Contemporary Labor Economics Summary
Chapter 7: Alternative Pay Schemes and Labor Efficiency
McConnell, Brue, and Macpherson have examined different pay packages viewed as complex in purpose and composition that the regular hourly wage rate. Using definitions, calculations and examples, the chapter describes types of fringe benefits as part of total compensation. Total compensation is the wage earnings and costs of fringe benefits. Fringe benefits are those public programs like unemployment compensation, social security, worker’s compensation, retirement savings, insurance, paid leave, supplementary pay, and any legally required benefits. Fringe benefits are the key topic since they make up 70% of the total compensation and 30% of the employees’ fringe benefits, and they vary across industry.
Fringe benefits as part of the total compensation had grown by 27% by 2008 from 1929. Factors like tax advantage, economies of scale, and efficiency of the firm influence this growth. The growth in fringe benefits is also a product of the increase of workers income over the decades, and the introduction of mandated benefits by the government. These variations in fringe benefits arise from the dynamics of variations in income and leisure choices. Other factors have contributed to the growth of fringe benefits one of them being the elasticity of income. Changes unions make to employment also influence benefits. This is because unions have demanded an increase in benefits for workers.
The matter is that the budget constraints limit workers as they have to reach a trade-off between leisure and earnings. This is in the indifference map, which shows the various combinations of benefits and wages with corresponding worker satisfaction. For example, in-kind benefits are in the difference map with a downward slope as they are substitutable. Workers substitute their benefits or part of them for wages to prevent the tendency of getting goods for immediate gratification, for essential items like pension and health insurance. This substitution on the indifference curve creates the marginal rate of substitution, which falls with each addition of benefits. Fringe benefits’ effect on total compensation is in the employer’s Isoprofit Curve, which shows the effects of fringe benefits and wages on a firm’s profit. This implies that for an employer, there is a certain fringe and wage optimal balance that elicits desired profits.
It is necessary to understand this relationship since an increase or decrease in factors like economies of scale, tax advantages, and a firm’s efficiency, increases and decreases the price of fringe benefits. Therefore, internal and external factors from a firm’s performance or the external labor market cause employers to find an optimal balance between wages and benefits to retain and attract highly skilled employees. Fringe benefits not only benefit the employee but also reduce an employer’s taxes, increase efficiency and economies of scale like the purchasing life, medical or dental insurance.
An essential element discussed is the principal-agent problem arising from the conflict between interests of agents (workers) and the goals of principals (firms). This is because workers seek to increase their utilities, while firms seek to increase profits. The authors explore different strategies and principals used to reduce the problems of principal-agent. One of these is the incentive pay plans, which are piece rates, royalties, commissions, bonuses, promotions, and profit or equity sharing. These are to prevent employees or agents from shirking, as they use unauthorized breaks and offer less of their working hours. This introduces the concept wage-productivity dependence, where under certain conditions an increment in wages does increase productivity under the efficiency wage theories. This theory reduces the wage cost per effective unit of labor service. These are common wage theories; others include the labor turnover and nutritional model. The nutritional model is often seen in poor nations, where wage increment leads to an improvement of health and nutritional levels of workers. Labor turnover, on the other hand, is the increment of wages to reduce the rate at which employees leave jobs.
Chapter 8: The Wage Structure
In the real world, there is no homogeneity of the labor markets, as competition thrives from the movement of employees from various jobs. The labor market differs on wages paid in this manner creating the lack of harmony. Therefore, wage structure is the array of wage rates paid to workers. There are different types of wage differentials that are in relation with this lack of harmony. Wage differentials are either equilibrium, which do not motivate any labor movement from low to high paying jobs, and transitional wage differentials, which promote the mobility of workers and decrease disparities in wages. They arise from heterogeneous jobs and workers as well as market imperfections. The latter are the immobilities and imperfect information, while heterogeneous workers are in relation with worker preferences and human capital differences. Finally, heterogeneous jobs are created by job amenities, skill requirements and efficiency wages. In fact, heterogeneous jobs demand different degrees of skills, use nonwage qualities and varying wages to increase productivity and efficiency. Skill differences create wage differences, since a firm’s ability to acquire enough laborers is dependent on wages paid to the skilled and non-skilled workers.
