human capital, discrimination and trade unions

Chapter 13
Human capital, discrimination and
trade unions
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith
13.1
Hourly earnings in the UK 1998
0
2
4
6
8
10
12
14
£.p
Manual Nonmanl
Men Women
 In both manual and
non-manual
occupations, men
are seen to earn
more than women.
 Does this mean
there is
discrimination?
13.2
Sources of differential pay
 Education and training
 Job experience

 Race and gender
 Trade union membership
13.3
Human capital
 The stock of expertise accumulated
by a worker
 It is valued for its income-earning
potential in the future
 A form of investment
13.4
Age-earnings profiles
 Age-earnings
profiles show how
typical earnings
vary with age and
educational
qualifications
– education induces
a differential
– which tends to
increase with age
Age
Income
No formal
qualifications
A-level or
equivalent
University degree
or equivalent
13.5

 Worker organizations designed to
affect pay and working conditions
 A closed shop
– an agreement that all the firm's workers
will be members of a trade union.
 A trade union may raise wages by
restricting labour supply
Trade unions
13.6
Unions in the labour market
Employment
W
0
With no union, the industry
faces a horizontal labour
supply curve at the wage W
0
.
Given industry demand for
labour DD, equilibrium
is at E
0
.
D
D
E
0
N
0
By restricting labour

supply to N
1
, the union
can increase wage to W
1
N
1
W
1
The differential is larger for any
given reduction in industry
employment, the more inelastic
is industry labour demand
13.7
Discrimination?
 Women and non-whites on average
receive lower incomes than white
males
 women and non-whites are
concentrated in relatively unskilled
jobs with fewer opportunities for
promotion
 This need not reflect blatant sexism
or racism by employers
13.8
Discrimination?
 It may reflect:
– educational or other disadvantages
before young workers reach the labour
market

– a low perceived rate of return for firms
on money spent in training such
workers
 Only if we allow for all these effects
can we show discrimination in the
labour market.
13.9
Chapter 14
Capital and land:
completing the analysis of factor markets
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith
14.11
Capital and land
 Physical capital
– the stock of produced goods which
contributes to the production of goods
and services
 Land
– the factor of production which nature
supplies
 Together capital and land make up
the tangible wealth of a country.
14.12
Investment
 Capital depreciates over time
– becoming less productive and less valuable
 Gross investment
– the production of new capital goods and the

improvement of existing capital goods
 Net investment
– gross investment minus the depreciation of
the existing capital stock
14.13
Stocks and flows
 A stock
– the quantity of an asset at a point in
time
– the asset price is the sum for which the
stock can be bought outright
 A flow
– the stream of services that an asset
provides during a period
– the rental rate is the cost of using
capital services
14.14
Interest and present value
 The present value of £1 at some future date is the
sum that, if lent out today, would accumulate to
£1 by that future date.
– It depends upon how far into the future the sum
accumulates
– and on the rate of interest
 The price of a capital asset should be related to
the stream of future payments that will be earned
from the services it provides
– discounted back to give the present value.
14.15
Real and nominal interest rates

 The nominal interest rate
– tells us how many actual pounds will be
earned in interest by lending £1 for one year.
 The real rate of interest
– measures the return on a loan as the increase
in goods that can be purchased rather than as
the increase in the nominal value of the loan
fund.
 The real rate of interest is the nominal rate
minus the inflation rate.
14.16
The equilibrium real interest rate
Current consumption
Future consumption
A
A'
AA' shows the production
possibility frontier between
current and future
consumption:
by devoting resources to
investment, future
consumption can be
increased.
The slope of the frontier
has magnitude –(1 + i)
where i is the rate of
return on investment.
14.17
The equilibrium real interest rate

Current consumption
Future consumption
A
A'
U
U
Given society's preferences
between present and future
consumption, the optimal
position is at E, where the
indifference curve UU is at
a tangent to the PPF.
E
The slope of the red line
represents –(1 + r),
where r is the real interest
rate that balances the
productivity of investment
and the thriftiness of
consumers.
14.18
The markets for capital and land
 The derived demand curve for capital
(and for land) services closely
parallels the earlier analysis of
labour demand.
 But land is in fixed supply to the
economy as a whole.
 Rental rates tend to become
equalized across alternative uses.

14.19
Changes in capital intensity
 Over time, the UK economy is
becoming more capital-intensive
– the wage-rental ratio has increased,
leading industries to substitute capital
for labour
– in the long run the supply of labour is
less elastic than the supply of capital
– new capital embodies latest technology
14.20
The functional distribution of income in the UK
0%
20%
40%
60%
80%
100%
1981-89 1998
Employment Self-employment Profits & rents
The distribution of income between the factors of
production changed little between 1981-89 and 1998.