The Markets for the Factors of Production

What Determines a Competitive Firm’s Demand for Labor?

Demand for labor describes the amount of labor that firm is willing to employ at a given point in time (Tucker, 2013). The factors that determine the demand for labor include the number of labor workers are willing to supply at that wage and the real wage the firms are willing to pay for such labor. Other factors include the market-determined selling price of the firm’s output and the unit cost of capital.

Technology also determines a company’s demand for labor, through the price of outputs and determination of the marginal products. The changes in output price and technology change the value of marginal product. Installing robots in a factory would decrease the demand for labor as the robots would replace people.  Further, the demand for a firm’s outputs determines the demand for labor. A rise in the output price shifts the labor demand curve to the right since more labor would be demanded at each wage.

The wage rate determines the demand for labor since a firm would hire workers if the additional workers would add more to the firm’s income than costs. Therefore, profits would go up thus prompting the firm to hire the workers. As such, the demand for labor is inversely related to the wage rate as shown by the law of diminishing returns. Immigration, education levels, and age of the population would also determine the demand for labor as they would either increase or decrease the number of labor people are willing to supply to the market (Mulhearn & Vane, 2015).

How Does Labor Supply Depend on the Wage?

The labor supply represents the number of hours people are willing and able to work at a given wage rate. Labor supply depends on wage available in the markets whereby a rise in the wage in the alternative labor markets increase, workers will join the alternative markets thereby shifting the labor supply in the first market to the left. Conversely, decreasing the labor supply will lead to an increase in the wage rate, which explains why some professions, such as medicine and labor unions try to limit the number of workers they represent.

Higher wages will also entice workers to supply more labor since the work is more attractive compared to leisure. The result is a substitution effect. The supply curve for labor is thus upwardly sloping. However, rising wage rates lead to downward sloping labor supply curve since the individual supplies less labor at higher wages due to the income effect (Mulhearn & Vane, 2015). As a person grows richer they can afford leisure and thus may prefer leisure to work when compared to low-income earners.

What Other Factors Affect Labor Supply?

The market supply of labor depends on the number of qualified people willing to work, the difficulty in getting such qualifications and the non-wage benefits of a job. If the number of qualified individuals in a certain profession is low, the supply of labor will be low thus making the supply inelastic. Concerning the non-wage benefits, fewer people will be willing to take up unpleasant jobs, which remain lowly paid.

The wages and conditions of other jobs will also affect the supply of labor whereby if the working conditions are favorable, more workers will be willing to supply labor to the firm. The size of the working population will also determine the amount of labor available for supply in the market. Immigration and migration also affect the labor supply in the market (Tucker, 2013). Since most migrants tend to be of working age and from low-wage countries, they provide a ready market for labor.

Other factors, such as people’s preferences for work and work and leisure tend to affect the supply of labor. If workers prefer more work due to benefits, such as subsidized childcare, the supply of labor ultimately increases. Non-work benefits that entice people to increase their willingness to supply more labor include promotion prospects, holiday entitlements, and job security.

Consequently, having many dependents increases a person’s willingness to supply labor to a firm. The length of training workers determines the effective supply of labor both in the long-term and short-run. Barriers to entry into the labor market, for instance, due to strict qualifications needed also affect the labor supply in the market.

How Do Various Events Affect the Equilibrium Wage and Employment of Labor?

In the labor market equilibrium, the wage adjusts to balance the supply and demand for labor and as such the wage equals the value of the marginal product of labor. The demand for labor and the amount of labor supply will thus determine the equilibrium wage. Events, such as the retirement of a class of workers, such as the baby boomers and the changes in technology to enhance productivity will affect the employment of labor and equilibrium wage (Mulhearn & Vane, 2015). Following the retirement of workers, the equilibrium wage will rise while the employment of labor will fall. Technological advancements to increase productivity, on the other hand, would increase both equilibrium wage and employment of labor.

Increases in the supply of labor result in surplus labor thus exerting a downward pressure on wages. Firms see the profitability involved and hire more workers thereby lowering the value of the marginal product and as a result occasioning a diminishing marginal product, which gives the labor market new wage equilibrium. Labor supply results from a trade-off between leisure and work thus adjusting the price paid to each factor depending on their marginal contribution to production.

 

How Does Discrimination Affect the Amount of Money That a Person Earns?

Wage discrimination refers to a situation whereby similar workers are different remunerated depending on their age, gender, race, sexual orientation, or ethnicity rather than factors directly related to productivity. In wage discrimination scenarios, workers may earn lower wages in a particular job, or are assigned to low-wage jobs within firms, or even employed in low-wage firms.

