates of Return 383 The Value of a Primary Education 383 EMPIRICAL EVIDENCE 7-2 Schooling and Earnings 385 The Skewness in Earnings 385 The Dispersion in Earnings 386 Summary 391 Review Questions 392 Additional Readings 393 APPENDDC1A Education as a Screening Device 395 Job Market Signaling 395 Education as a Screening Device 396 Signaling Failures and the Optimal Signal 398 APPENDIX IB Estimating a Human Capital Earnings Function 401 Deriving the Earnings Function 401 Estimating the Earnings Function: An Example 403 Chapter 8 Occupational Wage Differentials 407 The Pattern of Occupational Earnings 407 Compensating Wage Differentials 410 Job Attributes 410 Differences in Tastes and Abilities 411 Unemployment and Noncompeting Groups 414

12 Contents xxvii The Hedonic Theory of Compensating Wage Differentials 416 Employee Indifference Curves 417 Employer Isoprofit Curves 418 Matching Workers and Firms 420 The Economics of Employee Benefits 422 The Relative Cost of Employee Benefits 424 The Preferences of Employees 426 The Equilibrium Wage/Benefit Mix 427 Implications 429 IN THE NEWS Flexible Benefit Plans Grow in Popularity among Both Workers and Employers 430 Occupational Licensing 433 Who Is Licensed? 433 The Benefits and Costs of Licensing 434 Occupational Licensing as a Source of Monopoly Rents 436 Raising Minimum Standards 436 Restrictions on Interstate Mobility 436 Restrictions on Training 437 Occupational Attainment and Earnings of Men and Women 437 Gender Differences in Occupational Attainment 438 Reasons for Occupational Segregation 440 The Discontinuous Pattern of Female Participation 440 Gender Roles 443 Discrimination 444 IN THE NEWS Why More Women Managers and Executives Are Putting Their Careers on Hold 445 POLICY APPLICATION 8-1 Government Regulation of Occupational Safety and Health Conditions 447 The Occupational Safety and Health Act 448 The Cases for and against Government Regulation 449 The Size of Compensating Wage Differential 450 Issues in Safety and Health Regulation 452 The Optimal Level of Regulation 452 The Method of Enforcement 453 EMPIRICAL EVIDENCE 8-1 Compensation for Reputation 455 EMPIRICAL EVIDENCE 8-2 Occupational Segregation and Male/Female Earnings Differentials 457

13 xxviii Contents Summary Review Questions Additional Readings APPENDIX 8A Measuring Occupational Segregation the Duncan Index The Duncan Index An Example: The United States International Comparisons Chapter 9 Discrimination in the Labor Market 469 The Pattern of Earnings Differentials by Race and Gender 469 Theories of Market Discrimination 471 Personal Prejudice 472 Prejudice by Employers 473 Prejudice by Workers 476 Prejudice by Consumers 479 Market Power 479 Monopsonisitic Discrimination 480 Discrimination by Unions 482 Imperfect Information 483 Unequal Productivity 483 Equal Productivity 485 IN THE NEWS The Young and the Beautiful 486 Discrimination and Life Cycle Earnings 487 Discrimination in Training 488 Discrimination in Promotion 490 Women and Minorities in Dead-End Jobs 490 So Close, and Yet So Far Away: The Glass Ceiling Effect 493 Discrimination and Labor Market Choices 495 The Measurement of Discrimination 496 The Residual Method 496 Estimates of Discrimination 499 Sources of Bias 500 The Economic Progress of Blacks and Women 501 Blacks 501 Women 504

14 Contents xxix IN THE NEWS The "Mommy-Track": Fair or Unfair to Women? 506 Government Programs to Combat Discrimination 507 Federal Legislation 508 Effectiveness of Antidiscrimination Programs 511 POLICY APPLICATION 9-1 Comparable Worth 513 IN THE NEWS Canada's Experience with Comparable Worth 516 EMPIRICAL EVIDENCE 9-1 Discrimination in Full-Time Compensation 519 What Is a Full-Time Wage Premium? 519 How Many Hours Is Full-Time? 520 Summary 521 Review Questions 522 Additional Readings 523 APPENDIX 9A The Measurement of Discrimination 525 Chapter 10 Union Membership and Collective Bargaining 527 The Pattern of Union Membership 527 The Origins of Labor Unions 529 The Divorce of Capital and Labor 529 Employers and Workers: Adversaries or Partners? 530 Individual Action versus Collective Action 532 The Determinants of Union Membership: A Demand and Supply Model 533 The Demand for Union Services 534 The Benefits of Union Membership 536 IN THE NEWS The Jungle of the 1990s 538 The Costs of Union Membership 540 The Supply Curve of Union Services 541 The Cost of Organizing 543 The Costs of Representing Workers 543 Institutional Innovations and the Quality of Union Leadership 544 The Legal Environment 544 The Equilibrium Level of Union Membership 544 Union Membership Over Time 546 The 1930 to 1954 Period 547

