Principles of economics openstax chapter15

LABOR MARKETS: UNIONS, DISCRIMINATION, AND
IMMIGRATION
DR. RICHARD GEARHART
ENTERPRISE COLLEGE
6/16/2016


LABOR SUPPLY AND DEMAND


EQUILIBRIUM


MINIMUM WAGE


MINIMUM WAGE
 The neoclassical minimum wage leads to a SURPLUS of workers who want to work
at the new, higher, wage. This leads to MORE unemployment.

 Some individuals “get off of the couch” now that the wage is higher.
 Some individuals leave their jobs to acquire this new, higher paid, job.

 The shortage is shown by the difference between qD and qS.


 However, most estimates have found that the minimum wage does little to reduce employment
(or increase unemployment).

 Most of the increase in unemployment is found in teen workers (those who typically work only part
time and will leave at the end of a given time frame, i.e., summer).

 However, these have typically been for smaller increases in the minimum wage than the new
increases found in California.

 Efficiency wages; firms may not reduce employment from the minimum wage because workers may
actually increase effort from working (fear of losing job and higher pay, less shirking, …).


 How, then, does the minimum wage affect the economy?
 Firms pass the cost increase on to the consumer in the form of higher prices.
 Firms eat the cost increases and see reduced prices.
 Firms don’t reduce employment, but change the composition of employment (more older workers,
fewer “transitory” workers, such as high schoolers or college-aged individuals).

 Firms reduce non-wage benefits (health insurance, retirement, reduced price meals, gym
memberships, etc.).

 Firms start investing more in technological innovation that will lead to long-term unemployment
(where it will be hard to see the link between the minimum wage and employment numbers).


LABOR MARKET DISCRIMINATION
 Labor market discrimination is when different workers are paid differently, but not
based on education, skills, training, or length of experience on the job.

 In other words, discrimination occurs when people are NOT paid based on workrelated factors.

 Discrimination occurs when some trait, that is largely not a choice by the
individual, leads to lower pay (gender, race, sexual orientation, religion, …).

 There are two types of discrimination.

 Statistical discrimination: when you discriminate based on the population average.
 Before you hire a worker, you do not know how productive they will be, or how good of a worker.
 You therefore base your expectations on observable features of that worker.

 While bad (this tends to prevent upward mobility by the “discriminated” groups), it is based on
objective facts.

 How can I get an education, and raise the population average, if I cannot get the jobs that will pay
for the college education?


 Example 1: why are women paid less than men?

 The probability of a male getting pregnant is strictly 0.
 The probability of a female getting pregnant may be 0, but could be positive.

 At older ages, women are more likely to be in ill health than males (more hospitalizations, more
sick leaves, etc.).

 Statistical discrimination would therefore say that, each year, the probability of a female
missing work is higher than the probability of a male missing work. Pay them less.


 Example 2: in terms of a college education, non-Hispanic whites are more likely to have a
college education (29%) compared to both Hispanics (14%) and Blacks (17%).

 Suppose that you hire a worker at age 18, and your benefits include a paid college education.
You would like this worker to achieve the college education by age 30.

 Based on statistical discrimination, you would be less likely to hire the Hispanic or Black
individual, as they are less likely (ON AVERAGE) to achieve a college degree.


 Biased Discrimination: discrimination that occurs because a particular individual does not
like some non-choice attribute of a worker.

 I will not hire a female because I do not like women in the workforce.
 I will not hire a Methodist because those religious beliefs are antithetical to mine.

 THIS is the bad discrimination. This is not based on any belief OTHER than dislike/hatred.

 Statistical discrimination is, at the very least, based on a set of objective facts.


 With both types of discrimination, workers in the disadvantaged group will be hired ONLY if
they agree to be paid less.


 Does discrimination pay in a competitive labor market.
 Based on a seminal article by Gary Becker.

 The only way that a discriminatory firm will hire workers they discriminate against is if they pay
the workers less.

 HOWEVER, it is unlikely that all firms discriminate against these workers. They will therefore

earn higher wages elsewhere, and will leave.

 Discriminatory firms therefore lose high productivity “minority” workers.
 BUT, they lose more than this. “Minority” shoppers will not want to shop at this firm, so they
also lose business revenues.


 A study of female lawyers found that 55% of the wage difference (between them and male
lawyers) was due to the fact that women had worked less (childbirth, childcare, …).

 Childless women earn no more than women with children.
 Thus, other 45% is largely biased discrimination.

 “Are Emily and Brendan More Employable Than Lakisha and Jamal? …”

 Sent out IDENTICAL resumes to firms. Only difference was the name.
 White-sounding names received 1 call for every 10 resumes sent out. Black-sounding names
received 1 call for every 15 resumes.

 White-sounding, high quality resumes, got more callbacks than white-sounding, low quality resumes.
 Black-sounding, high quality resumes got no more callbacks than black-sounding, low quality
resumes.

 Found in EVERY industry (even for federal contractors and large employers).
 We have both statistical discrimination and biased discrimination.


ECONOMIC IMPACTS OF IMMIGRATION
 Immigration is the movement of peoples between countries (and where these peoples are not
natives, nor do they possess citizenship).

 What are the economic impacts of immigration?

 Immigrants tend to lead to lower wages for natives that they compete, in the labor market, against.
 Immigrants tend to lead to lower product prices for ALL natives.

 Suppose that low skilled immigration happens (i.e., immigrants do not have a college

education). They likely compete directly against low skill natives (natives without a college
education).


•

The presence of immigration leads to more workers competing for jobs.

•
•

This lowers the wages paid to workers.

This COULD lead to lower wages for other native workers whose jobs are not being “replaced” by immigrants.

•

Unlikely that this effect is large. Can lower wage, low skill (no college education) workers replace high skill (college
education) workers?


 Suppose that these low skill workers (both natives and immigrants) produce clothes.

 Because of immigration, the cost of producing a piece of clothing falls as the wage falls. What
happens?




 Immigrants are either high skilled or low skilled.

 Reduces the prices of low-skill products (agriculture, maid and janitorial services,
telecommunications support, landscaping, …).

 Relieves pressures on not enough high skill workers.
 Healthcare professionals (doctors, nurses).
 STEM researchers.
 Information Technology (IT).


 What does the evidence suggest?

 Immigrants add (after taking into account native job losses, loss in tax revenue, increases in
welfare payments) $7 Billion to $25 Billion in GDP per year.

 These benefits would increase by attracting more high skill immigrants (nearly $55 Billion).

 Wage impacts of immigration on natives is small.
 Natives move to other cities.
 Immigrants tend to “cluster” in immigrant enclaves (large groupings of similar immigrant groups).
 10% increase in # of immigrants leads to wages to fall by 3-4%.
140,000 more immigrants each year would lower average incomes from $35,000 per year to $34,000 per
year.

 Most of the impacts of lower wages from immigration are new immigrants replacing older
(existing in the country) immigrants.

 Most of the native immigrant impact (i.e., lower wages) is felt by natives who have less than a
high school diploma.

 High school educated, college educated, and more than college educated natives have a minimal
impact of immigration.

 10% more immigrants in an area lead to prices of low-skill services (maids, nannies,
landscapers, farmworkers) to decrease by 2%.

 2,000 more immigrant workers in Bakersfield would lead to a $20/year decrease in the price of
landscaping services.