Prepared by Dr Della Lee Sue, Marist College MICROECONOMICS: Theory & Applications Chapter 18: Using Input Market Analysis By Edgar K Browning & Mark A Zupan John Wiley & Sons, Inc 12th Edition, Copyright 2015 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Analyze the effects of minimum wage on the employment of unskilled workers 18.1 THE MINIMUM WAGE Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 and to lower prices for products produced by complementary factors of production  Copyright © 2015 John Wiley & Sons, Inc All rights reserved Figure 18.1 - The Minimum Wage Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 10 Explore the benefits to firms from colluding in hiring an input through examining the NCAA cartel 18.4 THE NCAA CARTEL Copyright © 2015 John Wiley & Sons, Inc All rights reserved 21 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) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 22 Figure 18.8 - An Input Buyers’ Cartel Copyright © 2015 John Wiley & Sons, Inc All rights reserved 23 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 24 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 studentathlete 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 25 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 receive Copyright © 2015 John Wiley & Sons, Inc All rights reserved 26 Show how employment discrimination can affect wage rates and employment 18.5 DISCRIMINATION IN EMPLOYMENT Copyright © 2015 John Wiley & Sons, Inc All rights reserved 27 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 28 Figure 18.9 - Discrimination in Labor Markets Copyright © 2015 John Wiley & Sons, Inc All rights reserved 29 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 30 Outline the benefits and costs of immigration 18.6 THE BENEFITS AND COSTS OF IMMIGRATION Copyright © 2015 John Wiley & Sons, Inc All rights reserved 31 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 incomes of capital owners Copyright © 2015 John Wiley & Sons, Inc All rights reserved 32 Figure 18.10- The Effects of Immigration on the U.S Labor Market Copyright © 2015 John Wiley & Sons, Inc All rights reserved 33 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 34 Figure 18.11 – A Further Look at the Effects of Immigration Copyright © 2015 John Wiley & Sons, Inc All rights reserved 35 ... 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 Copyright... 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. .. Inc All rights reserved 14 Explore an important hidden cost of Social Security that results from the program's long-run impact on saving and social accumulation 18. 3 THE HIDDEN COSTS OF SOCIAL SECURITY