School Of Industriell And Labor Relations Cornell University

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inwiiirniGlobal EditionTwelfth EditionRonald G. EhrenbergSchool of Industriell and Labor RelationsCornell UniversityRobert S. SmithSchool of Industrial and Labor RelationsCornell UniversityPEARSONBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Säo Paulo Sydney HongKong Seoul Singapore Taipei Tokyo


ContentsPreface18CHARTER 1INTRODUCTION23The Labor Market 24Labor Economics: Some Basic Concepts 24Positive Economics 25The Models and Predictions of Positive Economics 26Normative Economics 29Normative Economics and Government Policy 32Efficiency versus Equity 33Plan of the Text 34SiSuHHÖMS Positive Economics: What Doos It Mean to "Understand"Behavior? 27Review QuestionsProblems3536Selected Readings 37Appendix 1A Statistical Testing of Labor Market HypothesesCHARTER 2OVERVIEW OF THE LABOR MARKET3847The Labor Market: Definitions, Facts, and Trends 48The Labor Force and Unemployment 49Industries and Occupations: Adapting to Change 52The Earnings of Labor 53How the Labor Market Works 58The Demand for Labor 59The Supply of Labor 63The Determination of the Wage 65Applications of the Theory 70Who Is Underpaid and Who Is Overpaid? 71Unemployment and Responses to Technological Change across Countries 74 TTiluTlly-niWReal Wages across Countries and Time: Big Macs per HourWorked 56lOSnSSääBI The Black Death and the Wages of LaborBSaZElBKJul6Forced Labor in Colonial Mozambique6973

7ContentsEmpirical StudyPay Levels and the Supply of Military Officers: ObtainingSample Variation from Cross-Section Data 76Review Questions 77Problems79Selected ReadingsCHARTER 380THE DEMAND FQR LABOR81Profit Maximization 82Marginal Income from an Additional Unit of InputMarginal Expense of an Added Input 8483The Short-Run Demand for Labor When Both Product andLabor Markets Are Competitive 85A Critical Assumption: Declining MPL 86From Profit Maximization to Labor Demand 87The Demand for Labor in Competitive Markets When Other InputsCan Be Varied 92Labor Demand in the Long Run 92More Than Two Inputs 95Labor Demand When the Product Market Is Not Competitive 96Maximizing Monopoly Profits 96Do Monopolies Pay Higher Wages? 97Policy Application: The Labor Market Effects of Employer Payroll Taxesand Wage Subsidies 98Who Bears the Bürden of a Payroll Tax? 98Employment Subsidies as a Device to Help the Poor 100The Marginal Revenue Product of College Football Stars 85Coal Mining Wages and Capital Substitution 94Empirical StudyDo Women Pay for Employer-Funded Matemity Benefits? UsingCross-Section Data Over Time to Analyze "Differences inDifferences" 102Review QuestionsProblems106Selected ReadingsAppendix 3ACHARTER 4105107Graphical Derivation of a Firm's Labor Demand CurveLABOR DEMAND ELASTICITIES117The Own-Wage Elasticity of Demand 118The Hicks-Marshall Laws of Derived Demand 120Estimates of Own-Wage Labor Demand Elasticities 123Applying the Laws of Derived Demand: Inferential Analysis 125108