15 xxx Contents The 1955 to 1980 Period 548 The 1981 to 1998 Period 549 IN THE NEWS Union Resistance: A Historical Picture 550 The Union-Management Bargaining Process 552 A Model of the Bargaining Process 553 The Contract Zone 554 Union and Employer Reaction Functions 555 Bargaining Power 558 The Strike as a Source of Bargaining Power 558 Other Sources of Bargaining Power 560 Outcomes of the Bargaining Process 561 Wage Determination 561 The Occurrence of Strikes 563 Alternative Methods of Dispute Resolution 566 Mediation 566 Fact-Finding 567 Arbitration 568 POLICY APPLICATION 10-1 The Legal Framework of Collective Bargaining 570 The National Labor Relations Act 570 Unfair Labor Practices 571 IN THE NEWS Proposed Reforms of NLRA Please No One 572 The National Labor Relations Board 573 Union Representation Elections 573 The Taft-Hartley Act 574 Unfair Labor Practices of Unions 574 Union Security 574 Decertification Elections 575 Labor Disputes 575 The Landrum-Griffin Act 576 Bill of Rights for Union Members 576 Financial Disclosure 576 Trusteeships 576 Union Elections 576 Public Sector Labor Laws 577 EMPIRICAL EVIDENCE 10-1 Who Belongs to Unions 578 Industry 578 Race 579

16 Contents xxxi Gender State EMPIRICAL EVIDENCE 10-2 The Pattern of Strike Activity The Bargaining Calendar The Business Cycle IN THE NEWS Factors Behind the Drop in Strikes Political Events Summary Review Questions Additional Readings APPENDED 10A A Comparison of Monopoly, Efficient Contract, and Median Voter Models of Union Wage Determination The Monopoly Model The Efficient Contract Model The Median Voter Model A Comparison of the Three Models Chapter 11 The Economic Impact of Labor Unions 605 Do Unions Raise Wages? 605 Measuring the Union-Nonunion Wage Differential 607 The Problem of Other Things Equal 607 Demographic Characteristics 608 Productivity Differences 608 Job-Related Characteristics 608 Structure of the Firm's Product Market 609 Employee Benefits 609 The Problem of Mutual Interdependence 609 The Spillover Effect 609 The Threat Effect 611 Five Dimensions of the Union Wage Effect, 611 Percentage of the Work Force Organized 611 The Union Wage Effect Over Time 613 The Union Wage Effect and the Structure of the Product Market 615 IN THE NEWS German Unions Feeling the Pain of Trade Liberalization 618

17 xxxii Contents Unions and Wage Inequality 619 Wage Dispersion within Firms 620 Wage Dispersion between Firms 620 The White-Collar-Blue-Collar Wage Differential 620 The Blue-Collar, Union-Nonunion Wage Differential 621 The Union Wage Effect in the Public Sector 621 The Union Effect on Nonwage Outcomes 624 Unions and Employee Benefits 624 Unions and Productivity 625 Unions and Profits 628 IN THE NEWS GM Could Learn a Lesson from History... and Ford 629 POLICY APPLICATION 11-1 The Davis-Bacon Act 630 EMPIRICAL EVIDENCE 11-1 Estimates of the Union Wage Effect 632 Cross-Sectional Estimates 632 Longitudinal Estimates 636 Summary 638 Review Questions 639 Additional Readings 640 APPENDIX 11A Estimating Union-Nonunion Wage Differentials 641 Chapter 12 Unemployment 645 The Pattern of Unemployment 645 Why Worry about the Unemployment Rate? 646 The Measurement of Unemployment 648 Types of Unemployment 651 Frictional Unemployment 651 Structural Unemployment 652 Cyclical Unemployment 653 Distinguishing between Types of Unemployment 654 Causes of Unemployment 657 Job Search 657 The Stigler Model 658 The McCall Model 660 Implications 661

18 Contents * xxxiii Rigid Wages Unions and Minimum Wage Laws Implicit Contracts Transfer Programs Relative Wage Comparisons Turnover and Training Costs Efficiency Wages The Composition of Unemployment Unemployment Flows Two Sources of High Unemployment Rates POLICY APPLICATION 12-1 Government Employment and Training Programs Training Programs for Jobs in the Private Sector Private-Sector Employment Incentives Public Sector Job Creation Programs Economic Development Program IN THE NEWS If You Pay, They Will Come... Maybe EMPIRICAL EVIDENCE 12-1 The Beveridge Curve in the 1990s Job-Matching Efficiency Growth of the Labor Force Turnover Summary Review Questions Additional Readings APPENDIX 12A International Unemployment Statistics Glossary Name Index Subject Index