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MODERN LABOR ECONOMICSTheory and Public PolicyEighth EditionRONALD G. EHRENBERGSchool of Industrial and Labor RelationsCornell UniversityROBERT S. SMITHSchool of Industrial and Labor RelationsCornell UniversityAddisonWesleyBoston San Francisco New YorkLondon Toronto Sydney Tokyo Singapore MadridMexico City Munich Paris Cape Town Hong Kong Montreal

Brief ContentsDetailed ContentsPrefaceviixviiCHAPTER 1IntroductionCHAPTER 2Overview of the Labor MarketCHAPTER 3The Demand for LaborCHAPTER 4Labor Demand ElasticitiesCHAPTER 5Quasi-Fixed Labor Costs15696and Their Effects on DemandCHAPTER 6131Supply of Labor to the Economy:The Decision to WorkCHAPTER 724163Labor Supply: Household Production,the Family, and the Life Cycle203CHAPTER 8Compensating Wage Differentialsand Labor Markets 231CHAPTER 9Investments in Human Capital:Education and TrainingC H APTER 1 0Worker Mobility: Migration, Immigrationand TurnoverCHAPTER l I265310Pay and Productivity: Wage Determinationwithin the Firm344CHAPTER 12Gender, Race, and Ethnicity in the Labor MarketCHAP i ER 13Unions and the Labor MarketCHAPTER 14Inequality in EarningsCHAPTER 15Unemployment423471503Answers to Odd-Numbered Review Questions and ProblemsName IndexSubject Index377537571577v

Detailed ContentsPrefacexviiCHAPTER 1INTRODUCTIONThe Labor Market12Labor Economics: Some Basic Concepts2Positive Economics 3The Models and Predictions of Positive Economics 4Normative Economics 7Normative Economics and Government Policy 9Plan of the Text12EXAMPLE 1.1 POSITIVE ECONOMICS: WHAT DOES IT MEAN TO "UNDERSTAND" BEHAVIOR?APPENDIX 1A STATISTICAL TESTING OF LABOR MARKET HYPOTHESESCHAPTER 2OVERVIEW OF THE LABOR MARKET24The Labor Market: Definitions, Facts, and Trends25The Labor Force and Unemployment 26Industries and Occupations: Adapting to ChangeThe Earnings of Labor 30How the Labor Market Works2934The Demand for Labor 36The Supply of Labor 40The Determination of the WageApplications of the Theory5154247Who Is Underpaid and Who Is Overpaid? 48International Differences in Unemployment 51EXAMPLE 2.1 THE BLACK DEATH AND THE WAGES OF LABOR46EXAMPLE 2.2 ENDING THE CONSCRIPTION OF YOUNG AMERICAN MEN:THE ROLE OF ECONOMISTS 51CHAPTER 3THE DEMAND FOR LABORProfit Maximization5657Marginal Income from an Additional Unit of InputMarginal Expense of an Added Input 6058vii

viiiCONTENTSThe Short-Run Demand for Labor When Both Product and Labor MarketsAre Competitive60A Critical Assumption: Declining MPL 61From Profit Maximization to Labor Demand62The Demand for Labor in Competitive Markets When Other InputsCan Be Varied 67Labor Demand in the Long RunMore Than Two Inputs 6967Labor Demand When the Product Market Is Not Competitive71Maximizing Monopoly Profits 71Do Monopolies Pay Higher Wages? 72Monopsony in the Labor Market73Profit Maximization 73How Do Monopsonists Respond to Supply Shifts and Mandated WageIncreases? 76Policy Application: The Labor Market Effects of Employer Payroll Taxesand Wage Subsidies 79Who Bears the Burden of a Payroll Tax? 79Are Payroll Taxes Responsible for European Unemployment? 82Employment Subsidies as a Device to Help the Poor 83EXAMPLE 3.1THE MARGINAL REVENUE PRODUCT OF COLLEGE FOOTBALL STARS59EXAMPLE 3.2 MONOPSONY AND COMPETITION IN MAJOR-LEAGUEAND NEGRO-LEAGUE BASEBALL75APPENDIX 3A GRAPHIC DERIVATION OF A FIRM'S LABOR DEMAND CURVECHAPTER 4LABOR DEMAND ELASTICITIESThe Own-Wage Elasticity of Demand9697The Hicks-Marshall Laws of Derived Demand 100Estimates of Own-Wage Labor Demand Elasticities 102Applying the Laws of Derived Demand: Inferential AnalysisThe Cross-Wage Elasticity of Demand88104105Can the Laws of Derived Demand Be Applied to Cross-Elasticities?Estimates Relating to Cross-Elasticities 109Policy Application: Effects of Minimum Wage Laws110History and Description 110Employment Effects: Theoretical Analysis 111Employment Effects: Empirical Estimates 115Does the Minimum Wage Fight Poverty? 117Applying Concepts of Labor Demand Elasticity to the Issueof Technological Change 118107

