LABOUR ECONOMICS

Labour Economics

Statistical discrimination is an economic theory that explains discrimination or prejudices perpetuated by gender or racial inequality based on stereotypes (Ashenfelter & Rees, 2015). The phenomenon occurs when people or organizations make distinctions between certain demographic groups based on what one may describe as real or imagined statistical distinctions between the groups. The pioneers of the theory are Kenneth Arrow and Edmund Phillips, who posit that where there is a lack of knowledge or information on a certain fact or ability, one would substitute group averages (Ashenfelter & Rees, 2015).

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If there is a difference between groups, the discriminators may use the group identity for screening. Statistical discrimination is more present when the group distributions are closer.

Occupational segregation is the distribution of people within and across jobs based on certain visible demographic characteristics (Ashenfelter & Rees, 2015). According to the author, these may include gender or race. The concept owes its origin to the work of Barbara Bergman, who was the first to propose it in 1974 (Ashenfelter & Rees, 2015). According to her, it could lead to male and female jobs, or job categories based on other considerations such as race. For example, women tend to occupy pink- collar jobs concentrated in the office such as administrative support and service occupations. On the other hand, men assume the blue- collar roles that may be more mechanical in nature and require more manual work (Ashenfelter & Rees, 2015).

The segregation index is a summary measure used to characterize the overall level of segregation. It captures several aspects as that cover how organizations discriminate against their workers. First, it gives a comparison of the degree of segregation over time. That tracks how well organizations perform when it comes to ensuring that they afford their employees equal treatment and avoid discriminative practices at the workplace. The index also tracks how different countries fair and the treatment that workers receive across boundaries. That is important in determining the best countries to work in and the ones that may not be as welcoming.

The index also captures differences between demographic on the basis of such as gender, age, race, and ethnicity. Another aspect captured in the index is a comparison between different sectors of the economy. One of the most commonly used segregation index is the Duncan index of dissimilarity. It is applicable for comparison between groups on the basis of race, age, the location of residence among other factors.

2a. Unemployment is a common occurrence in many countries and has different ways of manifesting itself. As such, there are different forms or types of unemployment, and they may occur individually or even simultaneously. One of the types of unemployment is frictional unemployment. Some people also refer to it as search unemployment because it happens when one leaves one job and is in the process of finding another (Mankiw & Taylor, 2011). It reflects the imperfections and the inevitable time lags that may be in the labor market.

Structural unemployment may take place when a particular change in the economy such as automation or permanent shifts in demand eliminates some jobs (Baumol & Blinder, 2006). According to the authors, structural unemployment is longer- term in nature and results from fundamental shifts in the economy. As such, it may last for decades and may require some random changes to address it. With advances in technology, machines may replace humans and people thus find themselves out of work (Mankiw & Taylor, 2011). Additionally, globalization may mean that producers can easily transfer jobs from one location to another, but the workers would not be willing to relocate, and they find themselves unemployed as a consequence (Mankiw & Taylor, 2011). Demand deficient unemployment occurs when the economy does not have enough aggregate demand to support full employment.

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In the diagram above, a slump in economic activity shifts the demand for labor reduces and given the stickiness of wages downwards; firms have to employ fewer employees (Mankiw & Taylor, 2011).

2b. Unemployment is an undesirable outcome that every country tries to combat. Governments employ measures to reduce the incidences of people without jobs to a minimum, and there is a host of policy options to choose from (Glanville & Glanville, 2011). According to the authors, there is no standard way of defining what the minimum is. They, however, argue that it is the priority that unemployment takes when it conflicts with other policy goals. Equally contentious are the methods proposed as cures for unemployment with some economists prescribing some approaches to deal with specific forms of unemployment (Glanville & Glanville, 2011). Further, the government may apply demand- sided measures to deal with unemployment resulting from a recession or insufficient aggregate demand or supply- sided measures to reduce structural unemployment (Baumol & Blinder, 2006).

The first policy is expansionary fiscal policy that would see the state relax the tax rates or increase its spending to boost aggregate demand.

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The fiscal policy shifts the demand from AD to AD2 and thus producers expand production for which they require more workers (Krugman & Wells, 2009). The government may also turn to monetary policy in which case it reduces interest rates. That reduces the cost of borrowing and people borrow and spend thus increasing the aggregate demand (Krugman & Wells, 2009).

