ASPECTS OF NEO-CLASSICAL THEORY

REGARDING LABOR SUPPLY AND DEMAND, UNIONS, AND MIGRATION

LABOR SUPPPLY AND DEMAND

I Essence of theory is individual choice: assuming that individuals make rational decisions so as to maximize whatever goal they have; all of this is done in whatever environment may exist

---Individuals supply labor; maximize their utility, which is a combination of income (goods) and leisure. The environment they face is a set of jobs and various wage rates and a limit on the number of hours (days) in a day (year).

---Business firms maximize profits by selling goods at less than the cost of producing them---production requires inputs, including labor, thus the demand labor, which involves maximizing output for a given cost (minimizing cost for a given output)

II Labor Supply

Individual makes the choice in short and long run.

---Short run: choice of hours and participation

---Long run: choice of hours, participation and labor supply (# of children)

(Occupational choice: a function of wages, cost of training, and psychic attributes of job…below)

Short run

---hours…..based on the labor-leisure choice, leading to a discussion of income and substitution effects, and the extent to which leisure is a normal good Example: implications of increased welfare

---participation…..usually thought of in terms of nature of attachment to the labor force via primary and secondary workers



Long run

---hours>>>>>decline in hours a matter of opting for leisure (as a normal good) H. Greg Lewis example>>>>

from "Hours of and Hour’s of Leisure" 1971 collection of readings

"Let me summarize the preceding discussion in the language of a supply-demand model: On the supply side there is a stable, negatively inclined long-run schedule relating average hours of work per head to the average real wage rate. On the demand side there is, to a first approximation, an infinitely elastic schedule involving the same variables. With long-run growth of the economy., the demand schedule has move upward along the real wage rate axis tracing out the observed hours of work-real wage rate points on the stable long-run supply schedule (except during times of substantial unemployment or effective legislation affecting hours of work when the points are off the supply schedule).
 
 

---participation>>>>>decline for men (leisure as a normal good)

increase for women>>>>>>>enter theory of time allocation via the concept of a household production function…ARE MEN DIFFERENT FROM WOMEN IN REGARD TO TASTES??? NO, SAY ECONOMISTS

---enter the concept of the Household Output Function

= f (market goods, time in the home) ---supply>>>>>>>># of children a function of cost and utility of children
 
 

Occupational Choice

---major issue around Theory of Human Capital (i.e., focus on income maximization)

---Nature of job, with focus on risk assessment:

risk aversion leads to higher pay for riskier jobs---

employers calculate the cost of improving safety versus the loss in profits….and employers who find it hard to reduce safety employ workers who are less risk averse, at a higher wage

from Borjas 2000….Different firms have different isoprofit curves and different workers have different indifference curves. The labor market marries workers who dislike risk with firms that find it easy to provide a safe environment, and workers whose do not mind risk as much with firms that find it difficult to provide a safe environment…

III Demand for Labor

Arises from the profit seeking desires of the firm, i.e., demand for labor derived…. and is a function of labor productivity (in a physical sense) and value of labor’s product (a function of product price)

Marginal Productivity Theory:

short run…..usually assumes a fixed factor (capital), with increasing, decreasing and negative returns to labor; marginal productivity curve provides the basis for the demand curve for labor, once we know the VALUE of the marginal product

Implications of Marginal Productivity Theory

employment a function of;

(a) wages (lower with higher wages),

(b) productivity (higher with increased productivity), and

(c) capital intensity (higher with more capital)

long run….no longer any fixed factor>>>>>>changes in wages now will impact labor in terms of substitution of capital for labor……

I.E., demand curve for labor more elastic in the long run
 
 


NEOCLASSICAL PERSPECTIVE ON UNIONS

Role of UNIONS

Discussed mostly at the start of 20th Century…..with a variety of views…revolutionary, friendly-up-lift, business, corrupt rip-off institutions

---business view dominates….particularly in United States

Explaining Union Growth

Ashenfelter and Pencavel…..union’s provide services (essentially wages and employment security) membership has its costs…..dues, time, boss retaliation…these, coupled with political climate (% of Democrats in House) successful in explaining growth 1900-1960

Enter stagnation thesis, without anticipating decline beginning in late 1970s

Neumann and Reissman…..govt provided services take advantage from unions…..

