Study this chapter to learn about labor markets, including topics on wage differentials, discrimination, and unions.
On NBC's 2005 television series, The Apprentice: Street Smarts vs. Book Smarts, the contestants without college degrees who were chosen for the program were earning three times as much as those with college degrees. The two sides fought valiantly against
each other, and the final episode pitted 37 year old, "street smart" Tana, a top-selling sales woman for Mary Kay, against 26 year old, "book smart" Kendra, a real estate agent. At the end of the Apprentice series, it was Kendra, the college graduate,
to whom Donald Trump shouted, "You're hired!" As the array of contestants in the series demonstrates, not every college graduate earns more than every high school graduate, but on average, that is certainly the case.
One way of measuring the payoff from college is to compare the extent to which the wages of college-trained workers exceed the wages of high school - trained workers. In the United States the payoff from college has soared over the last 30 years.
In 1979, male college graduates 25 years of age and older earned 30% more than male high school graduates in the same age bracket. By 2009 the gap had increased more than two and a half times - male college graduates earned a stunning 79% more than male high school graduates. Female college graduates gained as well. Female college graduates 25 years of age and older earned 56% more than their high school - educated counterparts in 1979; that gap increased to a whopping 96% by 2009.
The dramatic widening of the wage gap between workers with different levels of education reflects the operation of demand and supply in the market for labor. For reasons we will explore in this chapter, the demand for college graduates was increasing while the demand for high school graduates - particularly male high school graduates - was slumping.
Why would the demand curves for different kinds of labor shift? What determines the demand for labor? What about the supply? How do changes in demand and supply affect wages and employment? In this chapter we will apply what we have learned so far about production, profit maximization, and utility maximization to answer those questions in the context of a perfectly competitive market for labor.
This is the first of three chapters focusing on factor markets, that is, on markets in which households supply factors of production - labor, capital, and natural resources - demanded by firms. Look back at the circular flow model introduced in the initial chapter on demand and supply. The bottom half of the circular flow model shows that households earn income from firms by supplying factors of production to them. The total income earned by households thus equals the total income earned by the labor, capital, and natural resources supplied to firms. Our focus in this chapter is on labor markets that operate in a competitive environment in which the individual buyers and sellers of labor are assumed to be price takers. Other chapters on factor markets will discuss competitive markets for capital and for natural resources and imperfectly competitive markets for labor and for other factors of production.
Workers have accounted for 70% of all the income earned in the United States since 1960. The remaining income was generated by capital and natural resources.
Figure 12.2 Alternative Views of the Labor Market
One way to analyze the labor market is to assume that it is a single market with identical workers, as in Panel (a). Alternatively, we could examine specific pieces of the market, focusing on particular job categories or even on job categories in particular
regions, as the graphs in Panel (b) suggest.
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