Cameron Trujillo May 1st, 2014 Economics 1010 Macroeconomic Paper: The labor market- How wages are

decided, and why minimum wage is important

Within Economics there are different disciplines and focuses. One great focus within economics is Labor. Labor is a factor of production, first and foremost, but on a deeper level economics studies the role of workers and their part in the play of an economy. In this paper I would like to expand on an issue that fascinates me within the labor market, that being how wages are decided and other factors that influence labor within an economy. Labor markets provide great insight into the relationship between firms and workers. Labor markets can also help us understand why different workers receive different wages, through the study of different aspects of the relationship between workers and firms. This paper will discuss the great question of why do different workers receive different wages, and propose three explanations and factors that influence the labor market. Those being, labor unions, risk within the workplace, and price floors (minimum wage regulations or governmental intervention). Labor unions within the United States came to be due to poor working conditions for employees and poor treatment of employees by businesses. During the industrial revolution within the United States, there was little to no regulation on firms and no defined workers rights. Employees would work fifteen hour days, seven days a week in very dreary working conditions. It was not uncommon for workers to lose limbs due to accidents involving heavy machinery or to develop illnesses from the unsanitary conditions within the factory. Unions emerged as a way to protect and raise the standard for workers.

Today, about 11.3% of the workforce is a union member according to the Bureau of Labor Statistics. This 11.3% pay union dues and are active members of the union. Union membership often results in higher wages for workers who are both union members and, in right to work states, are represented by unions. As a matter of fact, wages average about $150 more for those who are within and represented by unions per week, than those who have no union affiliation at all, according to the Bureau of Labor Statistics. Below is a graphical representation of average weekly wages for union members, those represented by unions who are not members, and those who have no affiliation with unions.

A great benefit that unions bring is that where and when they represent industries with a relatively inelastic demand curve have more success in that they can demand higher wages for their members without costing the jobs and positions of other workers. Another explanation for why different workers receive different wages surrounds workplace conditions and environments. Within some industries the cost of making the working conditions more desirable is simply to instead give in to the workers in their desire for higher wages. Here is a firsthand example of this: within Salt Lake City there is a dog food plant. The plant manufactures wet dog food. The food has a very strong stench that is incredibly hard for

most to be around. It is a strong smell that often makes workers sick. However, for those workers that can take the odor, wages are higher than those individuals who are in a similar skill set or production type positions. To compensate for the difficult working conditions firms offer higher wages, a sort of mask or way to tip the opportunity cost of it. A compensating wage differential is simply a wage that compensates for non-money conditions of work (like in our example of the dog food plants work environment). Ideally these wages compensate for unpleasant factors of the workers position. Difference types of employees and workers have different preferences for unpleasantness within the workplace. This can be defined on an indifference curve for workers. The following graph defines the different preferences for three workers. This graph represents a worker who works in a risky facility and whose wages are directly associated with that risk. As risk, or unpleasant circumstances and whatever it may be, increases so does his/ her wage. It requires more to coerce the worker to perform the tasks he/ she is assigned.

Price floors, or minimum wage as set by the economies government, can also help determine why certain workers receive certain wages. A price floor is a minimum price below

which exchange is not permitted. The most common price floor within an economy is a minimum wage. In the United States the federal minimum wage is currently $7.25 per hour. Per federal law employers are not permitted to pay an employee below the minimum wage (price floor). For a price floor to be effective it often must be set above the equilibrium price. To illustrate, the minimum wage must be higher than the market determined equilibrium price. However when this occurs demand for the good (or in this case the labor) lowers, because it is now priced higher than the equilibrium rate as seen on the graph below.

Unfortunately this can lead to a surplus in labor as workers are priced out of the market because their skill set is below the lowest legal wage. Minimum wage does, however, protect those within the market. A minimum wage, by government definition, is a wage that is livable for workers. It is a wage that provides the necessities for a worker. Those within the market have assurance that they will never earn less than the price floor, or the minimum wage. There are many factors that contribute to a workers wage and explain why workers earn different amounts. Labor economists are economists that study the various factors in an attempt

to explain a wage. Through my research and what I have learned I have become impressed with the workings of the market and the delicate balance of it all that make up an employees wage.

Bibliography

Schiller, B. R. (1993). The Labor Market. Essentials of economics (). New York: McGraw-Hill.

Wages: Minimum Wage (2009, July 24). Retrieved May 1, 2014, from http://www.dol.gov/dol/topic/wages/minimumwage.htm

Case, K. E., & Fair, R. C. (1994). The Labor Market in the Macroeconomy. Principles of economics (3rd ed., ). Englewood Cliffs, N.J.: Prentice Hall.

Union affiliation of employed wage and salary workers by selected characteristics. (2014, January 24). . Retrieved April 28, 2014, from http://www.bls.gov/news.release/union2.t01.htm