ContentsEXAMPLE 4.1WHY ARE UNION WAGES SO DIFFERENT IN TWO PARTSOF THE TRUCKING INDUSTRY?1 06EXAMPLE 4.2 THE EMPLOYMENT EFFECTS OF THE FIRST FEDERAL MINIMUM WAGEAPPENDIX 4A116INTERNATIONAL TRADE AND THE DEMAND FOR LABOR: CAN HIGH-WAGECOUNTRIES COMPETE?CHAPTER 5ix123QUASI-FIXED LABOR COSTSAND THEIR EFFECTS ON DEMANDNonwage Labor Costs131132Hiring and Training Costs 132Employee Benefits 134The Quasi-Fixed Nature of Many Nonwage Costs 134The Employment/Hours Trade-off136Determining the Mix of Workers and Hours 136Policy Analysis: The Overtime-Pay Premium 137Policy Analysis: Part-Time Employment and Mandated EmployeeBenefits 140Firms' Labor Investments and the Demand for Labor141The Concept of Present Value 143The Multiperiod Demand for Labor 146Constraints on Multiperiod Wage Offers 148General and Specific Training150Specific Training and the Wage Profile 151Implications of the Theory 153Do Employers Ever Pay for General Training?156Hiring Investments 158The Use of Credentials 158Internal Labor Markets 158How Can the Employer Recoup Its Hiring Investments?159EXAMPLE 5.1"RENTING" WORKERS AS A WAY OF COPING WITH HIRING COSTSEXAMPLE 5.2Do UNJUSTDISMISSAL POLICIES REDUCE EMPLOYMENT?142EXAMPLE 5.3APPRENTICESHIP IN THE UNITED STATES AND ELSEWHERE151138EXAMPLE 5.4 WHY DO TEMPORARY-HELP FIRMS PROVIDE FREE GENERAL SKILLS TRAINING?CHAPTER 6SUPPLY OF LABOR TO THE ECONOMY:THE DECISION TO WORK 163Trends in Labor Force Participation and Hours of WorkLabor Force Participation RatesHours of Work 166164164157