On the supply side, the state may provide education and training programs to prospective employees to make them more marketable in the market (Glanville & Glanville, 2011). The government could also offer incentives to firms to set up in areas with high unemployment (Glanville & Glanville, 2011).

3. Labor productivity is a measure of the value of the output that the workers in a country produce per unit of time. One would need to divide a country’s real GDP in a year with the aggregate amount of hours that workers spent producing output to determine how productive they were. According to the Organization for Economic Cooperation in Development (OECD), labor productivity is an important indicator for any nation because it reveals several macroeconomic indicators. These include economic growth, competitiveness, and living standards that the people in the country enjoy (Glanville & Glanville, 2011).

Economic agencies and governments use several parameters to capture changes in productivity (Baumol & Blinder, 2006). The principle measure of the changes is the GDP per hour. The graph below shows the growth in Australia’s labor productivity since 1978, as captured by the GDP per hour.

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The growth in the productivity per worker could be as a result of several factors. The first one is the use of better technology in the production process (Arnold, 2011). According to the author, enhanced technology means that workers can produce more goods at any time as compared to before. Secondly, an increase in the physical or human capital used in production could also boost productivity. For continued growth in labor productivity, there is a need for sustained investment levels, and that would perhaps explain why countries with high savings rates have higher levels of productivity (Arnold, 2011).

4. In economic modeling, economists view the accumulation of human capital as an investment decision. An individual chooses to give up a portion of the income they could have earned in the period during which they undertake the training in return for enhanced earnings in the future. The decision to pursue higher education or further one’s learning comes with certain costs that Smart & Paulsen, (2011) categorize into three. First, an individual faces direct or out- of- pocket expenses that include tuition fees, spending on books, as well as other resources. The next set of costs is the foregone earnings. They occur because during the period one is learning they cannot work and even if they do they may not do it full time (Smart & Paulsen, 2011). The third set of costs is the psychic losses. According to the authors, one incurs these costs because the learning process often has difficulties and is also tedious.

A person several considerations when choosing whether to continue working or to take a break and first pursue higher education. The most critical factor is the earnings differential with theory having it that there is a positive correlation between the demand for higher education and the increase in lifetime earnings that a college education allows (Smart & Paulsen, 2011). It is difficult to predict future events with accuracy and students may, therefore, predict what they expect to earn based on what they see recent graduates earning.

Age is another critical factor. The analysis of age assumes similar yearly benefits for those that go to college or pursue higher education. The expectation is that younger people will have more in lifetime earnings than the older people becauss they would have more time working (Smart & Paulsen, 2011). The third factor is costs. As earlier mentioned, the decision to pursue higher education attracts certain costs that are both explicit and implicit. As such, changes in the real and perceived expenses in the short- term will affect one’s decision to pursue further studies (Smart & Paulsen, 2011). At the same time, incentives such as student loans and grants may make it more appealing for people to pursue education (Smart & Paulsen, 2011).

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5. The labor participation rate gives the portion of a country’s labor that is in active employment (GONG, 2011). In any economy, not all people that can work get to participate in gainful employment and thus the participation rate factors only those working currently as well as those seeking work. The participation rate comes in handy when assessing the unemployment rate in a country because the analysis is only sensible if it includes those that are unemployed but are in the process of looking for work (Gong, 2011).

The added worker effect explains the changes in the labor market manifesting themselves in the temporary spike in married women working as a result of their husbands becoming unemployed (Gong, 2011). According to the author, the concept goes back to the Great Depression in the 1940s when Wladimir S. Woytinsky conducted a study on the issue. The job loss by a family member may have a direct impact on the income of the household and members who suffer the consequences may respond, and that may have a bearing on the labor market (Gong, 2011).

Another critical consideration is the discouraged worker effect. This concept captures the number of people that may give up looking for work because they believe with enough conviction that they cannot find employment under the prevailing circumstances. That is especially the case in periods of recession as the economy is in a bad state and there may be few job openings (Glanville & Glanville, 2011).

An increase in the social security payments that the government pays would encourage more people to take up early retirement options (Krugman & Wells, 2009). Part of the reason why people near the retirement age choose to work longer is that they want to have more benefits in their sunshine years.

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1.The 90/10 ratio is a measure of income inequality in a given economy. It compares what the 90th percentiles of the citizens who form the top 10 percent of all income earners make and contrasts that with what the 10th percentile that represents the bottom 10 percent makes (Rycroft, 2013). According to the author, the 90/10 is the simplest measure of the income gaps that exist between those with high incomes and those with low incomes.

