Labor Economics Literature Review Essay
This paper is a literature review in labor economics, demonstrating understanding of empirical methodology through selection of papers and by highlighting the key features of papers selected for review. This specifically focuses on an extensive description of how empirical research around the compensating wage differential which passed through evolution in the American nation. Some of the work included in the review might be out of date now. However, this also demonstrates why it is out of date by describing how the papers that followed it marked an improvement or advancement in the literature.
According to Harbison (1973), “a country, which is unable to develop its people and utilize them effectively in the national economy, would be unable to develop anything else”. As a new labor economist, let me first define what a human resource is. This refers to the number of people and their level of skills. Human capital is related to this which is defined as the productive investments embodied in human persons, and it includes the abilities, skills, ideals, and health resulting from expenditures on education, training, attitude towards work, among others.
As a new labor economist, the labor market can be seen as comparable to any other market in that the strength of supply and demand mutually settle on price, in this situation the pay scale, and magnitude, or the quantity of populace in work. Labor power or labor force is the most important of the productive forces. It is incorporated in the labor power the mental and physical capabilities existing in a human being, which a person is capable to increase the productivity of a work that he or she handles.
Under free enterprise, in accordance with Marx, the constructive influences of employment become visible as the ingenious control of investment. Work becomes just work, and we need workers to control or manage over work. This work control or influence becomes an article of trade, which can be vended and purchased on the market. An employee attempts to put up for sale his or her work control to a manager, in replacement for a pay.
The human resources in various countries should be developed by giving proper education and training and also be given proper care and protection of their welfare: health and safety, since they included both the physical component or the minimum physical requirements for a healthy worker and the value of labor power which is the outcome of a combination of factors: productivity. By giving their ample needs to be productive, they may not engage to forms of contradicting with the state as a whole and the firms where they work, like being part of some distractive unions, though there are some unions which are, in some ways, beneficial to the society.
Human resource management is a strategic and coherent approach, like they must be compensated enough and be given proper treatment at work, to the management of an organization’s most valued assets—the people working there who individually and collectively contribute to the achievement of the objectives of the business and to the nation as a whole.
Labor economics study has reached a level of educational propriety among economists over and above it can be considered probable in 1967 (Artzt & Armor-Thomas, 1992, 353). Although, simultaneously it has turn out to be more detached from the practitioner since it became tougher for them to understand writing and identify with the literature. It has developed into a much more scientific approach, with more thorough and complicated in its analysis and empirical operation. The use of controlled method to it has formed strong empirical outcomes which were formerly unidentified.
The evolution of research on compensating wage differential
For several periods, theories of compensating wage differential have a tendency to focus on how persons work in a cluster. This replicated a point which was governing where the background of societal relations was seen more as a condition for personal goings-on than as a center of study in it. More lately, the cluster itself has grown to be the component of breakdown and the concentration has moved to more developing, communally built, matters of the relations (Dillenbourg, 1996, 189). In the issue of compensating wage differential, earlier studies of its effect consisted of papers that used aggregate time series data, others that used cross section data. More recently we have seen papers using the difference in differences method using firm level data, and using individual micro data drawn from different provinces over time (so that the data have a panel structure), from 1954 onwards. Source of variation in compensating wage differential includes examples such as a lot of lowest-paid people in society like short order cooks, also have relatively poor working conditions (e.g. high risk). If by assumption, many of the lowest-paid people in society – for example short order cooks – also have relatively poor working conditions (e.g. high risk), there will be some compensation for those workers in other forms but not the wage type of compensation.
According to the theory of compensating wage differentials, wage differentials exist, in part, to compensate workers for non-pecuniary characteristics of alternative types of employment. This explains wage differences across individuals and across occupations such as heterogeneous jobs and workers.
In order for the firm to compensate people like workers employed in the secondary labor market who generally receive low wages and experience unstable employment relationships like short order cooks to take the unpleasant job, which is with relatively poor working conditions, with high risk, it must pay them a higher wage then the more pleasant job. The higher salary rate is remunerated to recompense the employee for the objectionable functioning circumstances. Over and above being salaried for the unwanted running situation, it is as well desirable to recompense for occupations that have a immense danger of damage or harm. A lot of occupations that compensate well do not necessitate a high degree of proficiency, although they are extremely hazardous. As a consequence, paying compensation to public to bear that peril, personnel are rewarded a recompensing pay degree of difference.