XCONTENTSA Theory of the Decision to Work167Some Basic Concepts 168Analysis of the Labor/Leisure Choice 173Empirical Findings on the Income and Substitution EffectsPolicy ApplicationsBudget Constraints with "Spikes" 190Programs with Net Wage Rates of Zero 193Subsidy Programs with Positive Net Wage RatesEXAMPLE 6.1 THE LABOR SUPPLY OF PIGEONSEXAMPLE 6.2Do LARGE187190196171INHERITANCES INDUCE LABOR FORCE WITHDRAWAL?EXAMPLE 6.3 DAILY LABOR SUPPLY AT THE BALLPARK184187EXAMPLE 6.4 LABOR SUPPLY EFFECTS OF INCOME TAX CUTS189EXAMPLE 6.5 STAYING AROUND ONE'S KENTUCKY HOME: WORKERS' COMPENSATION BENEFITSAND THE RETURN TO WORK193EXAMPLE 6.6 WARTIME FOOD REQUISITIONS AND AGRICULTURAL WORK INCENTIVESCHAPTER 7197LABOR SUPPLY: HOUSEHOLD PRODUCTION,THE FAMILY, AND THE LIFE CYCLE 203The Theory of Household Production203Graphing the Model 204Implications of the Model 206The Tripartite Choice: Market Work, Household Work, and LeisureTime Use by Women and MenTwo Substitution Effects 208207207Joint Labor Supply Decisions within the Household210Specialization of Function 211Do Both Partners Work for Pay? 212The Joint Decision and Cross-Effects 212Labor Supply in Recessions: The aDiscouraged" vs. the "Additional* Worker 213Life-Cycle Aspects of Labor Supply216The Labor Force Participation Patterns of Married Women 216The Substitution Effect and When to Work over a Lifetime 218The Choice of Retirement Age 220Policy Application: Child Care and Labor Supply223Child-Care Subsidies 224Child Support Assurance 226EXAMPLE 7.1 WORK AND LEISURE: PAST VS. PRESENT208EXAMPLE 7.2 HUSBANDS, WIVES, NEIGHBORS AND THE END OF THE SIX-HOUR WORKDAYATKELLOGG'S214EXAMPLE 7.3 THEVALUEOFAHOMEMAKER'STIME218

ContentsCHAPTER 8COMPENSATING WAGE DIFFERENTIALSAND LABOR MARKETS 231Job Matching: The Role of Worker Preferences and InformationIndividual Choice and Its Outcomes 232Assumptions and Predictions 234Empirical Tests for Compensating Wage DifferentialsHedonic Wage Theory and the Risk of Injury231236238Employee Considerations 239Employer Considerations 241The Matching of Employers and Employees 242Normative Analysis: Occupational Safety and Health RegulationHedonic Wage Theory and Employee Benefits246251Employee Preferences 251Employer Preferences 253The Joint Determination of Wages and Benefits 255EXAMPLE 8.1 WORKING ON THE RAILROAD: MAKING A BAD JOB GOODEXAMPLE 8.2 PARENTHOOD, OCCUPATIONAL CHOICE, AND RISK238244EXAMPLE 8.3 COMPENSATING WAGE DIFFERENTIALS IN 19TH-CENTURY BRITAINAPPENDIX 8A COMPENSATING WAGE DIFFERENTIALS AND LAYOFFSCHAPTER 9247260INVESTMENTS IN HUMAN CAPITAL:EDUCATION AND TRAINING 265Human Capital Investments: The Basic ModelThe Demand for a College Education267269Weighing the Costs and Benefits of College 269Predictions of the Theory 271Market Responses to Changes in College Attendance 276Education, Earnings, and Postschooling Investments in Human Capital 276Average Earnings and Educational Level 278On-the-job Training and the Concavity of Age/Earnings Profiles 279The Fanning Out of Age/Earnings Profiles 281Women and the Acquisition of Human Capital 282Is Education a Good Investment? 286Is Education a Good Investment for Individuals? 286Is Education a Good Social Investment? 289Is Public Sector Training a Good Social Investment? 297EXAMPLE 9.1 WAR AND HUMAN CAPITAL266EXAMPLE 9.2 DID THE C.I. BILL INCREASE EDUCATIONAL ATTAINMENT FOR RETURNINGWORLD WAR II VETS?274EXAMPLE 9.3 VALUING A HUMAN ASSET: THE CASE OF THE DIVORCING DOCTOR287xi