8ContentsThe Gross-Wage Elasticity of Demand 127Can the Laws of Derived Demand Be Applied to Cross-Elasticities? 128Estimates Relating to Cross-Elasticities 130Policy Application: Effects of Minimum Wage Laws 131History and Description 131Employment Effects: Theoretical Analysis 132Employment Effects: Empirical Estimates 136Does the Minimum Wage Fight Poverty? 138"Living Wage" Laws 139Applying Concepts of Labor Demand Elasticity to the Issue ofTechnological Change 140Example 4.1 Why Are Union Wages So Different in Two Parts of the TruckingIndustry? 126Example 4.2 The Employment Effects of the First Federal Minimum Wage 137Example 4.3 Gross Complementarity in the 19th Century Apparel Industry 142Empirical StudyEstimating the Labor Demand Curve: Time Series Data andCoping with "Simultaneity" 146Review Questions 149Problems 150Selected Readings 151CHARTER 5FRICTIONS IN THE LABOR MARKET 152Frictions on the Employee Side of the Market 153The Law of One Price 153Monopsonistic Labor Markets: A Definition 156Profit Maximization under Monopsonistic Conditions 157How Do Monopsonistic Firms Respond to Shifts in the Supply Curve? 161Monopsonistic Conditions and the Employment Response to MinimumWage Legislation 164Job Search Costs and Other Labor Market Outcomes 165Monopsonistic Conditions and the Relevance of the CompetitiveModel 167Frictions on the Employer Side of the Market 168Categories of Quasi-Fixed Costs 168The Employment/ Hours Trade-Off 172Training Investments 176The Training Decision by Employers 176The Types of Training 177Training and Post-Training Wage Increases 178Employer Training Investments and Recessionary Layoffs 180

Contents9Hiring Investments 181The Use of Credentials 181Internal Labor Markets 183How Can the Employer Recoup Its Hiring Investments? 185g ffTTTKl Does Employment Protection Legislation Protect Workers? 169FffTffWHFff'l "Renting" Workers as a Way of Coping with Hiring Costs 174 IrTMrffTmi Why Do Temporary-Help Firms Provide Free General SkillsTraining? 182Empirical studyWhat Explains Wage Differences for Workers Who Appear Similar?Using Panel Data to Deal with Unobserved Heterogeneity 184Review Questions 186Problems187Selected ReadingsCHARTER 6189SUPPLY OF LABOR TO THE ECONOMY: THE OECISION TO WORKTrends in Labor Force Participation and Hours of WorkLabor Force Participation Rates 191Hours of Work 193190190A Theory of the Decision to Work 195Some Basic Concepts 195Analysis of the Labor/Leisure Choice 199Empirical Findings on the Income and Substitution Effects 214Policy Applications 217Budget Constraints with "Spikes" 217Programs with Net Wage Rates of Zero 220Subsidy Programs with Positive Net Wage Rates 224Example 6.1 The Labor Supply of New York City Taxi Drivers 199Example 6.ZDo Large Inheritances Induce Labor Force Withdrawal? 209Example 6.3 Daily Labor Supply at the Ballpark 215Example 6.4Labor Supply Effects of Income Tax Cuts 216Example 6.5Staying Around One's Kentucky Home: Workers' CompensationBenefits and the Return to Work 220Example 6.6Wartime Food Requisitions and Agricultural Work Incentives 227Empirical StudyEstimating the Income Effect Among Lottery Winners: The Searchfor "Exogeneity" 228Review QuestionsProblems229231Selected Readings232

10ContentsCHARTER 7LABOR SUPPLY: HOUSEHOLD PRODUCTION, THE FAMILY,AND THE LIFE CYCLE 233A Labor Supply Model That Incorporates Household Production 233The Basic Model for an Individual: Similarities with the Labor-LeisureModel 234The Basic Model for an Individual: Some New Implications 236Joint Labor Supply Decisions within the Household 239Specialization of Function 240Do Both Partners Work for Pay? 241The Joint Decision and Interdependent Productivity at Home 243Labor Supply in Recessions: The "Discouraged" versus the"Added" Worker 243Life Cycle Aspects of Labor Supply 247The Substitution Effect and When to Work over a Lifetime 247The Choice of Retirement Age 249Policy Application: Child Care and Labor Supply 254Child-Care Subsidies 254Child Support Assurance 257Example 7.1Obesity and the Household Production Model 237Example 7.2Child Labor in Poor Countries 245Example 7.3How Does Labor Supply Respond to Housing Subsidies? 249Empirical Study The Effects of Wage Increases on Labor Supply (and Sleep):Time-Use Diary Data and Sample Selection Bias 260CHARTER 8Review Questions262Problems 264Selected Readings266COMPENSATIO WAGE DIFFERENTIALS AND LABOR MARKETS267Job Matching: The Role of Worker Preferencesand Information 267Individual Choice and Its Outcomes 268Assumptions and Predictions 270Empirical Tests for Compensating Wage Differentials 273Hedonic Wage Theory and the Risk of Injury 274Employee Considerations 275Employer Considerations 277The Matching of Employers and Employees 279Normative Analysis: Occupational Safety and Health RegulationHedonic Wage Theory and Employee Benefits 288Employee Preferences 288283

