Download Labor Market Equilibrium

Labor Market Equilibrium
(Week 6)
1
Textbook reading
• Borjas, Chapters 4 and 5.
• Ehrenberg & Smith, Chapter 8.
• Cahuc & Zylberberg, Chapter 5.
2
Additional readings
• A. Roy, “Some Thoughts on the Distribution of
Earnings.” Oxford Economic Papers (1951).
• J. Heckman and B. Honore, “The Empirical
Content of the Roy Model.” Econometrica
(1990).
• G. Borjas, “Self-Selection and the Earnings of
Immigrants.” American Economic Review
(1987).
• J. Roback, “Wages, Rent and the Quality of
Life”. Journal of Political Economy (1982).
3
Why study labor market equilibrium?
• Main questions:
– Why do wages differ?
• Across workers, jobs, industries, regions…
– Why do wages and employment go up and down?
• Basic (competitive) model: LD=LS
– Equilibrium level of employment and wages.
• We will start from there, derive its implications,
then extend it to more realistic settings.
4
Competitive labor markets
• Main assumptions:
– Transparency (perfect information).
– Free entry (no market power).
• LD=LS
– Equilibrium level of employment and wage.
– Given the demand for the final good, the
prices of other factors, technology, public
programs, etc.
5
• “A competitive economy where a
homogeneous group of workers and firms
can enter and exit the market has a single
equilibrium wage across all labor markets”
6
In equilibrium,
• No pressure for wages to go up or down.
• No unemployment.
• Efficiency:
– Output is maximized.
• In a given labor market, wages are the same for all
workers and jobs, even though:
– Workers may differ in their “taste for work” and their non-labor
income.
– Firms can differ in their production function.
7
All jobs are the same
• In the basic model, all jobs are the same:
– They all pay the same wage.
– Workers are indifferent between different
firms.
– Implicit assumption: non-wage characteristics
of jobs are the same across firms.
8
What are wages a function of?
• Characteristics of workers and jobs.
• LS: demography, distribution of non-labor
income, public programs, etc.
• LD: demand for the final good, capital
markets, regulations, etc.
9
Implications
• Even the basic, competitive model generates
interesting implications.
• Allowing us to think about the effects of a
number of policies.
–
–
–
–
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Minimum wages
Payroll taxes
International trade
Migration
etc.
10
Extensions
• In practice, there are additional reasons why
different workers get paid different wages:
– Workers’ have different skills: formal education,
experience, innate ability, …
– Jobs vary in how demanding they are (how hard or
unpleasant): non-wage characteristics.
• We can incorporate these dimensions of
heterogeneity in the competitive model.
11
Heterogeneity in workers’ skills
• The Roy model focuses on heterogeneity
of skills or talents across workers.
– Self-selection.
• The human capital model stresses that
workers can choose to invest in increasing
their productivity.
12
Non-wage characteristics of the job
• The compensating differentials model
focuses on the “difficulty” of a job.
– “Hedonic theory of wages”.
13
What if the LM is not competitive?
• Social norms
• Imperfect information
• Market power
– Monopsony
– Monopoly
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