Economists have cited several reasons as the drivers of the earnings disparities. The first is the capital vs. labor share. According to the OECD, the percentage of earnings that trickles to workers has reduced to the 42 percent it is today from 50 percent in the 1960s, and that is the reality across the globe. That comes against the backdrop of rising corporate profits to mean that most of the profits go to capitalists and not workers (OECD, 2011). The figure below shows the picture in the United States.

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According to Mankiw & Taylor, (2011), the top earners have higher IQ and skills, and also contribute more to the economy. The globe has shifted to become more integrated and technologically- powered, and that has allowed the highly- talented people to generate their high incomes (Mankiw & Taylor, 2011). The growth of technology has further fuelled the growth of the super-rich individuals. The list of such people includes figure such as Bill Gates and Mark Zuckerberg as well as the Australian duo of Scott Farquhar and Mike Cannon-Brookes, who co- founders of the software enterprise Atlassian (Morrell, 2014). Another factor causing the inequality is the change in the growth of incomes with the people at the top seeing their incomes grow faster than those at the bottom (OECD, 2011).

2. The acceptance or reservation wage is the minimum that it would take for a job seeker to accept an offer (Brown & Taylor, 2013). When searching for employment, individuals have expectations of what they would like to earn once they land a new job. As such, they hope that whatever job they land offers more money than their acceptable minimum. Part of the formation of the reservation wage comprises the incorporation of forward- looking information that includes expectations about future wages and inflation (Brown & Taylor, 2013).

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Inflation and expected future changes in the price levels are critical considerations when setting the acceptance wage. A consumer has to set themselves a wage target that will enable him or her to comfortably adjust to changes in inflation in the future (Brown & Taylor, 2013). As such, the expectations about the future patterns in inflation factor in the acceptance wage framework. A consumer will rely on the information that they possess about future movements in inflation to set their anticipated minimum earnings target. They purely depend on the expected changes within the realms of their estimations and nothing outside of that. As such, unexpected changes in the future inflation figures largely have no effect on the reservation wage (Brown & Taylor, 2013).

3. Training and development is a critical component of the staffing function in any organization. The purpose of on- the-job training is to raise the employee’s productivity or make them acquire a given special skill that they did not possess before (Rima, 2015). There are two levels of training in any setting. First, there is general training that raises the productivity of a worker equally at all firms. Specific training, on the other hand, improves an employee’s productivity at one firm, but that improvement may not be useful at another firm (Rima, 2015).

General skills are useful at the incumbent firm where one is employed as well as other organizations in the industry. They are portable to mean that they are of no value to other employers while specific skills are not portable (Rima, 2015). The analysis of portability introduces the concept of portability that refers to a competitive labor market operating within a single given time period. The portability of general skills means that they are valuable on the spot market, and a firm might need to increase the skills of a worker who acquires them. Therefore, the firm need not pay for the acquisition of general skills but leave the cost to the worker (Rima, 2015). Specific skills, on the other hand, have no value on the spot market. As such, the firm need not increase the wage of workers that possess them. However, the firm would need to pay cost of acquiring them. That is because workers do not have the motivation to pay as they would not earn a wage increment even after their acquisition (Rima, 2015).

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4. Gary Becker developed a model that sought to demystify discrimination in employment. In perhaps the most prominent neoclassical explanation on discrimination, Becker says that some employers, workers, or customers do not want to interact with members of different races or gender (Becker, 2010). There is no justification for the prejudiced behavior with the conclusion being that it is just a taste or preference that one acquires.

If a firm does not want to employ workers from a certain group, it will have some choice and trade- offs to make. First, if it has to pay all workers the same, it can simply accomplish its goal by not employing members of the unwanted group (Becker, 2010). However, if there are wage differentials, then it faces some tradeoffs. It can hire from the less preferred group at lower wages and thus boost profitability. Also, it can employ only from the preferred class with no consideration for those from the marginalized or unwanted group even though they command higher wages, and that would reduce profits (Becker, 2010).

The scope of carrying out discriminative practices in employment diminishes in perfectly competitive markets. That is because discrimination comes with costs. By hiring more expensive workers, a firm foregoes the opportunity to employ cheaper labor and subsequently profits. In the long run, the non- discriminating firms will drive the discriminating ones out of the market (Becker, 2010).