Contents11Employer Preferences 290The Joint Determination of Wages and Benefits 292Example 8.1Working on the Railroad: Making a Bad Job Good 274Example 8.2Parenthood, Occupational Choice, and Risk 281Example 8.3Indentured Servitude and Compensating Differentials 283Empirical StudyHow Risky are Estimates of Compensating Wage Differentials forRisk? The "Errors in Variables" Problem 294Review Questions 296Problems 297Selected ReadingsAppendix 8ACHARTER 9298Compensating Wage Differentials and Layoffs 299INVESTMENTS IN HUMAN CAPITAL: EDUCATION AND TRAINING 304Human Capital Investments: The Basic Model 306The Concept of Present Value 306Modeling the Human Capital Investment Decision 308The Demand for a College Education 310Weighing the Costs and Benefits of College 310Predictions of the Theory 311Market Responses to Changes in College Attendance 317Education, Lamings, and Post-Schooling Investments in HumanCapital 318Average Eamings and Educational Level 318On-the-Job Training and the Concavity of Age/Earnings Profiles 321The Fanning Out of Age/Earnings Profiles 323Women and the Acquisition of Human Capital 323Is Education a Good Investment? 328Is Education a Good Investment for Individuais? 328Is Education a Good Social Investment? 331Is Public Sector Training a Good Social Investment? 339Example 9.1 War and Human Capital 305Example 9.2Can Language Affect Investment Behavior? 313Example 9.3Example 9.4Did the G.I. Bill Increase Educational Attainment for ReturningWorld War II Vets? 315Valuing a Human Asset: The Case of the Divorcing Doctor 329Example 9.5The Socially Optimal Level of Educational Investment 337Empirical studyEstimating the Returns to Education Using a Sample ofTwins: Coping with the Problem of Unobserved Differencesin Ability 340

12ContentsReview Questions342Problems 343Selected Readings344Appendix 9ACHARTER 10A "Cobweb" Model of Labor Market AdjustmentWQRKER MOBILITY: MIGRATION, IMMIGRATION, AND TÜRNOVERThe Determinants of Worker Mobility345349350Geographie Mobility 351The Direction of Migratory Flows 351Personal Characteristics of Movers 352The Role of Distance 354The Earnings Distribution in Sending Countries and InternationalMigration 354The Returns to International and Domestic Migration 356Policy Application: Restricting Immigration 359U.S. Immigration History 360Naive Views of Immigration 363An Analysis of the Gainers and Losers 365Do the Overall Gains from Immigration Exceed the Losses? 371Employee Turnover 374Wage Effects 374Effects of Employer Size 375Gender Differences 376Cyclical Effects 376Employer Location 377Is More Mobility Better? 377Example 10.l The Great Migration: Southern Blacks Move North 353Example 10.2 Migration and One's Time Horizon 355Example 10.3 The Mariel Boatlift and Its Effects on Miami's Wageand Unemployment Rates 370Example 10.4 Illegal Immigrants, Personal Discount Rates, and Crime 373Empirical StudyDo Political Refugees Invest More in Human Capital thanEconomic Immigrants? The Use of Synthetic Cohorts 378Review Questions 380Problems 381Selected ReadingsCHARTER 11382RAY AND PR0DUCTIVITY: WAGE DETERMINATION WITHIN THE FIRMMotivating Workers: An Overview of the FundamentalsThe Employment Contract 385385383

