A Rare Disagreement with Bryan Caplan
By David Henderson
Last week I highlighted Bryan Caplan’s comprehensive notes, homework sets, and keys to homework for the courses he teaches.
While perusing his first homework set for his labor economics course, I came across the following problem:
Using separate supply-and-demand curves, show what happens in a single occupation if employers provide free coffee for workers, and:
A. Workers like coffee, but the caffeine makes them “hyper” and less able to do their job.
B. Workers actively dislike coffee, but it enhances their ability to keep working late at night.
I agree with his answer to A. But he provides the following answer to B:
Labor supply decreases, but labor demand increases.
I think that’s wrong. If workers “actively dislike coffee,” they won’t drink it. So there will be no effect on labor supply.
The effect on labor demand is also interesting. If the employer provides this every day, then he/she will notice that at the end of the day, none of the coffee is being drunk. So the employer will likely get rid of it. But, taking Bryan at his word that the employer is providing something the employees don’t like, and assuming that the more workers employed, the more unused coffee is being provided, then the employer regards the cost of the coffee as incremental to the decision to employ a given worker. The employer’s demand curve for labor falls.
What if, however, the employer provides a fixed amount of coffee no matter how many workers there are? Why would the employer do this? The coffee is going to be thrown out at the end of the day anyway, so why not waste one gallon of coffee instead of ten gallons? Then the coffee expense is not incremental to hiring an additional employee. Assuming that the coffee expense is not great enough to shut the employer down, there is no effect on the employer’s demand for labor.
I might, though, be taking Bryan too literally when he says that workers “actively dislike coffee.” Maybe he means that they dislike it but somehow feel compelled to drink it. That would be a pretty nasty employer, but OK. Then his reasoning is correct.
If that’s the spirit of the question, then I think I have a better question that gets at Bryan’s point without raising the problems I raised with his coffee example. It would be this, for part B:
Using separate supply-and-demand curves, show what happens in a single occupation if employers pipe in music to the workplace, music over which the workers have no control, and:
B. Workers hate the music, but it enhances their ability to keep working late at night.
Then his conclusions about demand and supply curves would follow. Even here, though, I would want to specify some cost of supplying the music and whether the cost varies with the number of employees. (It probably doesn’t.)