Wage discrimination will thus affect the amount of money an individual makes because they will not apply for well-paying jobs as they know upfront that they will be discriminated against in the recruitment process (Hyclak, Johnes & Thornton, 2013). Similarly, people who have a history of wage discrimination will apply to low-wage jobs to avoid competition from the groups who are favored. Additionally, workers may collaborate to exclude those who they feel as different thus prompting firms to pay lower wages to the workers with less bargaining power.

Assuming that an employer discriminates against a certain group of people, the process of hiring certain kind of persons will make the organization have a segregated workforce. According to Becker’s model, discrimination does not pay whereby hiring workers of certain characteristics would make the employer pay a wage above the competitive wage thus fails to hire enough workers. The people who are discriminated against are likely to work in less-performing firms and thus end up getting lesser compensation compared to workers in firms that discriminate (Mankiw, 2009).

What Causes This Type of Discrimination?

Labor market discrimination refers to a situation whereby workers who are capable of producing the same number and quality of output are treated unequally by some observable characteristics, such as the color of their skin, gender, ethnicity, or age. In the United States, the labor market shows discrimination outcomes of Hispanics, Blacks, Whites, women, and men and the discrimination differences concern occupation, wage, education, employment, and workforce participation (Tucker, 2013).

A firm may favor workers with certain qualifications, which may discriminate against people who lack such skills and qualifications. Discrimination by qualifications is a form of premarket discrimination, which takes place before a worker can enter the job market. It also tends to discriminate against people depending on their impoverished neighborhoods, low parent health and education as well as unequal schooling systems.

Wage discrimination often takes place after the person has joined the workforce and results from legislation, imperfect competition, imperfect information, and prejudice (Mankiw, 2009). Some legislation may work against certain groups of people, such as immigrants to give preference to native workers. Further, imperfect information may be passed about an individual, which may make the employer discriminate against them and as a result prevent them from reaching a certain remuneration bracket either through permanent employment or promotions.

The action of firms to maximize their utility may lead to wage discrimination as they try to employ qualified workers, who happen to share common characteristics, hence prejudice. According to Becker’s taste model, employers and workers tend to have distaste for people from different ethnic backgrounds while consumers may dislike buying products from salespeople associated with certain characteristics (Hyclak et al., 2013).

Wage discrimination may also emanate from the employer’s ignorance as they may be unable to directly observe an individual’s productivity for characteristics, such as gender, race, and age. Therefore, through ignorance, the employers conclude that certain group of individuals are less productive and thus increase the chances of not hiring them even when they are competent and when hired they get paid less. Discrimination may also arise from occupational crowding effects whereby minorities and women are crowded into lower paying occupations.

What Do Governments Do to Try to Discourage Discrimination?

To discourage discrimination, governments pass legislations that offer equal compensation at work and discourage employers from engaging in such practices. The governments, through their rules and institutions, close the discrimination gaps thereby reflecting the power relations of society. For example, the United States federal and state governments prohibit pay or compensation discrimination through the equal pay Act, Title VII, ADEA, and ADA (Mulhearn & Vane, 2015).

The equal pay Act requires that people of both genders be compensated equally for equal work in the same establishment (Hyclak et al., 2013). According to the Act, the jobs need not be identical, although they must be substantially equal. The equal remuneration is thus determined by job content rather than job titles. Additionally, the Act mandates employers to desist from paying unequal wages to men and women who perform jobs that require substantially equal skill, responsibility, and effort and that are performed under similar working conditions within the same firm.

Title VII is contained in the Civil Rights Act of 1964 and was passed to deter wage discrimination in the workplaces. Other legislations include the Age Discrimination in Employment Act of 1967, ADEA and the Americans with Disabilities Act, ADA. Another piece of legislation is the Anti-Discrimination Act 1991, which prohibits discrimination based on sexual harassment and vilification in employment against the law (Mankiw, 2009). The Act applies in matters concerning termination of employment, terms and conditions of employment, and recruitment.

The Anti-Discrimination Act also gives employers the power to take appropriate action against supervisors who may engage in discrimination acts in the workplace. The employer may take disciplinary action against such supervisor or in serious cases dismiss them. The Act promotes equal opportunity principles and practices and thus increasing the productivity of a firm, smoothen work relations and avoid conflicts.

Governments also try to discourage pay discrimination by fixing the minimum wage on an annual basis (Tucker, 2013). The minimum wage specifies the amount of compensation each worker is liable to for the specified work performed. The employer cannot pay below the level set by the government. 

Are These Policies Successful in Your Opinion?

The policies are, however, successful because they have evidently led to decreased workplace conflicts, boosted workplace and market diversity, decreased the cost of training, improved client service delivery, and minimized the legal costs incurred. The policies have also led to reduced staff turnover as well as lesser disruptions. There is evidence of improved corporate image in firms which were traditionally known to discriminate against minority workers.