There are loads of work features that merit this salary disparity. To make things easier things, it is supposed that the single occupation attribute that is dealt with is the danger of damage on the profession.
Compensating wage rate differentials dole out significant communal wants or requirements to the populace in society. It supplies human resources an enticement to, of their own accord, perform unsafe or disagreeable occupation and it serves as a repayment to laborers who agree to unlikable professions by compensating them more than analogous employees who have more enjoyable or nice careers.
There are many aspects manipulating earnings other than operational circumstances. As a result, the premise of the degree of difference of paying compensation for wages is established on several suppositions. It can be presumed that laborers make the most of the efficacy or convenience and not the earnings.
Using Hedonic pricing model, the existence and magnitude of compensating wage differentials can be determined. There exists both a member of staff and executive part of the labor market. On the side of workers, the salary rate can be a sign of the extent of chance of harm on the occupation. If the human resources were aware of the likelihood of acquiring damage on a profession or employment, it follows that the salary rate they give a positive response suggests this prospect. If the occasion of obtaining damage intensifies, therefore they would call for a higher pay to give back to them for this higher intensity of jeopardy with the purpose of maintaining the equivalent amount of usefulness. In this way for each danger point there is a salary rate that would pay costs to the one who is damaged so that he or she can uphold the uniform scale of advantage. This set of affairs can be revealed by indifference lines or curves in the economics context. The indifference curves are convex and have a positive slope. An individual is receiving a comparatively high salary at the same time as in front of high intensity of hazard. In view of the fact that they have so much threat to get going with, they would be agreeable to be deprived of a great deal of earnings to trim down the harm. As the consequence degree falls off, the individual is less enthusiastic to renounce risk so the indifference curve is more even.
Distinctive persons have diverse forbearances for jeopardy. If one is exceedingly susceptible to risk meaning he or she is a risk averse: may be paid as input-based, in that case he or she would have an extremely sheer indifference curve. There is a necessity for a big proliferation in the individual’s salary rate to emerge even an undersized added quantity of danger. Alternatively, if the person is not risk averse or an individual who is not bothered with precarious occupations, the individual is still required to be remunerated with higher salaries to engage in more risky things; nevertheless, he or she do not necessitate as huge of a pay reimbursement as the individual who is frightened of harm. Consequently, this individual would have an even indifference curve.
Conversely, managers as well stand in front of a salary or danger transaction of substitution nonetheless they regard it from an atypical approach than the workforce. The assumptions are as follows: It is expensive for an employer to reduce risk for his employees. It costs money to purchase safety equipment, special training etc. Moreover, strains from the labor market location do not permit the business ventures to do something to deserve additional or spare proceeds. And the enterprises previously are on familiar terms with each and every occupation features. As a result of these assumptions, a firm must reduce wages to remain competitive if they have a program to reduce risk of injury. Despite the fact that take-home pays are issues, the business enterprise can as well take into account the reduction of other provisions and situation of employment to lower charge when they struggle to lessen danger. An economical business will merely receive standard revenue thus no economic profit exists. To contend they must let down remunerations if they are outlaying more on danger diminution. Isoprofit curves are made use to illustrate the manager’s exchange between salaries and risk that looks toward business ventures. They slope upward because a reduction in risk raises a firm’s cost; wages must be reduced to offset the cost of risk reduction if profits are to be held constant.
In matching employers and employees, employees will try to get to the highest levels of utility possible. They will choose that indifference curve that gives them the maximum level of utility. However, they are constrained by what employers are willing to offer. The less risk the lower the wage and the higher the risk the greater the wage rate. Firms on the other hand try to maximize profits. On the other hand given that the labor market is economical they can not present higher than market rates for the reason that their expenditures will be collegial and they will be driven out of commerce by near to the ground asking price of manufacturers. If they offer to low a wage then they will not be able to attract any workers. Thus their profits are usually normal because of the competitive nature of the market.