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5. Compensation for employees comprises wage earnings as well as fringe benefits. Fringe benefits include publically- mandated programs such as social security as well as non- mandated programs such as insurance and pensions (McKenzie & Lee, 2006). The choice that a given worker faces when taking wages or fringe benefits is something one may look at in the same manner as they assess the choice between work and leisure.Workers have reasons to forego wage compensation for fringes. First, fringes are not taxable. Also, they may not have the discipline to sacrifice current consumption for something they may not need in future such as medical care or retirement benefits (McKenzie & Lee, 2006).
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The figure above is an isocost- isoprofit curve model. It shows the combinations of wages and fringe benefits that cost the employer a certain amount. Some economists refer to it as the isoprofit curve because it also shows the combinations that give the employers certain levels of profit.

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For a worker, the optimal combination that maximizes utility from wages and benefits is obtained by combining their indifference curve with the isocost line and the worker has to locate the highest indifference curve possible. The position occurs at the point of tangency between the two functions which happens to be at d in the above diagram.

Part Three

1.Economists perceive labor just like any other commodity traded on the market. As such, it has demand and supply sides, and the equilibrium quantity is a product of the interactions between the demand and supply factors (Borjas, 2005). According to the author, labor demand has an inverse relationship with the prevailing real wage.

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The first determinant of demand is the price or the cost of labor. A firm incurs costs when engaging labor and thus considers the much it would pay and has to assess the resources it has and whether they would be enough to pay the workers. Therefore, an increase in the relative cost of labor would mean that a firm hires less and may even lay some of the current staff off (Borjas, 2005).

The demand patterns in the economy also have an impact on the number of workers that firms demand. During times of prosperity, demand is strong, and thus, employers hire more staff unlike in times of recession, when demand is weak, and thus, the demand for labor is also subdued. Another factor that could affect demand is the incentives that the state could offer to employers (Borjas, 2005). For example, if the government offered subsidies to firms, they would be in a position to hire more staff, and that would mean that they demand more workers than before the subsidies regime (Borjas, 2005).

1b. The production function Q= f(L, K) describes the technological possibilities that the firm faces in its production (Lieberman & Hall, 2012). In the short- run, the assumption is that the amount of capital remains fixed at KO. Firms can increase their output by increasing labor but subject to the law of diminishing returns that implies a decreasing marginal product of labor.

In the long- run, the firm has the ability to change both capital (K) and labor (L). One has to assume that the marginal returns reduce on adding more units of K and simultaneously holding L constant and as well as adding more units of L while holding L constant (Lieberman & Hall, 2012). The long- run analysis uses the isoquant- isocost lines to determine the optimal quantities of K and L when K is variable. Assignment 2 - Labour Economics 13

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The figure above depicts the optimal combinations of K and L at different wage levels while holding the cost of capital constant. An increase in wages from W0 to W1 would reduce the demand for labor from LA to LB and that change has two components. First, there is the substitution effect shown by the movement from A to C, and that shows how the firm will have to use less labor and more capital to produce the same amount of goods QA at the higher wage level W1. The scale effect is the movement from C to B and measures how the amount of inputs used changes because of varying output, holding the input prices constant.

2a. Labor unions have always used their positions over the years to earn wage increases for their members (Cowen, Tabarrok, & Cowen, 2012). According to the authors, some suggest that unions are the reason why wages are so high in some countries and yet so low in others.

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The first medium that unions use to push for higher wages is restricting the supply of workers in a given sector or industry (Cowen, Tabarrok, & Cowen, 2012). They restrict the membership to the unions and threaten to strike if employers do not hire unionized members. That move shifts the labor supply curve leftwards and upwards and increases the wages (Cowen, Tabarrok, & Cowen, 2012).

Union workers enjoy relatively higher wages than comparable nonunion workers. Such disparities have often led to the concept of union premium to refer to the higher percentage that one is likely to earn by virtue of belonging to a union (Cowen, Tabarrok, & Cowen, 2012). It has therefore become acceptable that unionized workers should earn more, and that maintains the status quo where unions can have their workers earn more than outsiders. In many countries, unions enjoy protection in the law that they use to derive the power they wield in negotiations for workers’ benefits (Cowen, Tabarrok, & Cowen, 2012). The employers have to negotiate with the unions in good faith, and that hands the power to the unions.