Heterogeneous workers have different skills and preferences for jobs creating competing groups of workers in the labor market. Moreover, differentials arise from varying wage rates created by costly and imperfect information among firms. Principals (firms) also face wage differentials arising from market immobilities associated with sociological, institutional, and geographic changes.
Prostitution as a profession exemplifies the wage differential dynamics. In this example, wages are higher, and prostitutes abound more in developing nations that developed nations. The wages for prostitutes are higher in some markets to compensate for the lack of opportunities of raising an income in marriage. This is because there are more opportunities for better paying employment in developed nations, with more income opportunities in marriage which makes prostitution less desirable. Another explanation is that prostitution is under the influence of a high ratio of men to women. In societies where prostitution is high, number of men is higher than that of women.
It is essential for an economist to understand the various concepts of jobs that influence wage differentials and decisions in job supply. These are factors that include job status, job location, fringe benefits, risk of job death and injury, prospect of wage advancement, and regularity of earnings. Compensating wage differentials are within jobs with a high risk of death and injury since the higher the risk the lower the labor supply. Fringe benefits are often to compensate the differences in wages to create harmony in jobs that have similar workers and wage rates. Compensating wage differentials also occurs for jobs that are between low-and high-status seeking, for job locations that do not offer basic amenities. This is because different locations have different economies and markets thereby offering different amenities and cost of living. This implies that employees in similar jobs will require compensation for job location that significantly varies. Compensation is also to cover the disparity in jobs that do not have regularity of earnings. Jobs that offer security to employees for long periods of time, and some form of implicit and explicit assurance do not require compensation like those that offer paychecks by the week. Therefore, there is compensation for jobs where the likelihood of unemployment is high.
Chapter 9: Mobility, Migration, and Efficiency
Efficiency, employment rates, and productivity of firms are not only affected by compensation and wages, but by mobility and migration. Mobility entails occupational and geographic mobility. Mobility is under the expectation of making higher life earnings in comparison to the costs of mobility, like forgone income, transportation, and psychic costs. In the United States, the total immigration has increased from an average of 650,000 per annum in the 1980s to 850,000 in 1992. Despite this increment in immigrants, illegal aliens have not decreased employment opportunities for natives due to various labor market factors associated with migration. The Illegals have the least effect in the labor market. However, under these factors illegal aliens reduce the rate of wages in several labor markets. It is necessary to recognize the factors associated with mobility and migration in labor markets, and their effects on employees and firms.
A worker’s mobility can cause a change of occupation and residence as seen with transfers and promotions. Occupational mobility is another type of mobility with occupational change and no change in residence. Occupational mobility is often observed in 1-10% of workers in the U.S. annually, with a majority of them under 35 years. Another is geographic mobility, where workers experience a change in geographic location but no change in occupation. Sixteen to eighteen percent of workers in the U.S. experience this mobility annually. The last mobility is geographic, job-related mobility, which occurs in 30% of job moves in America. The changes in jobs cause changes in the occupational and geographic mobility.
Various reasons drive workers to migrate. These are age, family status, and education attainment. Older people are less likely to migrate than other generations. This is for the worker with a family unit since they are unlikely to migrate. However, these two classes of workers will migrate under certain extreme conditions. A worker that is older and has a family may migrate, following upward mobility in the job due to education attainment. However, if the migration is over a large distance, many workers experience discouragement and opt to remain in the current job. Unemployed workers have the highest probability of migrating. However, this decreases if their destination has a high probability. These different factors indicate that workers’ mobility and migration are mainly due to job security, opportunity of high returns or better wages and benefits. However, on average, the returns of migration are 10-15% positive for workers that migrate.
