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Labour Economics - Essay Example

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Summary
There is a long history in labor economics and industrial relations of studying wages in specific labor markets. This interest dates back to early micro studies of labor markets that emphasized heterogeneity in wage policies across employers. Some more recent work has also studied the issue of within- versus between-employer wage differentials in the United States…
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Labour Economics

Download file to see previous pages... To get the industry labor supply and labor demand functions these must be added.
Minimum wages are intended to benefit low-paid workers. In practice a job is described by a set of characteristics, so in addition to the wage rate features such as the hours of work and the effort level required are relevant. If the impact of the minimum wage is to create an excess supply of workers, employers may benefit by degrading the non-wage aspects of the employment package. More effort, longer hours, fewer perks and a less agreeable working environment can all be imposed without a firm losing its workers. As indicated above, in response to the minimum wage employers raise hours of work to such an extent that the benefit of a higher wage is more than offset. Consequently, both the workers remaining in employment and those who become unemployed are made worse-off by the minimum wage. It also results in a loss of profit for the firm and introduces aggregate inefficiency. In this situation, there is nothing to commend a minimum wage policy. Under a fairly weak condition, a monopsonist responds to a minimum wage by reducing hours, which is a double bonus for those with jobs. Unlike the standard analysis of monopsony, which shows that a minimum wage, if set below the marginal revenue product of labor, is efficiency enhancing, it turns out that when hours are a choice variable there may be a loss of efficiency. A minimum wage on its own can no longer replicate the perfectly competitive outcome, but when combined with a limit on hours of work, a first-best outcome can be achieved. Prior discussions of minimum wages and the contrast between competition and monopsony have focused on whether the minimum wage will raise or lower employment - with it taken as granted that those remaining in employment always benefit.

When hours are variable, a job is described by its two characteristics: the wage rate and hours of employment. It is not surprising that a competitive firm forced to pay a minimum wage has to adjust the non-wage element of the employment package in a manner deleterious to the interests of the workers. Proposition 1 gives a result much stronger than this: the increase in hours more than offsets the benefit of the minimum wage. In the competitive environment the imposition of a minimum wage is always harmful to the workers. Moreover, this is even true for those who remain in employment and receive the increased wage. This is a simple consequence of the firm being able to adjust an inefficient variable (hours of work) to clear the market at the new wage. The standard monopsony result is that the introduction of a minimum wage that is below the marginal revenue product of labour (MRPL) must be beneficial to those employed and also have the effect of increasing employment. The latter effect arises because the marginal labour cost curve facing the firm is replaced by the fixed minimum wage at points below the ...Download file to see next pagesRead More
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