2b. The spillover effect in the context of labor unions refers to the people the reduction in the wages that people outside the unions earn when they seek nonunion employment. The reality of higher wages by unions is that comes with an accompanying unemployment and those that lose their jobs spill over to the nonunion sector, effectively depressing their wages.

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Threat effect is the phenomenon where nonunion employers increase wages out of fear of off the threat of their workers becoming unionized (Borjas, 2005). As such, the threat of spillover effect is tempered by what some refer to as the equitable comparisons. The nonunion employers feel uncomfortable every time there is a union wage increase, and the larger the union- nonunion differential, the more the threat.

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Production market effect is the increase in nonunion wages caused by the shift in consumer demand from the relatively high priced goods by union workers to those by nonunion workers that are lower priced (Borjas, 2005).

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The superior worker effect, on the other hand, is a phenomenon where prospective workers will queue up for the good union jobs because of the better terms on offer. The availability of many job seekers means that employers have the chance to vet them and pick the best based on their ability, motivation, and the least need for supervision as well as productivity (Borjas, 2005). The diagram below illustrates the differences between the union and nonunion sectors.

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2c. Trade unions thrive in industries with imperfect competition as opposed to those with perfect competition (Hindriks & Myles, 2013). In perfectly competitive markets, firms are price takers. As such, each firm will maximize profits by choosing the employment level at which the marginal revenue product of labor will become equal to the wage rate. In a monopsony, however, the firms have a considerable degree of market power in selling their goods and hiring labor (Hindriks & Myles, 2013). Examples include having one firm as the employer in a town or the case of government. For the monopsonist, the marginal product of labor from additional employment exceeds the cost, and they could hire more labor. However, Hindriks & Myles, (2013) say that the firm will not increase the wage that it pays.

When the unions come in, they may increase both the wage as well as the people that the monopsony hires. Increasing the unionized staff is good for the unions since it gives them more power (Hindriks & Myles, 2013). In the diagram below, if the union bargains for wage rate W3, there will be no decline in employment which still remains at Q2.

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In the case of perfect competition, the actions of trade unions may cause unemployment. The trade unions may use threats and other mechanisms to agitate for higher wages. However, their negotiated wage is above equilibrium, and the firms have to reduce their employees.

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2d. The structural change hypothesis opines that the decline of labor unions over the past 50 years is due to the occurrence of unfavorable changes in the economy and the workforce unsuitable to union membership (Webster & Dunning, 2013). The manifestation of the change has come in many ways including the shift of unemployment from unionized industries and consumers moving their demand from goods manufactured by union US producers to foreign goods. Additionally, the demand has changed from the unionized firms typical of the old economic dispensation to more high- tech industry (Webster & Dunning, 2013). In recent times, most of the new workers have been the youth and women that are harder to unionize.

The managerial opposition hypothesis holds that firms are more opposed to trade unions now more than in the past (Webster & Dunning, 2013). According to the authors, the growth in union wage advantage over time is the reason behind the increased resistance.

Another reason for the unions’ decline is the substitution hypothesis that argues that other institutions have come to provide workers with the services that they obtained from the unions (Webster & Dunning, 2013). For the unions, their success in achieving more government intervention in employer- employee relations, as well as their ability to convince firms that it is in their best interest to treat their workers with respect and share their gains with them, has meant that there reduced demand for their services (Webster & Dunning, 2013).

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3. A perfectly competitive labor market bears several characteristics that make it stand out. First, it comprises a large number of firms competing for a specific type of labor (Webster & Dunning, 2013). Also, there are many people possessing a given skill and who independently supply their service. Thirdly, the firms in the market are price makers and do not have any power to set wages. Another aspect of the market is perfect information and thus costless and perfect mobility of labor(Webster & Dunning, 2013).

Allocative efficiency in the labor market is a notion that suggests that people get to work in the fields or areas in which they are most suited (Webster & Dunning, 2013). According to the authors, it occurs when workers are directed to their highest value use. That implies society obtains the highest output from the labor available. It means that the value of the marginal product of labor (VMP) is the same for all alternative employments (Webster & Dunning, 2013).

When one considers any two industries, the VMP of the last unit of labor hired must be the same for both for there to be allocative efficiency. The VMP must equal the wage paid for the labor. Firms will be willing to hire more labor as long as their VMP exceeds the marginal wage cost. They will continue hiring more workers until their VMP equals the wage rate (Webster & Dunning, 2013). According to the authors, these conditions are present in perfectly competitive markets and therefore perfect competition reflects efficiency in allocation.

