Ch. 9 and discussion of Kristof and Unpaid work article:

 

Labor market
Derived demand

Budget constraint

Labor/leisure tradeoff

Backward bending Supply

Labor force participation

Human capital

Unions
Executive pay

Pay for performance

Living wage

Nonmarket (unpaid) work
Cake theory

double burden

 

When economists think about costs, what costs do they have in mind? 
The main inputs they focus on are labor and capital.

 

In order to understand labor markets, we have to look at two aspects:

 

1. households’ decision to sell labor

2. firms’ decision to buy labor

 

We now have another market – the supply and demand of labor (note that in this case, suppliers of labor are households, while demanders of labor are firms. In the case of product markets, suppliers of products are firms, while demanders of products are households.)

 

As with other markets, we assume that the supply of labor is upward sloping – the more you are willing to pay, the more individuals will be interested in the position.  And similarly the demand for labor is downward sloping.

 

How is Labor demand determined?

 

Firms must make a decision about how many workers to hire.

What determines this?

1. Derived demand - what is happening in the output market.

2. Technology a. price of substitute inputs (capital), b. complementary inputs

How do we derive the supply of labor?

Economists again use the budget constraint to look at this problem.

We each have 24 hours in a day.

 

As in other cases, we have to oversimplify the budget constraint, narrowing it down to two dimensions – work  and leisure and assuming that work is paid (hence we can convert work time into $s earned), and that all unpaid activities are leisure.  (We will discuss later why this is a particularly problematic assumption in the case of women.)

Suppose Laura can earn $10. Her budget constraint will be as follows:

 

Leisure	Work	$ earned
24	0	0
22	2	20
20	4	40
18	6	60
16	8	80
14	10	100
12	12	120
10	14	140
8	16	160

 

Again we can graph this as a budget constraint.

 

If the wage changes, what will happen to the budget constraint?

It will rotate.

Suppose the wage rises to $15?

The maximum she can earn now is $240.

 

From this we can derive a labor supply curve, which will generally be upward sloping (although there are exceptions).

As wages rise, the opportunity cost of leisure also rises.

At some point though, you may decide that even if you can make more money, you prefer more leisure (because you already make enough money.) Then the labor supply curve becomes backward bending.

Economists talk both in general about the supply of labor, as well as about the supply of specific types of labor, such as engineers, economists, low wage workers.

 

What might cause the labor supply curve to shift?
a. Population increases (baby boom, immigration),

b. changes in norms (women entering the labor market).  
c. A particular labor supply curve may shift because of changes in the number of students graduating in a particular major.

 

Economists actually model the labor supply decision as a 2 part decision:

1. Whether to work? (Labor force participation decision)

2. How much to work?

And assume that individuals choose both.

 

What determines wages?

A simple answer is the location of the S and D for Labor, which are in turn, according to economic theory, is linked to worker productivity (we'll discuss this further when we discuss firm costs.)

Education – which in turn may be linked to productivity

 

Many economists find this theory too simplistic and argue that labor markets are not like other markets. 

 

If CEO compensation is linked to performance, CEOs should take huge pay cuts when companies are not doing well. And yet they don’t.  So ‘Pay for performance’ theory does not seem to be valid in this case.

The article on exec pay points out how the gap between CEO and the average worker’s pay has been increasing. Does this mean that CEOs productivity is growing faster than the average worker’s? Unlikely.

 

So in some cases labor theory is not realistic. It doesn't necessarily allow for the complexity of some labor markets.

 

Some argue that even if labor markets do work, they are inequitable, since they do not guarantee workers a living wage (a wage at which they can pay for food, shelter, and other necessities.) These folks advocate for legal legislation mandating a living wage (a minimum wage, but higher than the current wage.)

 

They also are among those advocating putting caps on CEO salaries, although that is unlikely.  Still shareholders are putting some pressure on companies to reduce the gap between CEO and average worker pay.

 

What real world issues might make economists’ assumptions about labor markets problematic?

1. Standardization of 40 hour work week.

2. Assumption about upward sloping supply curve in this case.

Is it really the case that as the wage rises, people are willing to work more hours? What about the opposite problem – the lower your wages, the more hours you need to work, just to survive (this is one thing that could make the labor supply ‘backward bending’ at all points.)

3. Do labor markets function - is there really complete information about productivity of workers?

4. Theory defines unpaid work as leisure.

What problems does the article on unpaid work identify with the fact that economists have equated work with pay?

 

Is all work paid?

No, lots of work, especially child care, food preparation, gardening, house repairs, elder care, laundry, shopping, is unpaid.

And much of the unpaid work is done by women.  Statistics suggest that 2/3 of men’s work is paid, while 2/3 of women’s work is unpaid and that in most countries men and women work similar hours of total work (paid and unpaid).

What is the relationship btw paid and unpaid work?

The paid economy would cease to function if the unpaid work didn’t get done.

One way of thinking about the relationship between the paid and unpaid economies is the idea of 'cake theory.'

Cake theory says that the economy is built as follows:

natural resources/unpaid work/public sector/private sector

What is the consequence of the lack of recognition of unpaid work?

The cake collapses!

Some have argued that policies often fail to address this sector of the economy.  (The need for labor saving devices in the home, the need for government programs to help relieve women of their unpaid work as they enter the paid economy (child care, etc.) This is particularly true in the US, which has one of the least generous maternity leave policies.

What is the result of ignoring the unpaid market?

Women, because they bear most of the burden of unpaid work, are much more likely to be in poverty.

Double burden.

Women also suffer stress as they try to juggle paid and unpaid work.