Markets for Labor Lecture Note 2

Box 9.2 Good Jobs Are Good for Business According to research by Zeynep Ton at MIT, providing employees with “good” jobs and paying efficiency wages can frequently be good for business, too. She notes that this idea runs counter to prevailing notions of cost minimization. The conventional wisdom is that many companies have no choice but to offer “bad” jobs—especially retailers whose business models entail competition by offering low prices. If retailers invest more in employees, customers will have to pay more, so the assumption goes. She studied several businesses that provide their employees with good jobs, including Trader Joe’s and Costco. Trader Joe’s starting salary of around $40,000 per year is about twice what many of its competitors offer. Costco’s wages are about 40 percent higher than those of their main competitor, Walmart’s Sam’s Clubs. Both Trader Joe’s and Costco also offer good opportunities for advancement. Turnover at these companies is low, and employee morale is relatively high. They are both also known for high-quality customer service. Ton finds that, rather than hurting these firms’ profits, they actually financially outperform their competitors. For example, annual revenues per square foot are $986 at Costco, but only $588 at Sam’s Club. Sales rates at Trader Joe’s are about three times that of a typical U.S. supermarket. She notes that companies offering well-paying jobs also institute policies that promote worker efficiency, including training workers for a variety of tasks and allowing them to make relatively small decisions on their own. Ton concludes: Today many retail managers believe that there is a tradeoff between investing in employees and offering the lowest prices. That is false. Retailers that persist in believing in it forgo the opportunity to improve their own performance and contribute the kind of jobs the U.S. economy urgently needs. When backed up with a specific set of operating practices, investing in employees can boost customer experience and decrease costs. Companies can compete successfully on the basis of low prices and simultaneously keep their customers and employees happy. Source: Zeynep Ton, “Why Good Jobs Are Good for Retailers,” Harvard Business Review (January–February 2012): 124-131. In some cases, employers try to increase good feelings through direct means, such as by hosting parties, giving nonmonetary honors to let employees know that they are appreciated, or having “team-building” activities designed to increase cooperation among coworkers and identification with the organization. A key factor in morale is perceived equity: whether the workers feel that they are being treated fairly by management, especially compared to expectations raised by history and by the wider culture. For example, people have expectations about the relative wages of different jobs. If the wage for one job goes up, there is strong psychological pressure for the wages of what are seen as related jobs (whether they are paid more, less, or the same) to rise enough to keep the wages in about the same relation. 4.4 Dual Labor Markets dual labor markets: a situation in which primary workers enjoy high wages, opportunities for advancement, and job security, while secondary workers are hired with low wages, no opportunities for advancement, and no job security The theory of dual labor markets also presents a different picture from the standard labor model, based on the idea that there can be different segments within a labor market. Although not all economists agree with the theory, it is useful for explaining some real-world labor outcomes. The theory describes labor markets in which the “primary” portion of a workforce is motivated by high wages, opportunities for advancement, job security, and perhaps other favorable working conditions. Employment in the “secondary” workforce, by contrast, is more closely driven by market conditions. These workers receive generally lower wages, have minimal opportunities for advancement (even if they increase their human capital), and have low job security. Obviously, many workers in the secondary sector would prefer to work in primary sector jobs. Secondary sector workers could be assumed to be willing to accept something less than the normal wages in primary sector jobs; yet those employers do not jump on the chance to lower their wage bill. Text Such labor market segmentation may take place across firms. A primary sector of large, established firms (or entrenched government agencies), which use some of their surplus revenues to pay high wages, may exist side by side with a secondary sector of smaller organizations that are more subject to competitive pressures. Dual labor markets may also exist within a single organization. For example, a firm may employ regular workers with health and retirement benefits and, alongside them, hire temporary workers on short contracts with no benefits. In many colleges and universities, tenured faculty constitute the “primary” workforce. Then lecturers, adjuncts, and research associates, who constitute a secondary workforce, are hired as the need arises—and let go when the need falls. Such a structure allows an employer to keep a loyal core of employees and to avoid making new long-term commitments in times of temporary high demand. But for an individual worker, moving from the secondary to the primary labor force may be difficult indeed. Workers in the secondary sector have fewer opportunities to build up human capital and may quickly develop an “unstable”-looking work history. An extreme type of dual labor market is what some economists call a “winner-take-all” market, such as the ones for star athletes, famous actors, and top managers. In such markets, the rewards for being in first place are vastly greater than the rewards for being a step down, even if the actual difference in talents and skills between the top tier and the next is negligible. Welfare analysis applied to such markets would find significant inefficiency. Very few people can actually get into the top tier in, for example, Olympic sports or an acting career; yet the rewards for winning are so appealing that many individuals devote huge amounts of time and effort to trying to “reach for the gold.” Except in cases in which the effort to “be the best” is rewarding in itself, those who unsuccessfully devote their lives to the effort would probably have happier, more productive lives working toward different goals. 