Nature of Union Demands

Three possibilities….given a downward sloping demand curve..

---employment…at the expense of wages

---wages….at the expense of employment

---wage bill……….maximize employment times wages

each of the above made easier with an inelastic demand for labor…all of which leads to the following efforts on the part of unions:

union label

feather bedding

reduce the elasticity of supply of other factors

(importance of being small)

Nature of Union Effects
 
 

Main focus on wages……higher 5-25%, depending on time, union, economic conditions…..but clearly, unions raise wages above what they would have been>>>>>>>PUSHES MORE WORKERS INTO NON UNIONIZED SECTOR….THUS INCREASING WAGE INEQUALITY

Neoclassical view on fringe benefits…..worker choice…(just like hours)

Assumes negative impact on productivity…via arbitrary work rules, etc

public policy….Union support for minimum wages, anti-free trade, and other government interference with the market>>>>>>>>>bad social legislation





NEOCLASSICAL VIEWS ON DISCRIMINATION

Discrimination is an "aversion," i.e., a TASTE, WHICH WHEN INDULGED COSTS THE DISCRIMINATOR, who may be

EMPLOYER, or WORKER or CONSUMER

1) PROBLEM WITH EMPLOYER IS FORCE OF COMPETITION

2) WITH WORKER DISCRIMINATION, WHITE WORKERS WOULD LOSE OUT, UNLESS THERE WERE AMPLE SUPPLIES OF EACH ETHNIC GROUP

3) CONSUMER DISCRIMINATION HARD TO CONTROL OTHER THAN BY GOVERNMENT LEGISLATION

MAJOR VARIATIONS…..

---SEX DISCRIMINATION IN SOME (READ GOOD) JOBS, WHICH PUSHES WOMEN INTO LOWER PAYING JOBS

---STATISTICAL DISCRIMINATION…A FUNCTION OF EMPLOYER EFFORTS TO MAXIMIZE PROFITS, AND MINIMIZE TRAINING COSTS AND HIRING COSTS

---AND MARKET IMPERFECTIONS….relevant with "one company town"….THEORY OF THE FIRM AND INDUSTRY CAN SHOW MONOPSONISTIC DISCRIMINATION…..I.E., WAGES LOWER THAN MARGINAL PRODUCT…OFTEN REFEREED TO AS "EXPLOITATION" ---BUT NOT IN THE MARXIST SENSE

MONOPOLY CAN YIELD THE SAME TYPE OF EXCESS PROFITS, BUT OFTEN ASSUMED THAT UNIONS CAN GET AT LEAST SOME OF THIS…..
 
 






IMMIGRATION

START WITH>>>>>>>>INTERNAL MIGRATION

The notion of "mobility" is highly desired in any competitive market>>>> and To the extent that such mobility is voluntary, it’s really a human capital decision…..with costs and benefits, a la basic diagram

United States Migration Patterns

  1. rural to urban----1850 about 85% of population rural, today about 20-25 rural, with some stability since 1970
  2. Black movement (part of rural to urban)…..moving out of agriculture and into manufacturing…..and away from segregation in the south…..movement back to the south after 1970s
  3. Regional…..out of "rust" belt into "sun" or "gun" belt
And economic motives have been a dominant factor in all of this…as will be the case for international movements discussed below

Who are the movers??