xiiCONTENTSEXAMPLE 9.4 THE SOCIALLY OPTIMAL LEVEL OF EDUCATIONAL INVESTMENTAPPENOIX 9A A "COBWEB" MODEL OF LABOR MARKET ADJUSTMENT301APPENDIX 9B A HEDONIC MODEL OF EARNINGS AND EDUCATIONAL LEVELCHAPTER 10295305WORKER MOBILITY: MIGRATION,IMMIGRATION, AND TURNOVER 310The Determinants of Worker MobilityGeographic Mobility311311The Direction of Migratory Flows 312Personal Characteristics of Movers 313The Role of Distance 314Skills, the Earnings Distribution, and International MigrationThe Returns to International and Domestic Migration 317Policy Application: Restricting Immigration315321U.S. Immigration History 321Naive Views of Immigration 323An Analysis of the Gainers and Losers 326Do the Overall Gains from Immigration Exceed the Losses? 328Employee Turnover and Job Matching331Effects of Job Tenure and Age 331Other Patterns of Job Mobility 332Are Quits Different from Layoffs? 336International Comparisons 336Is More Mobility Better ? 337Costs of Turnover and the Monopsony Model338EXAMPLE 10.1THE GREAT MIGRATION: SOUTHERN BLACKS MOVE NORTHEXAMPLE 10.2MIGRATION AND ONE'S TIME HORIZONEXAMPLE 10.3ECONOMIC VS. POLITICAL IMMIGRANTS314316318EXAMPLE 10.4 THE MARIEL BOATLIFT AND ITS EFFECTS ON MIAMI'S WAGE ANDUNEMPLOYMENT RATESEXAMPLE 10.5CHAPTER 11328MONOPSONY IN THE COAL FIELDS? PROBABLY NOTPAY AND PRODUCTIVITY: WAGEDETERMINATION WITHIN THE FIRM340344Motivating Workers: An Overview of the FundamentalsThe Employment Contract 346Coping with Information Asymmetries 347Motivating Workers 349Motivating the Individual in a Group 351Compensation Plans: Overview and Guide to theRest of the Chapter 352346

ContentsProductivity and the Basis of Yearly Payxiii353Employee Preferences 353Employer Considerations 354Productivity and the Level of Pay359Why Higher Pay Might Increase Worker Productivity 359Efficiency Wages 360Productivity and the Sequencing of Pay362Underpayment Followed by OverpaymentPromotion Tournaments 366Career Concerns and Productivity 368363Applications of the Theory: Explaining Three Puzzles370Why Do Earnings Increase with Job Tenure? 370Why Do Large Firms Pay More? 372Monopsonistic Behavior by Employers 374EXAMPLE 11.1THE WIDE RANGE OF POSSIBLE PRODUCTIVITIES: THE CASE OF THE FACTORYTHAT COULD NOT CUT OUTPUT345EXAMPLE 11.2 CALORIE CONSUMPTION AND THE TYPE OF PAY351EXAMPLE 11.3 POOR CROUP INCENTIVES DOOM THE SHAKERS357EXAMPLE 11.4 DID HENRY FORD PAY EFFICIENCY WAGES?361EXAMPLE 11.5 DEMANDING EMPLOYERS, OVERWORKED EMPLOYEES, AND NEGLECTED FAMILIESCHAPTER 12GENDER, RACE, AND ETHNICITY IN THE LABOR MARKETMeasured and Unmeasured Sources of Earnings Differences379Earnings Differences by Gender 379Earnings Differences betiveen Black and White AmericansEarnings Differences by Ethnicity392Theories of Market Discrimination388394Personal Prejudice Models: Employer Discrimination 395Personal Prejudice Models: Customer Discrimination 399Personal Prejudice Models: Employee Discrimination 400Statistical Discrimination 402Noncompetitive Models of Discrimination 403A Final Word on the Theories of Discrimination 407Federal Programs to End Discrimination408Equal Pay Act of 1963 408Title VII of the Civil Rights Act 409The Federal Contract Compliance Program 411Effectiveness of Federal Antidiscrimination ProgramsEXAMPLE 12.1EXAMPLE 12.2 THE GENDER EARNINGS CAP ACROSS COUNTRIESEXAMPLE 12.3414BIAS IN THE SELECTION OF MUSICIANS BY SYMPHONY ORCHESTRAS385FEAR AND LATHING IN THE MICHIGAN FURNITURE INDUSTRY401382368377