With the short order cooks having low wages even though they have higher risks, firms may grant them some employee benefits like fringe benefits such as health (Medicare) and pension benefits, issuing insurance policy, and vacations or day-offs. Particularly, it can be said that there is an opposite association between the comparative pleasant appearance of a business of service and the salaries obtainable in those commerce. If the recompensing pay speculation is right, in that case rationally, each and every unappealing occupation must present comparatively high salaries, given the quantity of ability desired to carry out the work. Unluckily, a number of monopsonist owners or managers are capable to compensate personnel low salaries for highly unwanted job. For a case in point, those short-order cooks have numerous unconstructive insubstantial characteristics: human resources must make an effort on their jobs longer and in sporadically planned or programmed periods of transferal, labor in a continually frantic setting, and make agreements with many furious and rude clienteles. Employers would have to pay its employees more.
As an organization, the reasons generating the requisite for recompensing salaries by advancing technology and varying a few of the pointless predilections can be eradicated. Prospect guiding principles could raise pays in this commerce by amending whichever monopsonist rudiments and by enlarging the yield of trade laborers by way of edification and preparation.
Researchers in this discipline are providential to have a profusion of important quality information with which to probe research queries vis-à-vis the performance of persons and firms in industry markets. Conceivably most remarkable are the outsized panel information sets on persons like the “National Longitudinal Surveys (NLS) and the Panel Study of Income Dynamics (PSID)”, in addition to the “Current Population Survey (CPS)”. Recently obtainable longitudinal facts on business enterprises from the Census Bureau give prospects for attractive study on their activities in the market.
Other emergent case is the wage difference between men and women which occurred Wage differences between men and women reflect discrimination and not just differences in job continuity and rational decisions with respect to education and on-the-job training. Education also reflects discrimination and this case may be a form of taste-based discrimination by which employers may pay a lower wage to a worker because of the worker’s gender due to their prejudices.
All along this alignment, there can be found diverse hypothetical standings such as socio-constructivist, socio-civilizing and collective cognition methods in the advancement of empirical research. Bird (1993) classifies a range of structures of heterogeneity like when representatives have dissimilar data, employ an assortment of data account plots or utilize sundry analysis means like induction, inference, correspondence, and many others (689). Furthermore, heterogeneity as he claimed, is one of the scopes that delineate the outline for multi-cause schemes.
In conjectural concerns, the person or the assemblage as the part and the kind of the dyad in compensating wage differential, they can be out looked as involving two comparatively autonomous cognitive arrangements which switch over communication. They can as well be perceived as a lone cognitive coordination with is particular facets. There are also disparities between the choices of lines of attack in conditions of the study of research techniques used. In the socio-cognitive viewpoint, the attitude was to arrange circumstances put forward to make possible education and to link the effects of this involvement with a number of control cluster. With those abovementioned processes, association is regarded as a black box which concentrates on the results. On the contrary, study from a socio-cultural approach is apt to use micro inherent examination of the public dealings. The center is on the procedures concerned in collective relations. This is partially due to the significance connected to the notion of arbitration in socio-cultural speculation.
As discussed by Rosenschein (1992), appearing in the 1900s, the work contribution of older men noticeably reduced from 65% to 25% (137). Not merely the great alterations occurred across time; there have also been several discrepancies in partaking degrees between countryside and metropolitan locales. Men were 10 percent more probable to perform in bucolic places than in cities. Women in workforce stridently boosted from 18% in 1990 to 75%, predominantly in 1960 and 1970. Great expansion in demand for women in white collar jobs such as educators and care givers emerged after World War II. More than a few accounts for the upsurges in the precedent century can be seen. The increase of log wages goes down between 1970 and 1990; amateurish pays of laborers show to be responsive to alterations in the recompense from managers to administration and to clandestine retirement fund and health indemnity. The portion of these paybacks augments from 1% to 17% from 1929 to 1980s. Labor time considerably diminished like leisure hours to a large extent augmented in the course of the initial decades of the century. Forty hours per week commenced for the period of the great depression captivatingly and there occurred an increase in female work contribution (11).
This issue involves labor market discrimination by which comparison of men and women reveal substantial earnings, allocations among various occupations, and accumulations of human capital. In considering the gender differences in earnings, full-time female workers have weekly earnings that are approximately 75% of that of males. Regarding the issue of education, gender differences in investment in human capital (though education) is a reason for gender differences in earnings. Women have less post education investment because firms are less likely to invest in firm specific human capital for women due to their traditional roles like getting pregnant and being a mother, and many more. However, education is still categorized as part of the discrimination.
