HW_C5 - Chapter 5 Frictions in the Labor Market This...

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Chapter 5 Frictions in the Labor Market This chapter, which is new to the ninth edition, analyzes the implications of labor market frictions on both the employee and employer sides of the market. Frictions workers face in moving among employers (that is, mobility costs) mean that the horizontal labor supply curve to firms associated with simple theory—which implies that wages follow the “law of one price”—must be reconsidered. Indeed, mobility costs create upward-sloping labor supply curves to employers that create monopsonistic conditions in the labor market. The implications of these conditions for employment, wages, and the employment effects of mandated wages (the minimum wage, for example) are analyzed in the first section of the chapter. Also analyzed in the context of monopsonistic conditions are the relationship of wages to both labor market experience and tenure with an employer. The second section considers the effects of frictions (the costs of adjusting the labor input) found on the employer side of the market. The section begins with a description of the magnitude and growth of nonwage labor costs, because the quasi-fixed costs of labor are generally nonwage in nature. One implication of the existence of both variable and quasi-fixed labor costs is that there arises a tradeoff between increasing employment through hiring added workers and increasing employment through hiring workers for longer hours. The tradeoff between workers and hours is then discussed, and the importance of distinguishing between employment and hours is highlighted in our policy analysis of the overtime pay premium and mandated benefits for part-time workers. The third and fourth sections offer detailed analyses of the two principal types of labor investments: training investments and hiring investments. In the section on training investments the student is introduced to the notion of general and specific training, as well as to the implications of training investments for the demand for labor. While Chapter 9 also covers aspects of education and training, it is our belief that this introduction to human capital theory in Chapter 5 is useful. In this chapter, as throughout the text, we introduce particular concepts or tools as they are called for by the larger context of analysis, because by maintaining a clear view of the overall context of analysis, the student is better able to learn the insights that economics has to offer. In this particular case, we deliberately chose to spread the concepts of human capital theory across different chapters—using these concepts as necessary and maintaining the overall substantive organization of the text (built around demand and supply).
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HW_C5 - Chapter 5 Frictions in the Labor Market This...

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