Contents13Coping with Information Asymmetries 386Motivating Workers 389Motivating the Individual in a Group 391Compensation Plans: Overview and Guide to the Rest ofthe Chapter 393Productivity and the Basis of Yearly Pay 393Employee Preferences 393Employer Considerations 395Productivity and the Level of Pay 401Why Higher Pay Might Increase Worker Productivity 401Efficiency Wages 403Productivity and the Sequencing of Pay 404Underpayment Followed by Overpayment 404Promotion Tournaments 408Career Concerns and Productivity 410Applications of the Theory: Explaining Two Puzzles 412Why Do Earnings Increase with Job Tenure? 412Why Do Large Firms Pay More? 414Example 11.1 The Wide Range of Possible Productivities: The Case of the FactoryThat Could Not Cut Output 384Example 11.2 Calorie Consumption and the Type of Pay 390Example 1 1.3 The Effects of Low Relative Pay on Worker Satisfaction 392Example 1 1.4Example 11.5Example 11.6Poor Group Incentives Doom the Shakers 397Did Henry Ford Pay Efficiency Wages?The "Rat Race" in Law Firms 410402Empirical Study Are Workers Willing to Pay for Fairness? Using LaboratoryExperiments to Study Economic Behavior 416CHAPTER 12Review QuestionsProblems 419418Selected Readings420BENDER, RACE, AND ETHNICITY IN THE LABOR MARKET421Measured and Unmeasured Sources of EarningsDifferences 422Earnings Differences by Gender 423Earnings Differences between Blackand White Americans 432Earnings Differences by Ethnicity 438Theories of Market Discrimination 440Personal-Prejudice Models: Employer Discrimination 441

14ContentsPersonal-Prejudice Models: Customer Discrimination 446Personal-Prejudice Models: Employee Discrimination 446Statistical Discrimination 447Noncompetitive Models of Discrimination 450A Final Word on the Theories of Discrimination 454Federal Programs to End Discrimination 454Equal Pay Act of 1963 454Title VII of the Civil Rights Act 455The Federal Contract Compliance Program 459Effectiveness of Federal Antidiscrimination Programs 461Example 1 2.1 Bias in the Selection of Musicians by Symphony Orchestras 427Example 1 2.2 Race Discrimination May "Strike" When Few Are Looking: TheCase of Umpires in Major League Baseball 437Example 1 2.3 Fear and Lathing in the Michigan Furniture Industry 448Example 1 2.4 Comparable Worth and the University 458Empirical StudyCan We Catch Discriminators in the Act? The Use of FieldExperiments in Identifying Labor Market Discrimination 462Review Questions 465Problems 466Selected Readings 467Appendix 12ACHARTER 13Estimating Comparable-Worth Earnings Gaps: AnApplication of Regression Analysis 468UNIONS AND THE LABOR MARKET 472Union Structure and Membership 473International Comparisons of Unionism 473The Legal Structure of Unions in the United States 475Constraints on the Achievement of Union Objectives 479The Monopoly-Union Model 481The Efficient-Contracts Model 483The Activities and Tools of Collective Bargaining 487Union Membership: An Analysis of Demand and Supply 487Union Actions to Alter the Labor Demand Curve 492Bargaining and the Threat of Strikes 494Bargaining in the Public Sector: The Threat of Arbitration 499The Effects of Unions 502The Theory of Union Wage Effects 503Evidence of Union Wage Effects 506Evidence of Union Total Compensation Effects 508The Effects of Unions on Employment 509

