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635 ILRIC Lecture 9 Mechanisms for Addressing Labor Issues Core postulates: 1) Firms maximize profits () o Without a clear pathway to profit, private investors are not normally motivated to meet the needs of the poor Companies do sell things to poor people if it means high profit Protestors and consumers can force profit maximizing behavior to be more socially conscious o Profit () = Revenue (R) Cost (C) Not maximize revenue and minimize cost (maximize difference) 2) Individuals maximize utility o Utility = f (goods, leisure) Model catches the essence of reality so that we can all understand Free Market let the market forces be, don't intervene (as opposed to regulated markets) - Fields believes markets are powerful, but that non-intervention is illogical y2 Fields: we should choose where we are on this frontier Laissez-Faire: let it be, wherever that may be y1 o Sen: "free market can produce outcomes that are perfectly understandable and perfectly horrible" - Market regulation is a form of market intervention, but not the only one o Regulation try to change market outcome directly (minimum wage) Standard example: minimum age for labor Can have unfortunate consequences (rent control) Regulation can provide both arbitrariness as well as corruption o Pre-market interventions alter the distribution of purchasing power Tax ourselves to provide poor people with food stamps Universal primary and secondary education Market failures: 1) Externalities (positive or negative) person's actions directly affect another 2) Public goods good consumption does not diminish another's ability to consume o Underproduction due to free-rider mentality 3) Non-existence of markets certain (example: no market for human body parts) o Example: no market for borrowing against future human capital 4) Promote economic stability court system, central bank Developing a global mindset - Stiglitz change mindset to think and act globally to make globalization work - *??* Friedman fastest gazelle must be faster than the fastest lion, or it will be eaten, the slowest lion must be faster than the slowest gazelle or else it will starve - Fields does not believe in "sustainable competitive advantage" o Success invites others to imitate an capture what has been achieved Stiglitz and Friedman globalization must be managed, not unambiguously good or bad - Understanding other cultures - other people have the same aspirations as we do o Though these aspirations may be met with different weights than ours A majority of income earned in markets is earned from labor markets - Labor market problems o Unemployment worked virtually no hours for pay - People who work for very little income (work for less than $2 per day) o People in developing countries are working (for low amounts) Labor Market People supply labor upward sloping Wage S - Other L markets or out of L force (W) Firms demand labor downward sloping D - Demand less L or shut down Labor (L) - Shifts of curves occur when the change in supply/demand is not a wage change Kenyan Flower Industry W S $80 D L Basis of the model: Wage(W) W1 W* W2 S Surplus D L* Labor Shortage Market-clearing: amount supplied = amount demanded Equilibrium:1) economy tends there, and 2) once there, economy tends to stay there - Equilibrium could be market-clearing, or not, depending on equilibrating forces

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