Labor Costs

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Introduction

Definitions and Basics

    Wages and Working Conditions, from the Concise Encyclopedia of Economics
    CEOs of multinational corporations, exotic dancers, and children with lemonade stands have at least one thing in common. They all expect a return for their effort. Most workers get that return in a subtle and ever-changing combination of money wages and working conditions. This article describes how they changed for the typical U.S. worker during the twentieth century....
    Labor Unions, from the Concise Encyclopedia of Economics
    Although labor unions have been celebrated in folk songs and stories as fearless champions of the downtrodden working man, this is not how economists see them. Economists who study unions--including some who are avowedly prounion--analyze them as cartels that raise wages above competitive levels by restricting the supply of labor to various firms and industries.

    Many unions have won higher wages and better working conditions for their members. In doing so, however, they have reduced the number of jobs available in unionized companies. That second effect occurs because of the basic law of demand: if unions successfully raise the price of labor, employers will purchase less of it. Thus, unions are a major anticompetitive force in labor markets. Their gains come at the expense of consumers, nonunion workers, the jobless, taxpayers, and owners of corporations....
    Health Insurance, from the Concise Encyclopedia of Economics
    In 1980, fewer than ten million people were enrolled in HMOs. Today, more than seventy-four million are, about one in four Americans. Three-fourths of all employees with health insurance are covered by some type of managed care. What difference has this change made?

    First of all, it has meant fewer choices for patients and doctors. Only a few years ago, a person with private health insurance could see any doctor, enter any hospital, or (with a prescription) obtain any drug. Today, things are different. In general, patients must choose from a list of approved doctors covered by their health plans. But because employers switch health plans and employees often switch jobs, long-term relationships between patients and physicians are hard to form. Moreover, many people cannot see a specialist without a referral from a "gatekeeper" family physician or even get treatment at a hospital emergency room without prior (telephone) approval from their managed care organization. Patients who fail to follow the rules may have to pay part or all of the bill out of their own pockets....

In the News and Examples

    Adam Davidson on Manufacturing, podcast on EconTalk. February 20, 2012.
    Adam Davidson of NPR's Planet Money talks with EconTalk host Russ Roberts about manufacturing. Based on an article Davidson wrote for The Atlantic, the conversation looks at the past, present, and future of manufacturing. Davidson visited an after-market auto parts factory in Greenville, South Carolina and talked with employees there as well as with executives at corporate headquarters. What is the future of factory work in America? Why are some manufacturing jobs in America while others are in China or elsewhere? The conversation looks at these questions as well as how well or poorly the U.S. education system prepares students for the world of work.
    Lisa Turner on Organic Farming. EconTalk Podcast, December 2012.
    Lisa Turner of Laughing Stock Farm talks with EconTalk host Russ Roberts about life as a small organic farmer. She describes her working day, the challenges of farming, the role of the U.S. Department of Agriculture in her life and what some job applicants who want to work on her farm need to understand about business.
    Stop, Drop, and Roll: The Privileged Economic Position of Firefighters, by Bryan Strow.
    Firefighters are popular. The annual Harris-Interactive Poll of Prestigious Occupations routinely ranks firefighters as the most prestigious occupation in the country. This year, when Ohio's public-sector unions wished to protest limits on collective-bargaining powers for government employees, they used firefighters, rather than teachers, in their advertisements. They did so not only because of the prestige associated with firefighting, but also because Ohio's firefighters are more likely to be registered as Republicans than as Democrats. Even Republicans have trouble not advocating more pay for Republicans. Firefighters are known, in part, for their bravery. But they also tend to be smart--after all, they have parlayed their across-the-board popularity into above-market compensation under the guise of public safety.
    Human capital and education: Dan Pink on How Half Your Brain Can Save Your Job, podcast on EconTalk. June 11, 2007.
    Author Dan Pink talks about the ideas in his book, A Whole New Mind: Why Right-Brainers Will Rule the Future. He argues that the skills of the right side of the brain--skills such as creativity, empathy, contextual thinking and big picture thinking--are going to become increasingly important as a response to competition from low-wage workers overseas and our growing standard of living.
    Did the decline in unions cause the Recession of 2008? Dean Baker on the Crisis, podcast on EconTalk. January 9, 2012.
    Dean Baker of the Center for Economic Policy and Research talks with EconTalk host Russ Roberts about the financial crisis. Baker sees the crisis as part of a broader set of phenomena--rising inequality and declining unionization. Baker is highly critical on both economic and political grounds of the policy attempts to stimulate the economy as well as the governance structure of the Federal Reserve. The conversation closes with a discussion of potential innovations to lower the budgetary cost of health care.

A Little History: Primary Sources and References

    Wages are a more secure form of income than profits: Chapter 14, Wages, from Economic Harmonies, by Frédéric Bastiat
    All men eagerly long for security. We do indeed find a few restless, adventurous individuals in the world for whom the thrill of the unknown is a kind of emotional necessity. Nevertheless, we can affirm that men, taken as a whole, want to be free of fear for their future, to know what to count on, to arrange their lives in advance. To understand what store they set by security, we need only to observe how eagerly they rush into government employment. Let no one say that they do so because of the prestige of public service. There are certainly civil service positions in which the work involved is far from being of a high order. It consists, for example, in spying on one's fellow citizens, prying into their affairs, annoying them. Yet such positions are nonetheless sought after. Why? Because they represent security. Who has not heard a father say of his son: "I'm trying to get him on the list for a temporary appointment in such and such a government bureau. Naturally, it's irritating that they require such a costly education. It's also true that with that kind of education, he might have gone into some more brilliant career. As a government functionary he will never get rich, but he will be sure of his living. He will always have enough to eat. In four or five years he will be getting a salary of eight hundred francs; then he will go up, step by step, to three or four thousand. After thirty years of service, he can retire on his pension. His livelihood is therefore assured. It's up to him to learn to live moderately and humbly, etc."...
    "Trade Unionism in the United States: General Character and Types", by Robert F. Hoxie. Journal of Political Economy, 1914. Free on Econlib.
    From the popular viewpoint, trade unionism is a simple, definite phenomenon upon which it is easy and safe to pass positive and sweeping judgments. Almost everyone, in fact, who is at all interested in economic or social affairs is inclined to assume that he knows just about what unionism is and just what ought to be done about it. The man in the street, the lawyer, the economist, the social worker, the teacher, the preacher, each has his positive concept and his positive scheme for union control or regeneration....

Advanced Resources

    The Distribution of Wealth, by John Bates Clark
    [This is the original book that worked out the economics of wages and returns to capital (economic rents) as presented in classrooms today—the marginal products of labor and capital. Difficulty level: very advanced.]

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