This gender issue regarding wage differences is due to the types of discrimination which are wage and human capital discrimination. In wage discrimination, female workers are paid less than the male for doing the same work. More technically, this exists when wage differentials are based on considerations other than productivity differentials. Alternatively in human capital discrimination, females have less access to productivity-increasing opportunities such as formal-schooling or on-the-job training.
Entry into the modern sector jobs depend on the level of completed education, whereas income-earning opportunities. More educated workers have lower unemployment rates than less-educated workers. High unemployment rates mean workers receive more unemployment compensation and welfare benefits. In this case, the return to education would overstate the increase in earnings that would be received by individuals. Ability and selectivity bias suggest observed difference in earnings between male and female.
Statistical discrimination model can also be applied to this matter. Employers generally train only the employees who are likely to stick around (lower probability of quitting). They have the belief that women quit more often since they do not get training, do not get promoted, and work becomes stagnate.
The Crowding model: Occupational Segregation can also be used to explain the discrimination between men and women concerning wage differences. The net result of occupational segregation is that men realize higher wages and incomes at the expense of the women. Women’s problem is that their supply is great relative to demand and their wage rate is therefore low compared to that of men (not being disadvantage as a result of exploitation: they are paid higher than their marginal rate of product or MRP or value of marginal product or VMP. Females and males have a propensity to labor in dissimilar professions. Even though much of study has been dedicated to the dimension measuring of inclinations and development in profession separation by sexual category, very small effort has been paid attention on the fundamental profession preference progression that produces this division.
Regarding job continuity, there is enacted maternity-leave legislation by firms. This legislation assured to mothers the entitlement, after a vacation of some degree of period, to come back to their pre-leave supervisors at the identical situations. There are even joblessness reimbursements to offer paid time off for fresh parents. Such plans were created in reaction to patterns that presented the quantity of functioning mothers increasing piercingly in the past two decades. By defending the claim of new mothers to come back to their preceding employment, maternity-leave decrees take steps to assist women for them to have an advantage more from on-the-job education and to lessen the salary disparity between mothers and females who have not at all had kids. If maternity-leave proposals are to accomplish their guarantee, it is essential to identify with the level to which they went back to their previous occupations before the channel of such rules and regulations in the society.
Concerning training, the commerce salary discrepancies stay alive which considers a laborer’s human resources distinctiveness such as edification, work tenure, and sexual characteristics. The pay disparity for every profession in a given business is evaluated by its contribution of the commerce’s service entirety. The measured remuneration gaps for every profession in the business are then summed to make the normal salary discrepancy, for the business enterprise in totality. For men, communal management salaries are higher than exclusive region pays with the exception at the institution of higher education degree. Moreover, despite the fact that salaries of the different sexual categories are at correspondence in the civic organization, there is a great sex salary-gap in the exclusive part in support of males.
Thus, again, wage differences between men and women indeed reflect discrimination and not just differences in job continuity and rational decisions with respect to education and on-the-job training.
There in time also existed studies about the increase in the wage rate of people, causing them to work fewer hours. This is a new labor-leisure framework comprising a person’s choice on whether he or she will work more or less with an increase in the wage rate.
The labor-leisure model assumes that individuals choose between work and leisure. Work is time spent on a paying job while leisure includes activities where one is not paid such as education, rest, or work within the household. Different people have different indifference curves. Workaholics place a low value on leisure and must be given a large increase in leisure to compensate for a small decrease in income. They also have a flatter indifference curve. On the other hand, there are leisure-lovers who place high value on leisure and are willing to give up a large amount of income to get a small increase in leisure. They have steeper indifference curve.
Under utility maximization principle, the optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve. If the marginal rate of substitution of leisure and income is greater than the real wage rate, the individual values leisure more than the real wage rate, so he/she should consume more leisure since he feels over employed. They have to be compensated to give up their leisure time. The less they have, the more you have to pay them to give it up, which indicate increasing opportunity cost of labor. On the contrary, if it is less than, the individual values leisure less than the real wage rate, so he/she should consume less leisure since he feels underemployed. The individual is willing to work even at low wages. But after he reaches some minimum level of income that sustains his needs, additional income brings less additional happiness, which indicates decreasing marginal utility of income. And if those factors are equal, then the utility is maximized for the individual.
