The Labor Market

Where does that wage come from?

What determines the wage?

• The interaction of labor supply and labor demand

SL

DL

Number of Workers

Wage

Equilibrium• Also called the market clearing wage

– When QSL = QDL

• Disequilibrium– When QSL = QDL

At Disequilibrium can have…

• Shortage (too few workers)– QSL < QDL

– Wage too low– Wage must increase to rid shortage

• Surplus (too many workers)– QSL > QDL – Wage too high– Wage must decrease to rid surplus

Moving to Equilibrium

Number of Workers

Wage

DL

SL

Shortage

Surplus

Equilibrium

Moving to Equilibrium

• If we have a surplus, wage must _______ to get to equilibrium.

• Decrease

• If we have a shortage, wage must _______ to get to equilibrium.

• Increase

In-class exercise 8

Supply and Demand of Labor

What about other countries?

Earnings ratio 1975

Earnings ratio 1994

Australia 80 86

Denmark 83 83

Korea 47 52

Japan 49 43

Why the difference?

• Labor force structure– More physical (male oriented) – Gender earnings ratio would?

• decrease

– More service (female oriented)– Gender earnings ratio would?

• increase

• Occupation sex structure – Are women in the low wage jobs?– Gender earnings ratio would?

• decrease

• Degree of modernization

– Is women’s major focus still seen as in the household?

– Gender earnings ratio would?• decrease

• Gender ideology– Are there certain male jobs vs female jobs– Does society frown on women working?– Gender earnings ratio would?

• decrease

What can explain the differences between men and women?

• Two theories…• Individualist theory

– Women possess attitudes, preferences and qualifications that make them less productive and less desirable to higher wage jobs

– No discrimination– Difference from preference for ideal job by men and

women– Individual is at fault– Supply Side

Types of Individualist Theories

• Neoclassical Theory– Men and women are free to choose

• Amount of education to obtain• Time to stay in the labor market• To work full or part time

– How these things are chosen determines wage– Men and women choose different amounts

Does work effort by men and women differ on average?

• Work effort: how much time men/women plan to spend in the labor force

• Men– Spend more time in labor force– Have more physical jobs– Have more full time work– All increase wages

So…why are women are in the “low wage” occupations??

• Remember the female occupation formula??• To avoid physical (labor) or nonphysical (high stress)

disamenities• Gain better working conditions

– Bad working conditions usually have high wages to entice people to take job

• Less depreciated knowledge if drop out of labor market for some time– atrophy

Atrophy

• How many of you took 5th grade math?• It was claimed that the shepherd was the shepherd

of 2000 sheep. The shepherd exclaimed, "I am not the shepherd of two thousand sheep!" Pointing to his flock, he added, "If I had that many sheep plus another flock as large as that, then again half as many as I have out there, I would be the shepherd of two thousand sheep." How many sheep were in the shepherd's flock?

• X+X+(1/2X) = 2000 or X = 800

Second Individualist theory

• Status Attainment– Sociologists attempt to link characteristics of a person (race,

sex..) to status in labor force– Pre-market discrimination inhibits people from getting certain

skills (discrimination exists)– BUT choices made by individuals prior to entry to job pushes

men to be more successful

If true…

• Why is the gender gap decreasing???• Are women now making different (better)

choices?• Yes…

– More education– More experience– More On the Job Training– All which increases wages

Institutionalist Theory

• Individual is not at fault…ECONOMY IS– Employers, employees, or customers have a taste

for discrimination

• Mechanisms in the labor market that restrict choice and competition for jobs

• It is how firms demand their labor not how people supply their labor

• Demand side

Types of Institutionalist theories

• Labor market segmenting theories– Wages are determined by the sector one is in– Internal labor market

• Administrative decision of where you are put• Primary sector ( increasing wage, OJT, unions,

promotions)• Secondary sector (constant wage, no OJT, no

unions, dead end job)

– Women almost twice as likely to be in secondary

Second type

• Occupation Segregation– Jobs vary according to the sex composition

• Why?– Employer wants certain types of workers– Employees want to work with certain types of workers– Customers want to deal with certain types of workers

• Graphs (discrimination vs. non-discrimination case)

Ls’

Ls Ls Ls’

Ld Ld

# workers # workers

Wage Wage

Firm Discriminates Firm does not Discriminate

2 1

W2W1W1W2

21

Third type of Institutionalist theory

• Statistical discrimination– Discrimination against a class of persons because

of group rather than individual characteristics– Ex. On average women tend to leave a job after 3

years– Interpretation is that ALL women tend to leave a job

after 3 years– Hard to overcome because it is an attitude

End of Material for Midterm