There are different reasons for mobility and migration of workers in the U.S. This is due to the effects of occupation tenure, which is on average 6.5%. In the U.S., age is a crucial factor affecting occupation tenure. Young workers tend to change jobs and occupation more often than older workers do. The length of a worker in the occupation is also under the influence of employment trends. In industries, which have rapidly growing employment rates and for higher industries with lower employment rates, occupation tenure is low. Self-employment also affects occupation tenure as self-employed workers tend to spend a longer time in the occupation. Moreover, the more educated a worker is, the lower is the occupational mobility since they have invested a lot in education. If all factors are constant in the labor market, higher pay and better benefits increase the occupational tenure of workers, as they increase motivation to remain in an occupation. Occupational tenure is also under the influence of gender, racial, and ethnicity factors. This is where men have a higher tenure as compared to women, while white Americans of both sexes have higher tenures than African-Americans. African-Americans in their turn have a higher tenure than Hispanics.
Workers’ mobility can be explained by the value of their employment. This is in terms of the value of their marginal product of labor (VMP). In a labor market where conditions like costless migration and perfect competition are a constant, workers will seek mobility until the VMP is similar in all employments. This implies that they move their high valued labor resources from jobs of low value to those of high value. A constant is achievable when the benefits and wages at these high-valued jobs are similar across the firm and industry thereby preventing further mobility.
The challenge with migration is the risk of getting a positive outcome. This is because workers that migrate risk the chance of gaining negative externalities, which reduce their efficiency, cause income distribution variations among individuals and groups within their destination. For firms to prevent the occurrence of negative externalities due to migration, they may use wage differentials for migrant workers. Wage differentials have the benefit of equalizing wages and reducing labor migration, thereby creating product flow and generating capital.
Chapter 10: Labor Unions and Collective Bargaining
In previous chapters, labor unions have been a crucial factor in affecting benefits, wages, and compensation of workers. The analysis of unionization is conducted owing to the fact that they have a complex and dynamic origin and evolution, which has affected the labor markets. Unions arose from the industrial revolution, when the self-employed artisan, craftsperson or farmer ended up depending on factories that undermined the self-employment system. Industrialization created a situation where the markets divided the functions of labor and manager. This division saw overworking, mistreatment, low wages, menial jobs, and unlawful termination of employees causing workers to team up and create groups to fight for their rights. The markets have seen situations in which unions have lowered wage demands using strikes thus driving a need to understand the various theories of unions. One of the theories is the monopoly union model, where unions give a set wage rate with firms determining the amount of the union employment using wage rates. In this model, a higher wage rate leads to a lower employment rate. The second theory is the efficient contract model, where the firm and unions bargain over employment and wage rate. This bargaining power of unions and firms creates lower wages and increased employment in the labor market as compared to the monopoly unions.
There are several factors which determine the make-up and agenda of unions. First of all, the unions are under the influence of industry and occupation, as industries that heavily depend on production of goods like construction and mining use heavy unions. Low-level unions with relative authority are in the service producing industries like retail, finance, and wholesale. These imply that the expectation of workers in heavy industries from unions is higher than the expectation of workers in light industries. For this reason, workers in the shipbuilding industry have higher expectations for services from their unions thereby causing these unions to have higher legal, policy regulations, and demands from industries.
There are different ways how unions influence the wage rates in firms. Firstly, unions use a rise in labor demand through actions that will increase the demand of products to raise wage rates. Secondly, they use enhanced productivity, increase the number of employees, and alterate the prices related to inputs to increase the wage rates. Unions still have a considerable influence on firms and the labor markets as they did in the industrial age. This is because they have an ability to increase wage rates by gaining control over a firm’s labor supply while threatening to limit labor until an acceptable wage rate is achievable. This introduces the concept of strikes as discussed in the accident strike model. In this model, unions use strikes to reach an agreement on wage rates when firms or unions do not concede.
