Econ 306: Labor Market and Wages
–Office hours: Tuesday 1:15-2:15, Wednesday 11:30-12:30 (Leacock 516)
•Doug’s office hours by appointment: douglas.barthold@mail.mcgill.ca
Introduction
–Market for Labor is very different from markets for a final good (bag of candy), or a
service (hairdressing) or intermediate goods (trucks)
–Other factors of production can’t think for themselves, can’t choose whether/how much
to invest in themselves
–Labor’s objectives can differ from those of the employer
–Other factors of production can’t combine to “bargain” with firms
–The “wage” (ie. price) firms wish to pay can differ depending on 1) type of labor 2)
whether the relevant time period for the firm is the hour, the week, the year…etc
–Institutions, practices and information within labor markets can change over time
Wage Differentials: An Overview
• In Competitive Markets:
– In competitive labor markets, supply and demand set the equilibrium wage and level
of employment, but equilibrium wages will differ for a variety of reasons;
1. Among workers with the same skills, equilibrium wages will differ because of
compensating differentials; this type of differential wage compensates for
different non-wage characteristics of the jobs
2. Even if all jobs are the same, (no compensating differentials), there may still
be some equilibrium wage differentials
a. Inherited Skills (aptitudes); may differ across workers
b. Human Capital Investment costly but the return is higher future wages
Monopoly: Just one power in a product market (selling)
Monopsony: Just one power in a factor market (buying)
Chapter 8:
Learning Objectives:
1) Relative Pay rates across jobs
2) Different wages for identical skills
3) Safety regulation
4) Adequate compensation for unpleasant or risky jobs
5) No free lunch for desirable work place characteristics
Perspective;
Simple D & S model sets equilibrium W assuming homogenous jobs and
homogenous workers -> Neither jobs nor workers are homogenous
Wage structure compensates for differences in;
oCharacteristics of the job -> “Compensating Differentials”
oPecuniary ($) and non-pecuniary differences in job characteristics
For equally skilled workers, we would expect lower money wages in jobs with;
oMore non-wage benefits (ie. Pension plan)
oBetter job security (ie. Less likelihood of layoff)
oBetter working conditions (less personal injury risk, cleaner, etc)
– Competitive labor markets to generate pecuniary differences in wages, to compensate
for non-pecuniary job characteristics -> Compensating wage differential
– Even for workers of equal skills, D & S Model gives equilibrium Wage structure (not a
single equilibrium wage rate)
– Wage Rate depends upon the level of productivity Wage = F (Productivity)
– But, there is a *reverse causality*; higher wages may cause higher productivity …
oBetter work morale, better health of workers, reduction in absenteeism and
labor turnover
– So, an increase in wages might increase a worker’s productivity (MPP) and shift (t the
right) workers MRP curve facing the firm
– An increase in minimum wage may not reduce employment
Why does higher productivity shift the demand for labor curve?
Demand = MRP (marginal revenue product)
MRP = MP (margin product) x P (price of output)
Compensating Differentials for Differences in Job Characteristics
Theory of Compensating Wage Differentials (pg 235- Adam Smith)
Underlying Principles:
Equilibrium differential is;
oWage differentials between equally skilled workers at which;
oNeither excess demand or excess supply of workers for the different jobs,
so no market forces remain to change the differential
If market is not at its equilibrium differential,
–Some workers will voluntarily reallocate themselves between jobs until the
differential equilibrium is reached
–Equilibrium differential fulfills the social function of getting people to do the “less
desirable” jobs by using incentives rather than compulsion (ie. War inscription)
Examples of differences in job characteristics;
Agreeableness/disagreeableness
Ease/difficulty of job and cost of learning job
Turnover in a particular job
Degree of power and trust held
