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Chapter 5

Quasi-Fixed Labor Costs and their Effects on Demand

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Quasi-Fixed Labor Costs

• Non-wage costs– Hiring and training– Benefits: elective vs non-elective

• Quasi-fixed labor costs vary by worker but not by hour

• examples:– SS is not fixed or quasi-fixed– Training is quasi-fixed

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Optimal solution

• MPM = Marginal Product / Worker

• MPH = Marginal Product / Hour

• MEM = Marginal Expense / Worker

• MEH = Marginal Expense / Hour

• Optimal: – MEM/MPM = MEH/MPH

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The Predicted Relationship Between MEM/MEH and Overtime Hours

Figure 5.1

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Issues

• Suppose firm must pay double time for hours > 40

– Hire more workers (sub effect)

– Hire more capital (sub effect)

– Hire less of everything (scale effect)

• Part time vs. Full-time

• Specific / General Training

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Effects of Training on Marginal Products SchedulesFigure 5.2

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How to Pay/Train

• Choose W0, W1, Z

• MP0 + MP1/(1+r) = W0 + Z + W1/(1+r)

– Profit Maximizing Condition

• W0 +W1 /(1+r) > W* + W*/(1+r)

– Employee Would like to be trained

• W1 > W*

– Employee will not leave

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Multiperiod Demand for LaborFigure 5.3

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A Two-Period Wage Stream Associated with Specific TrainingFigure 5.4

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Productivity and WageGrowth, First Two Years on Job, by Occupation and Initial Hours of Employer Training

Figure 5.5

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The Effect of a Decline in Demand on Employment with General and Specific Training

Figure 5.6

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Issues

• Recessions– Who is recession proof?

• Will general training occur? – Mobility

• Hiring Costs– Signals– Internal Markets