xivCONTENTSEXAMPLE 12.4 COMPARABLE WORTH AND THE UNIVERSITY412APPENDIX 12A ESTIMATING "COMPARABLE-WORTH" EARNINGS GAPS: AN APPLICATIONOF REGRESSION ANALYSISCHAPTER 13419UNIONS AND THE LABOR MARKETUnion Structure and Membership423424International Comparisons of Unionism 424The Legal Structure of Unions in the United States426Constraints on the Achievement of Union Objectives429The Monopoly-Union Model 431The Efficient-Contracts Model 432The Activities and Tools of Collective Bargaining436Union Membership: An Analysis of Demand and Supply 437Union Actions to Alter the Labor Demand Curve 442Bargaining and the Threat of Strikes 444Bargaining in the Public Sector: The Threat of Arbitration 449The Effects of Unions452The Theory of Union Wage Effects 452Evidence of Union Wage Effects 456Evidence of Union Total Compensation Effects 458The Effects of Unions on Employment 459The Effects of Unions on Productivity and Profits 459Normative Analyses of Unions 460EXAMPLE 13.1 THE EFFECTS OF DEREGULATION ON TRUCKING AND AIRLINESEXAMPLE 13.2 PERMANENT REPLACEMENT OF STRIKERSEXAMPLE 13.3Do RIGHT-TO-WORKLAWS MATTER?447461APPENDIX 13A ARBITRATION AND THE BARGAINING CONTRACT ZONECHAPTER 14INEQUALITY IN EARNINGSMeasuring Inequality440466471472Earnings Inequality since 1980: Some Descriptive Data475The Occupational Distribution 476Changes in Relative Wages 478Relative Changes in Hours of Work 478Growth of Earnings Dispersion within Human Capital GroupsSummarizing the Dimensions of Growing Inequality 481The Underlying Causes of Crowing InequalityChanges in Supply 483Changes in Institutional Forces 485Changes in Demand 486482480

ContentsInternational Comparisons of Changing Inequalityxv492Why Did Inequality Grow Most in Great Britain and the United States? 493Causes and Effects of Different Real Wage Changes amongthe Unskilled 495EXAMPLE 14.1LABOR'S SHARE OF TOTAL INCOME: "RAW" LABOR VS.HUMAN CAPITALEXAMPLE 14.2482CHANCES IN THE PREMIUM TO EDUCATION AT THE BEGINNINGOF THE TWENTIETH CENTURYAPPENDIX 14ACHAPTER 15491LORENZ CURVES AND CINI COEFFICIENTSUNEMPLOYMENT499503A Stock-Flow Model of the Labor Market 505Sources of Unemployment 506Rates of Flow Affect Unemployment LevelsFrictional Unemployment507509The Theory of Job Search 510Effects of Unemployment Insurance Benefits 513Structural Unemployment516Occupational and Regional Unemployment Rate Differences 517International Differences in Long-Term Unemployment 519Do Efficiency Wages Cause Structural Unemployment? 519Demand-Deficient (Cyclical) Unemployment522Downward Wage Rigidity 523Financing U.S. Unemployment CompensationSeasonal Unemployment526529When Do We Have Full Employment?530Defining the Natural Rate of Unemployment 531Unemployment and Demographic Characteristics 531Demographic Change and the Natural Rate 532What Is the Natural Rate? 533EXAMPLE 15.1THE UNEMPLOYMENT INSURANCE BONUS EXPERIMENTEXAMPLE 15.2UNEMPLOYMENT INSURANCE AND SEASONAL UNEMPLOYMENT:A HISTORICAL PERSPECTIVE530Answers to Odd-Numbered Review Questions and ProblemsName IndexSubject Index571577537515

The Hicks-Marshall Laws of Derived Demand 100 Estimates of Own-Wage Labor Demand Elasticities 102 Applying the Laws of Derived Demand: Inferential Analysis 104 The Cross-Wage Elasticity of Demand 105 Can the Laws of Derived Demand Be Applied to Cross-Elasticities? 107 Estimates Relating to Cross-Elasticities 109 Policy Application: Effects of .

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