4.5 Discrimination labor market discrimination: a condition that exists when, among similarly qualified people, some are treated disadvantageously in employment on the basis of race, gender, age, sexual preference, physical appearance, or disability Text Not all social norms and customs that influence the labor market can be considered benign. Labor market discrimination exists when, among similarly qualified people, some are treated disadvantageously in employment on the basis of race, gender, age, sexual preference, physical appearance, or disability. Workers who belong to disfavored groups may be paid less for the same work, may be denied promotions, or may simply be excluded from higher-paying and higher-status occupations. Historically, much labor market discrimination, particularly against African Americans and other minorities, was based on racist beliefs that certain groups were innately inferior. Some discrimination against women was similarly based on sexist notions of inferiority. However, sexual discrimination was also historically rooted in social norms that reserved better-paying jobs for men (who were assumed to be supporting families), while making women (who were assumed to have husbands to rely on) solely responsible for providing unpaid household labor and family care. Discriminatory attitudes may be held by employers, who discriminate on the basis of their own biases, expectations, and beliefs. They may also be held by customers or coworkers. This case poses a dilemma for employers, even if they themselves are not prejudiced. For example, suppose that a law firm hires a skilled minority lawyer, but clients feel more confident being represented by European-American lawyers. The firm may find that the new lawyer attracts little business to the firm. A construction firm that hires a female forklift driver or a preschool that hires a male teacher may find that the morale of its other workers sinks, as the workers react badly to seeing someone of the “wrong” sex in “their” jobs. More insidiously, discriminatory attitudes can become self-fulfilling prophecies: Even though the minority lawyer, the female construction worker, and the male preschool teacher are all fully qualified in a technical sense, their contribution to the firm can be low, and perhaps even negative, if social norms create an environment in which their skills go unused or work group cooperation occupational segregation: the tendency of men and women to be employed in different occupations Figure 9.7 is jeopardized. Employers concerned with immediate productivity may therefore fail to hire disfavored groups, even if they themselves do not harbor discriminatory beliefs about racial differences or gender roles. Such discrimination can be eliminated only by socially coordinated—and even courageous—action. In Figure 9.7 we compare median weekly earnings in the United States of full-time, yearround workers in various groups, using government data from 2013. Median earnings are at a level where half the people in the group make more and half less. We see that median earnings vary significantly by both race and gender. The median earnings of black male workers were about 77 percent of the earnings of their white male counterparts, and the median earnings of Hispanic male workers were only 67 percent of white male earnings. Disparities among female workers of different races also exist, although the differences are somewhat less pronounced. White female workers only earn 82 percent of the earnings of their white male counterparts. Sexual disparities are also evident among male and female workers of other races. We must realize that the data in Figure 9.7 are not necessarily evidence of wage discrimination. Some variations in wages may be due to other factors such as differences in experience, education, and occupational choice (although some of these differences may also be a result of discrimination). For example, we saw earlier in the chapter that educational attainment can have a significant impact on earnings. Education levels vary by race. About 30 percent of white individuals have a bachelor’s degree or higher, but only 20 percent of black and 14 percent of Hispanic individuals have at least a bachelor’s degree.14 So differences in education levels may explain the variation in wages by race, rather than discrimination. But again, differences in educational attainment may be a result of past, and current, discrimination. Educational attainment does not vary significantly by gender in the United States. So the differences in earnings between male and female workers in Figure 9.7 cannot be attributed to differences in education. Part of the explanation for women’s lower earnings is that women have traditionally had less work experience than men, on average. Men as a group have tended to work more continuously at their jobs, whereas, given social norms and, sometimes, individual preferences or requirements concerning family responsibilities, many mothers participate in the labor market less than full time when their children are young. To the extent that time on the job can contribute to productivity, this could explain some of the difference. Another important factor in explaining earnings differences by gender is occupational segregation—the tendency of men and women to be found in different kinds of jobs. For example, in the United States, jobs like bookkeeper, dental hygienist, child-care worker, Median Weekly Earnings, Select Groups of U.S. Workers Age 25-54, 2013 DĞĚŝĂŶtĞĞŬůLJĂƌŶŝŶŐƐ;ΨͿ ϭϬϬϬ ϵϬϬ ϴϬϬ ϳϬϬ Median earnings vary based on race and gender. ϲϬϬ ϱϬϬ ϰϬϬ ϯϬϬ ,ŝƐƉĂŶŝĐ ůĂĐŬ tŚŝƚĞ DĂůĞtŽƌŬĞƌƐ ,ŝƐƉĂŶŝĐ ůĂĐŬ tŚŝƚĞ &ĞŵĂůĞtŽƌŬĞƌƐ Source: U.S. Bureau of Labor Statistics, “Usual Weekly Earnings of Wage and Salary Workers,” Economic News Release, July 18, 2013. Text registered nurse, and teacher of young children are held overwhelmingly by women. Meanwhile, men notably dominate in occupations such as construction, metal working, truck driving, and engineering. Occupational segregation could be a result of differences in preferences, or it could also reflect discrimination. For example, existing stereotypes may lead more women to become nurses while doctors are more likely to be men. Statistical studies suggest that about a third of the differences between