Contents15The Effects of Unions on Productivity and Profits 510Normative Analyses of Unions 511Example 13.1 A Downward Sloping Demand Curve for Football Players? 480Example 13.2 The Effects of Deregulation on Trucking and Airlines 491Example 13.3 Permanent Replacement of Strikers 497Empirical StudyWhat Is the Gap Between Union and Nonunion Pay? TheImportance of Replication in Producing Credible Estimates 514Review Questions 516Problems517Selected ReadingsAppendix 13ACHARTER 14518Arbitration and the Bargaining Contract Zone 519UNEMPLOYMENT524A Stock-Flow Model of the Labor Market 526Sources of Unemployment 527Rates of Flow Affect Unemployment Levels 528Frictional Unemployment 531The Theory of Job Search 532Effects of Unemployment Insurance Benefits 535Structural Unemployment 539Occupational and Regional Unemployment Rate Differences 539International Differences in Long-Term Unemployment 541Do Efficiency Wages Cause Structural Unemployment? 542Demand-Deficient (Cyclical) Unemployment 545Downward Wage Rigidity 545Financing U.S. Unemployment Compensation 549Seasonal Unemployment 551When Do We Have Füll Employment? 553Defining the Natural Rate of Unemployment 553Unemployment and Demographic Characteristics 554What Is the Natural Rate? 555Example 14.1 Is Unemployment Self-Perpetuating? 534Example 14.2Empirical StudyUnemployment Insurance and Seasonal Unemployment:A Historical Perspective 552Do Reemployment Bonuses Reduce Unemployment?The Results of Social Experiments 556Review QuestionsProblems558559Selected Readings560

16ContentsCHARTER 15INEQUAUTY IN EARNINGS561Measuring Inequality 562Earnings Inequality Since 1980: Some Descriptive Data 565The Increased Returns to Higher Education 569Growth of Earnings Dispersion within Human-Capital Croups 570The Underlying Causes of Growing Inequality 572Changes in Supply 573Changes in Demand: Technological Change 575Changes in Demand: Earnings Instability 578Changes in Institutional Forces 579Example 1S.1 Differences in Earnings Inequality across DevelopedCountries 569Example 1 5.2 Changes in the Premium to Education at the Beginning of theTwentieth Century 571Empirical StudyDo Parents' Earnings Determine the Earnings of Their Children?The Use of Intergenerational Data in Studying EconomicMobiii ty 580Review Questions 581Problems 583Selected ReadingsAppendix 15ACHARTER 16584Lorenz Curves and Gini Coefficients585THE LABOR-MARKET EFFECTS OF INTERNATIONAL TRADE AND PRODUCTIONSHARING589Why Does Trade Take Place? 590Trade between Individuais and the Principle of ComparativeAdvantage 590The Incentives for Trade across Different Countries 592Effects of Trade on the Demand for Labor 596Product Demand Shifts 597Shifts in the Supply of Alternative Factors of ProductionThe Net Effect on Labor Demand 601Will Wages Converge across Countries? 605Policy Issues 607Subsidizing Human-Capital Investments 608Income Support Programs 609Subsidized Employment 610How Narrowly Should We Target Compensation? 611Summary 614599

ContentsExample 16.1The Growth Effects of the Openness to Trade: Japan's SuddenMove to Openness in 1859 597Example 16.2Could a Quarter of American Jobs Be Offshored? Might YourFuture Job Be among Them? 603Empirical StudyEvaluating European Active Labor Market Policies: The Use ofMeta-Analysis 612Review QuestionsProblems 615614Selected Readings616Answers to Odd-Numbered Review Questions and ProblemsName IndexSubject Index66767361717

The Hicks-Marshall Laws of Derived Demand 120 Estimates of Own-Wage Labor Demand Elasticities 123 Applying the Laws of Derived Demand: Inferential Analysis 125 . 8 Contents The Gross-Wage Elasticity of Demand 127 Can the Laws of Derived Demand Be Applied to Cross-Elasticities? 128 Estimates Relating to Cross-Elasticities 130 Policy Application .

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