There are more employee entitlements than before as workers are minority workers and women now enjoy higher pay rates and leave provisions depending on their duties and responsibilities of the job rather than personal characteristics of individual workers. The laws governments pass also ensure that employers and organizations refrain from incorporating unlawful discrimination in their employment and management practices (Hyclak et al., 2013). Following the decreases in the number of litigations due to wage discrimination, one can say that the government policies on pay and compensation discrimination are a success.

Companies are less likely to discriminate against workers for fear of tainting their corporate image through bad press as civil cases are filed against them. To the victims of pay discrimination, companies are forced to pay remedies, which deter discrimination. These remedies include; promotions, front pay, reinstatements, hiring, back pay, compensatory damages, punitive damages, which affect a company’s profitability and overall image. The remedies may also be in the form of attorney fees, expert witness fees, and court costs.

Employers may be forced to post notices to workers addressing the violations of particular charges and providing advice on how to abstain from discrimination. The success of the government policies in combating wage discrimination can also be shown by the setting of the minimum wage rate for all employees (Mankiw, 2009).

How Is Poverty Measured in the US?  Is This an Effective Measurement?

The U.S. government measures poverty using income standard termed as the specific dollar amount that varies by family size but is the same across the continental United States. However, the measurement does not include other aspects of economic status, for instance, living in substandard housing or material hardship, debt, and financial assets. The current poverty measure was established in the 1960s based on research indicating that families spent about one-third of their incomes on food. Therefore, to set the official poverty level, economists multiplied food costs by three. Since the measurement was set, the figures are updated annually for inflation although they have remained unchanged.

The measurement compares pre-tax cash income against the threshold that is set at three times the cost of a minimum food diet and is updated annually using the Consumer Price Index for family composition, size, and age of the householder. The Census Bureau holds that households whose income is above 100 percent but below 125 percent of poverty are “near poverty” while those with incomes at or below 100 percent are considered “in poverty” (Hyclak et al., 2013).

However, the current measurement is deemed ineffective since it is flawed in the specific dollar amount is based on outdated assumptions about family expenditures. Statistics show that food accounts for only one-seventh of an average family’s expenses, with other costs, such as transportation, health care, child care, and housing growing disproportionately. Therefore, the poverty level does not show the true cost of supporting a family (Mankiw, 2009). Moreover, the current poverty measurement fails to adjust for the substantial variation in the cost of living between urban and rural areas or from state to state.

The poverty measurement technique used does not accurately count family resources. The measurement includes income sources, such as cash assistance, Social Security, dividends, interest, and earnings. The technique does not include the Federal earned income tax, thereby overstating the income for some families. Further, the poverty measurement does not take into consideration the assistance government gives to low-income families, for example, Medicaid, housing and child care assistance, and food stamps.

What are some of the Issues That the US Government Faces in Trying to Move People out Of Poverty?

It has been difficult for the U.S. government to move people out of poverty due to the declining work rates, the rise of female-headed families, the arrival of millions of immigrants with poor education and low skills stagnant wages, and inferior education in some states. Family composition plays an integral role in the fight against poverty as shown in the 2009 study which showed that the poverty rate for children in married-couple families was 11.0 percent compared to 44.3 percent for children in female-headed families (Mankiw, 2009). Therefore, rises in the number of families that are headed by female parents present a challenge in fighting poverty. The mothers have to work extra jobs to take care of their families, something that would have been greatly different had the children have two parents.

The problem of immigration presents a challenge to the government in combating poverty. For the past twenty years, over one million immigrants have obtained legal permanent resident status in the U.S. each year (Tucker, 2013). These immigrants are unable to find work or result to working in low-paying jobs, which do not change their poverty levels. The wage rate paid to some workers makes them unable to afford basic amenities, which is also a problem in the fight against poverty. Additionally, these people taking such low wages may have more than one dependent.

What are the Principal Challenges Faced in Moving from One Economic Class to Another?

When moving from one economic class to the next, people are faced with the challenges of increased equality, stagnant social mobility, as well as the rise of low-wage jobs without benefits. For the working poor, such factors adversely affect their ability to move forward and upward economically. For the middle class, on the other hand, the factors lead to susceptibilities to financial shocks, such as predatory mortgages, unexpected medical expenses, and job loss, which affect their ability to prepare for the future adequately.

Further, some individuals may be able to move to the middle class on paper, for example, due to their income levels, job titles, and education but may never experience long-term financial stability. The threat of economic insecurity is also a persistent problem for people seeking to transition to the next economic class. In 2010, 32 percent of the American households reported having sufficient emergency funds, which was a reduction from 38 percent in 2007 thus presenting a challenge in transitioning to a higher economic class.

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