men’s and women’s pay in the United States can be associated with differences in occupational choice. Various reasons have been offered to explain why the sorts of jobs women tend to work at pay less on average. One explanation is that, because women were historically “crowded” into a narrow range of occupations, the supply curve in these job markets was artificially shifted outward, thus lowering the wage. Some have suggested that the average difficulty level of the job or the skill required might be less for “female” jobs. Others argue that differences in preferences between male and female workers could lead women to trade high wages for other beneficial job characteristics (such as flexibility in working hours). And still others argue that entrenched wage norms systematically devalue certain kinds of work (e.g., work involving emotional empathy or work with children). Even after accounting for differences in education, experience, and type of job, however, over a third of the difference between men’s and women’s earnings in the United States remains unexplained. That is, even comparing men and women with equal qualifications who hold the same jobs, differences in pay remain. In the United States, discrimination by sex and race in hiring and wages was made illegal by Title VII of the Civil Rights Act of 1964. (This act also covered discrimination by “color,” religion, and national origin. Later acts have addressed discrimination according to age and disability, and various states and localities have passed laws concerning employment treatment on the basis of sexual preference.) Enforcement, however, has proved difficult. Evidence suggests that bias, both blatant and subtle, still plays a significant role. (See Box 9.3 for more on labor discrimination.) Box 9.3 Labor Discrimination by FedEx In March 2012 the delivery company FedEx reached a settlement with the U.S. Department of Labor over allegations that the company discriminated against more than 20,000 job seekers. As part of the settlement, FedEx agreed to pay $3 million in back wages and offer jobs to about 2,000 rejected applicants as new openings become available. The company also agreed to revise its hiring practices to avoid future discrimination. The allegations were brought against FedEx by the Labor Department’s Office of Federal Contract Compliance Programs. The office said it found evidence of discrimination in hiring on the basis of sex, race, and national origin based on a regular audit of hiring practices. Such audits are conducted for all companies that contract with the federal government for services and goods. Of the rejected applicants, 61 percent were female and 52 percent African American—percentages that were disproportionate to the number of applicants. As one example of discrimination, it was found that women were automatically excluded from certain positions that required the lifting of heavy objects. Hiring rates for Hispanics and Native Americans were also significantly lower than hiring rates for whites. Labor Secretary Hilda L. Solis commented on the settlement: “When you do business with the government, we expect you to do the right thing. That includes giving all Americans an equal shot at a good job. It’s about more than just the law—diversity is smart for business.” Source: Steven Greenhouse, “FedEx Agrees to Pay $3 Million to Settle Bias Case,” New York Times, March 21, 2012. Discussion Questions 1. “Economists assume that people just want to make as much money as possible.” Is this statement correct or incorrect? Of the nonwage working conditions listed in the text, which ones are most important to you as you think about your future career? Text 2. Think about your current job or the last job that you held. Would you say that it is in a “primary” or “secondary” labor market? To what extent do you think that the factors discussed above—human capital, market power, compensating wage differentials, or discrimination—explain the wage and working conditions you experience(d)? 5. Wages and Economic Power In Section 4, we considered various explanations for why wages vary among different groups of employees. In this final section, we look at changes in overall wages over time, based on data for the United States. In order to understand how wages have changed over time, it is necessary to address the topic of economic power. In particular, how much of total revenues must firms pay its workers versus how much do they allocate in other ways, including to profits and taxes? 5.1 Wage Trends Figure 9.8 repeats a graph that we presented in Chapter 0, showing the time trend for real (inflation-adjusted) median weekly wages and corporate profits in the United States from 1980 to 2012. After adjusting for inflation, median weekly wages in 2012 were nearly the same level they were in 1980. Meanwhile, corporate profits, also adjusted for inflation, nearly tripled. Historical data indicate that American workers fared much better earlier in the twentieth century. According to the U.S. Census Bureau, real average annual earnings increased by a factor of about four between 1900 and 1970.15 During the 1970s real earnings essentially stopped increasing. Household income continued to increase slightly beyond the 1970s, only because more people per household entered the labor force. Figure 9.8 suggests that corporations have effectively been able to dramatically increase their profits in the past few decades without having to pay their workers higher wages and salaries. Meanwhile, the incomes of management executives, particularly those at the very top, have soared. As we also discuss in Chapter 10, the pay of chief executive officers (CEOs) of large U.S. corporations in 1965 was 20 times the pay of an average worker. But in 2012, CEO pay stood at 273 times the pay of an average worker! Are CEOs really worth so much more today than they were 50 years ago? It would require the use of very questionable assumptions to make the case that either the supply of CEOs has greatly diminished or the demand for them has greatly increased, relative to the supply and demand for Real Median Weekly Wages Versus Real Corporate Profits, United States, 1980-2012 Figure 9.8 'ROODUV%LOOLRQVRI'ROODUV    &RUSRUDWH3URILWV ELOOLRQVRIGROODUV   While median wages, adjusted for inflation, have stayed virtually constant since 1980, corporate profits have tripled.  0HGLDQ:HHNO\ :DJHV GROODUV