Lecture 2 1-19-2012

Lecture 2 1-19-2012 - 151 lectures Jan. 19, 2012 copyright...

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151 lectures Jan. 19, 2012 copyright 2012 by Michael Reich The distinctive features of labor markets Labor markets differ from other markets, such as the market in oranges or the market in condos. Here I begin to examine how and why they differ. I begin with the nature of the labor contract, then the structure of labor markets and the role of institutions, including laws and policies. We will begin to examine reasons why simple supply and demand models are often inadequate to understand labor markets. Outline 1. The distinctive nature of the labor contract 2. Different labor market structures 3. Institutions 4. Why institutions arise 5. Significant laws and policies regulating the labor market 6. Labor market policies and institutions vary among countries 7. Summary and what’s next Theme for today: while all markets are regulated to some degree, the labor market is distinctive from other markets and is among the most regulated. 1
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1. The distinctive nature of the labor contract -- Labor is embodied in the seller . Since slavery and indentured servitude are forbidden, it is always a “rental” contract. The buyer has use of the worker for a specified time period and the seller is always free to leave— to break the contract. -- At will In the U. S., the employment contract is most often at will.” This means the employer has the right to fire an employee at any time, without notice and without specifying a reason. Workers who are covered by collective bargaining contracts do have employment protections. -- In the labor contract the employee is the subordinate . This reflects i nequality of bargaining power between buyer and seller, since in most cases, the employer has resources to survive without the exchange but the seller does not (a point made by Adam Smith). How the labor contract differs from a commercial contract with an independent contractor: Who supervises and organizes the work, who supplies the raw materials, tools and equipment, and in who gets the “residual” product, also called the surplus or profits. These distinctions are used by the IRS as the criteria for whether you get a W-2 form or a 1099 form. 2
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--The labor contract is typically an incomplete contract. Compared to a commercial contract, it does not specify in detail the amount or quality of the work that will be performed. As a result, employers may be careful about whom they hire and they may structure motivational incentives, such as more pay for more effort or promotion ladders. --Labor contracts are typically made in a nonclearing market , i.e., with positive unemployment rates. The price of labor—the nominal wage—is usually downwardly rigid even when unemployment is high. Why? Employers adjust to declining demand via layoffs rather
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Lecture 2 1-19-2012 - 151 lectures Jan. 19, 2012 copyright...

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