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3b. The situation above reflects perfect competition in both the product as well as the labor market. Sometimes though it is possible to have perfect competition in the labor market but a monopoly in the product market. A monopoly usually experiences a demand curve that slopes downwards to mean it must reduce its price so as to increase sales (Arnold, 2011). If the firm is hiring from a perfectly- competitive market but producing in a monopoly, it then becomes a wage taker but a price maker.

For a firm facing such a scenario, it has a labor demand curve that is less elastic than the competitive curve (Borjas, 2005). The monopolist behaves in a manner similar to a competitor by determining the profit- maximizing level of employment where MRP= MWC. The wage that the monopoly pays in a scenario with no intervention by trade unions is the same as that paid by competitive firms. The monopoly case results in misallocation of labor resources.In perfect competition, the price of labor is reflective of the opportunity cost to society of using a resource in a particular employment. However, in monopoly, the VMP is greater than the price of labor for workers that the monopolist does not hire (Borjas, 2005). The implication is too few resources being allocated to the employment concerned and too many allocated elsewhere.

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3c. Another possible scenario when analyzing the labor markets is the monopsony. In this case, there is a single firm that hires a particular type of labor (Borjas, 2005). A monopsony has the power marginal wages that are lower than the marginal product of additional labor. The firm must increase the amount it pays to attract labor away from other industries. Another assumption is that the firm cannot pay its workers at different rates. As such, if it increases its wages so as to attract additional staff, it must pay all its workers at the higher rates (Borjas, 2005). Therefore, the marginal wage cost exceeds the wage rate.

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The labor supply curve is downward sloping because the monopsonist is the only one that hires that type of labor and thus faces the market’s supply curve (Lieberman & Hall, 2012). For the firm to maximize profits, it would need to equate MWC and MRP, which in the case of a competitive firm would be at the intersection of the D(L) and S(L) curves (Lieberman & Hall, 2012). However, the it is not profitable for the monopsony to operate as a competitor would and thus resorts to paying workers at a rate less than the competitive one and also one that is below the MRP of the last unit of labor employed (Lieberman & Hall, 2012).

4a. The determination of the interaction of labor demand and supply. That is according to the principle of wage determination that underlies the mechanism of pricing at the factor market (Kyloh, 2008). Such a scenario assumes perfect competition in the labor market with homogeneity of labor, a large number of buyers and sellers, perfect labor mobility, and perfect information. As such, all workers should get equal wages. The reality, however, is that there exists wage differentials even in the case of similar jobs and level of skill or experience (Kyloh, 2008).

In some instances, there may be compensating wage differentials that are rewards for risk- taking such as working in poor conditions (Rima, 2015). The actions of trade unions could create wage differentials because union staff may earn more than their nonunion counterparts even though they do a similar job (Rima, 2015).

The security associated with a certain job may also play a hand in the differentials. According to Rima, (2015), if two people are doing the same type of work but only one has guaranteed job security, it is likely that he will earn more than the other person who does not have similar security in their work. Wage differentials reflect the imperfect nature of the market. As such, the employers may offer different wages for similar jobs because the job seekers lack perfect information on how much they should earn for the work (Rima, 2015). That also factors the negotiating ability of an individual worker.

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4b. The classical theory of labor markets suggests that the determination of wages is a function of the elasticity of labor supply and the demand for labor as explained by the marginal revenue product (MRP) of labor (Rima, 2015). As such, a highly- skilled worker earns more because of higher MRP and the inelastic nature of supply.

One of the most important explainers of wage inequality is the differences in skills or qualifications. For jobs requiring a high level of skills, the supply is inelastic and thus wages are high. Firms have little choice when hiring labor that requires specialized qualifications and thus, have to pay more. Workers with low skill requirement face a more elastic supply hence low wages.

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The marginal product of labor is another determinant of wage equality as seen in the classic model (Kyloh, 2008). Workers with higher productivity should receive more in wages. Holding all other factors constant, a worker with higher productivity will earn more. Another source of wage inequality is the non- competing groups in the labor market. One has to view the market as consisting of different groups categorized based on the skills they possess (Kyloh, 2008). Teachers and doctors belong to different groups, and while people within a given category may compete with each other, there is no competition between two distinct groupings. Each category faces a unique set of factors that determine the wage levels and these differences contribute to wage inequalities (Kyloh, 2008).

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