Understanding Labor Economics: Key Graphs and Tables for Analysis

Introduction to Labor EconomicsGraphs and TablesHandout #2

Table B-1.1: Marginal Revenue Productof Labor

Figure B-1.1: Marginal Revenue Product of Labor MRPL $1,000 $300 MRPL L 1 8

Table B-1.2: Minimum Wage Legislation, 1938-2009

Source: Ehrenberg and Smith, Modern Labor Economics, 7th Edition, p. 122 • US DOL, “History of Changes to the Minimum Wage Law”

Figure B-1.2:Conventional Approach to Minimum Wage for a Two Sector Model W W S1 S0 S0 Wmin S2 WL W0 W0 W2 D D Lmin L0 LS L0 L2 L3 L L Uncovered Low Skill Market Covered Low Skill Market

Figure B-1.3: Minimum Wage Market with Employer Reductions in Fringes W S1 S0 a Wmin b W0 c W1 D1 D0 LminL1L0 L Covered Low Skill Market

Figure B-2.1: Elasticity and the Demand Curve w $60 eDL > 1 eDL = 1 $30 eDL < 1 L 180 360

Figure B-2.2: Relatively Elastic Demand Curve W $12 $10 D 1000 1500 L

Figure B-2.3: Relatively Inelastic Demand Curve D W $50 $25 900 1000 L

Figure B-2.4: Unit Elastic Point on Demand Curve W $60 eDL = 1 $30 L 150 300

Figure B-2.5: Substitutability of Other Factors of Production W W $10 $22 D0 $20 $5 D1 400 600 L 800 900 L L (a) Easy to find substitutes (b) Difficult to find substitutes

Figure B-2.6: Labor Cost as a Proportion of Total Cost W W $12 $12 $10 $10 D0 D1 80 160 80 90 L L (b) Capital Intensive Industry • Labor Intensive Industry

Figure C-2.1: Age-Earnings Profiles for High School Grads and College Grads Earnings YC (3) YHS Net Benefits to College Attendance Opportunity Costs (1) Age 18 22 65 Direct Costs (2)

Table C-2.1: Numerical Example

Table C-2.2: Direct Costs

Figure C-2.2a: Supply and Demand for Higher Education PHE S $9K $5K WL DSUB $3K D0 QHE 10m 14m

Explanation of Figure C-2.2a • (1) Subsidy lowers cost to students who now have to pay $3K and get subsidies of $6K. Result: More students go to college. • (2) Subsidy increases the overall cost of getting a higher education from $5K to $9K. Subsidy gets capitalized into value of inputs so the cost of education rises.

Figure C-2.2b: Supply and Demand for College Grads W S0 SSUB $30K WL $26K D0 L 20m 22m College Grad Labor Market

Figure C-2.3: Supply and Demand for College and High School Grads W W S S $18K $12K D D L 30m 50m L College Grads HS Grads

Explanation of Figure C2-3 • (1) Equilibrium differential between markets and the cost of acquiring a college education. • (2) Where PV = C. Where is PV < C and PV > C?

Figure C-2.4: Productivity in a Screening Model MP 2 1 Education E*

Figure C-2.5: Costs in a Screening Model CA $ CB Education CA = High psychic cost of acquiring education CB = Low psychic cost of acquiring education.

Figure C-2.6: The Signaling Model CA MP, $ CB 2 h 1 g 0 Education E*

Explanation of Figure C-2.6 • (1) Max Net Benefits for Group A • Case #1: Acquiring Signal E* • Benefits = 2, Costs = E*h, Net Benefits <1 • Case #2: Not Acquiring Signal E* • Net Benefits = 1, so don’t acquire signal E* • (2) Max Net Benefits for Group B • Case #1: Acquiring Signal E* • Benefits = 2, Costs = E*g >1, Net Benefits >1 • Case #2: Not Acquiring Signal E* • Net Benefits = 1, so acquire signal E*

Figure C-2.7: Signaling Failure MP, $ CA 2 CB 1 h’ g’ 0 Education E0 E*

Explanation of Figure C-2.7 • (1) Signal is set too low so that everyone from both groups has an incentive to acquire signal E0. Why might this occur? (In-Class exercise)

Figure C-2.8: External Benefits of Higher Education P S $9K $5K DSOC $3K DPVT QHE 10m 14m External Benefits = $6K so if only private individual preferences are considered there will be under-provision of higher education.

Figure C-2.9: Imperfect Capital Markets for Financing Higher Education S0 r 10% SGOVT LOAN 5% D Loanable Funds $10m

Figure C-2.10: Effect of Minimum Wage on Lifetime Earnings Earnings without Minimum Wage Earnings Losses Gains Earnings with Minimum Wage R Age

Understanding Labor Economics: Key Graphs and Tables for Analysis

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