Answer in human capital model

Cost of move and duration of returns>>>>>

---AGE the single most important factor: 20-24 peak age, by 35 rate is ½ and over 45 1/3 of peak age rates

argument is that costs are less (fewer family ties and responsibilities)

young workers have less specific OJT (that is, knowing your way around)

---after age, EDUCATION the best indicator…..(job market info and incentives that flow from returns to education)

----Finally, mobility is negatively related to "DISTANCE"….a proxy for costs

INTERNATIONAL MIGRATION

 
 
Same arguments GENERALLY hold

(major exception depending on nature of country of origin):

The earnings distribution of the home country may impact of the nature of out-migration>>>>>>

----In countries with a relatively high degree of income EQUALITY relative to destination country, relatively high rates of return to skilled workers...i.e., skilled leave Sweden for the US

----And with a high degree of inequality, unskilled may be more likely to leave for country with greater EQUALITY....i.e., unskilled in Mexico off the US

********************************************************

SUPPLEMENTAL MATERIAL

********************************************************

HOW DO MIGRANTS TYPICALLY DO IN DESTINATION COUNTRY?

Hard to compare with those left behind---little data available;

Comparison is thus made with domestic works of similar age, education….

    1. wages are initially lower: Asia and Europe 25%, Latin America 35%
2. for migrants entering US in the 1960s, wages now (1980s) 8-10% higher ---why lower at first????? Given qualifications, need to "learn the ropes," and the language….but higher because of higher motivation typically associated with migrants 3. pattern alters for migrants entering in 1970s and later
 
 
 
 
TO WHAT EXTENT SHOULD MIGRATION BE CONTROLLED
(i.e., if mobility is a good thing……..)

 
 
BRIEF HISTORY OF UNITED STATES MIGRATION LAWS
    1. first 140 years---till WW I---open borders (except for Asians and convicts); and very large migration after 1840, coinciding with U.S. Industrial growth….
    2. In 1920s quotas imposed…reducing immigration from eastern and southern Europe…and more formally with respect to Asians…
    3. In 1965 Immigration and Nationality Act---abolished quota system based on national origin
Ok for spouses, children and parents of citizens (family reunification…..this, along with filling labor market scarcities were seen as the basis for permitting immigration…. Otherwise….ILLEGAL TWO TYPES OF ILLEGAL IMMIGRAION: 50/50 IN NUMBERS…
    1. those entering legally, but staying beyond their welcome, including such folks as students, temporary workers, and visitors (mostly form Western hemisphere)…..when such individuals are offered a good job, they must return home, and suffer through an "adjustment of status" which is often longer than the job will wait
    2. illegal entrants
the latter, coupled with HIGH UNEMPLOYMENT OF 1970s, (in 1981 a select committee on immigration argued that unemployment would fall from 6 to 3.7% without the illegals). Lead to the 1986 Simpson/Mazolli act…..(tried to put penalties on employers), and provided for a grant of amnesty to workers who had been in the country illegally since 1981 and agricultural workers and their families working over 90 days a year….a total of about 2.7 million workers issues are alive again today….a la the concept of "amnesty"

(also, in the past unions used to be opposed to liberal immigration policies---fearful of comeptition---while today they favor legalization and are making efforts to unionize such workers, who without legal protection are at the mercy of employers, giving the latter a further advantage over domestic labor
 
 

PROBLEMS WITH ILLEGAL IMMIGRANTS

  1. taking U.S. worker’s jobs and
  2. social/welfare costs at both the NATIONAL and LOCAL level
US JOBS…
    1. taking jobs on a one for one basis
    2. no impact because they take "grunge" jobs
both arguments essentially incorrect… Focusing on only supply effects ignores capital movements and macro-economic effects…. i.e., increased labor, output, lower prices, greater profits,

and hence greater employment economy wide….

Some empirical estimates: For the period 1975-85, focusing on workers with less that 12 years of education…..
    1. 17-20 % of migrant workers concentrated in "host" cities and areas
    2. little impact found on white/black wage ratios
    3. approximately 2% decline in wages, with
    4. other immigrants most effected
    5. little impact on employment levels
    6. but native workers may be leaving and thus impacting other areas
IMPACT ON SOCIAL WELFARE EXPENSES
    1. immigrants pay taxes
    2. immigrants use services
    3. is there a disproportionate effect??
    1. pre 1990 evidence is sketchy, but best guess is that immigrants pay their way
    2. these conclusions may be changing