The net effects for wage increase are the following: if substitution effect is greater than income effect, then hours of work rise, and if substitution effect is less than income effect, then hours of work fall. If a worker is enthusiastic about his or her job, this represents that an increase in the wage rate will cause a person to work more which involves substitution effect. In spite of this, if extended work time turns out to be the custom in a community, these periods in all probability are not intentional and it stands for a lack of spare time. Even though specific people may reduce their hours of work as the market wage rises, labor supply curves of specific labor markets generally are positively sloped over realistic wage ranges. Higher relative wages attract workers away from either household production, leisure, or other labor markets and toward the labor market in which the wage increased.
While there are people who have positive relationship of wage rate and work hours and some have inverse relationship of the two, there are also people who have backward-bending labor supply curves. It occurs when the labor supply curve is positively sloped in some ranges of the wage and negatively sloped in other ranges.
If the replacement upshot is larger than the revenue consequence, the work supply curve will incline rising to the right side. This person will persist to add to his supply of work services as the pay rate rises up to a position where he is functioning definite hours. Further than this spot he will begin to decrease the quantity of work time he provides. Where the supply curve is sloping upwards to the right, the affirmative salary elasticity of work supply, the changeover outcome is larger than the returns result as stated by Valientes (2006, 201). The opposite upshot occurs when it slopes upwards to the left. The track of incline may alter more than once for a quantity of persons, and the work supply curve is to be expected to be dissimilar for diverse persons.
Other factors that have an effect on this choice take in dues, wellbeing or interests, and labor milieu. An example is a student working more, since more work hours means more income/ higher wage. A low wage rate means smaller quantity of work chances for young people, who are apt to take part-time jobs to have less of a connection to the work market. Quite the reverse, the result on low-wage elders, who almost certainly have a robust regard to the personnel, chiefly crops up through a decrease in labor time. Either means, nevertheless, the ending of most interest-earned revenue is alike, with off-putting upshots of least amount of pays apparent for those originally were at the smallest amount or salaries just above it.
Technology has also sustained to make better the efficiency of laborers; authorizing principles of living to ascend as period of time deteriorate. Then again, in the nonappearance of dilapidated labor time in goods-producing businesses, there has been a transfer in the character of production in the countrywide economy.
The pay for performance concepts which are input-based and output-based pays can also be incorporated in this area under discussion. In input-based pay, it measures the time or effort involved like hourly pay and the like. Workers receiving higher wages are the ones who work for longer periods of time. In output-based pay on another side, this measures of what comes out such as piece rates, commissions and royalties, bonuses, stock options/ profit sharing, and tournament pay. Here, workers receiving higher wages are the ones who give more effort to work by producing certain quantities of products. As for me, with the increase in wage rates in output and input-based pays, workers will continuously spend time to produce more of their outputs and inputs, but with some exceptions in input-based pay since there may occur some forms of shirking (working less).
According to McCrate (2005), the objective of the labor economics agenda is to train various kinds of people to carry out policy-related studies on imperative queries in the subject (11). This entails using academic representations of persons, business ventures, and markets as foundations for creating and improving econometric paradigms that can be empirically put into practice, for instance employing information series like those depicted above.
Labor Markets in the Twentieth Century
Over the twentieth century, labor time fell by approximately half, by and large for the reason that mounting salaries carry about by a trade and industry progress, with a sustaining part from commerce unions, collective bargaining, and successive lawmaking. At the outset, it makes available a motivation for business enterprises to control operational time. Secondly, it composes these supplementary times more pleasing for the member of staff. In reality, it is not exceptional for overtime hours to be established willingly by wage-earning laborers, by reason of the premium reimbursement. Unions time and again manage overtime as an enviable article of trade when discussing how these prospects shall be divided among affiliates (12).
As the trends, in general, in the 20th century, there subsisted rising work compensation, mounting leisure or shorter labor time, growing female input in labor markets, and the like.
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