Chapter 1 Flashcards
How is “labor” considered to be a market?
1) institutions such as want ads and employment agencies have been developed to facilitate contact between buyers and sellers of labor services
2) information about price and quality is exchanged in employment applications and interviews
3) some kind of contract (formal or informal) is made covering compensation, conditions of work, job security, and duration of the job.
- employers compensate employees for their time and not for what they produce
- employers give careful attention to worker motivation and dependability of workers.
In the labor market, labor services can only be…
Rented
Workers can’t be bought and sold
Because labor services cannot be separated from workers, the conditions under which services are rented are often as important as the price.
-nonpecuniary factors
A host of institutions and pieces of legislation that influence the employment relationship do not exist in other markets
What is the most important national resource, and where is it allocated?
Through the labor market, out most important national resource (labor) is allocated to firms, industries, occupations, and regions.
Labor economics
The study of the workings and outcomes of the market for labor.
Labor economics is primarily concerned with the behavior of employers and employees in response to the general incentives of wages, prices, profits, and nonpecuniary aspects of the employment relationship, such as working conditions
These incentives serve to both motivate and to limit individual choice
The focus in economics is on inducements for behavior that are impersonal and apply to a wide range of…
People.
Positive economics
Most used
“What is”
Is a theory of behavior in which people are typically assumed to respond favorably to benefits and negatively to costs
Closely resembles the skinnerian psychology, which views behavior as shaped by rewards and punishments
The rewards in economic theory are pecuniary and nonpecuniary gains (benefits), while the punishments are forgone opportunities (costs)
The purpose of positive economics is to analyze, or understand, the behavior of people as they respond to market incentives.
Scarcity
Any resource devoted to satisfying one set of desires could have been used to satisfy another set, which means that there is a cost to any decision or action.
We are always constrained in our choices by the resources available to us.
Rationality
A second basic assumption of positive economics is that people are rational.
They have an objective and pursue it in a reasonably consistent fashion.
When considering persons, economists assume that the objective being pursued is utility maximization
Utility maximization
(Part of rationality)
Utility is generated by both p…….. And n……….. Dimensions of employment
People are assumed to strive toward the goal of making themselves as happy as they can, given their limited resources.
Utility is generated by both pecuniary and nonpecuniary dimensions of employment
Profit maximization
(Part of rationality)
When considering the behavior of firms (nonpersonal entities) economists assume that the goal of behavior is profit maximization.
Profit maximization is a special case of utility maximization in which pecuniary gain is emphasized and nonpecuniary factors are ignored
The assumption of R………. Implies a consistency of response to general economic incentives and an adaptability of behavior when those incentives change.
These two characteristics of behavior underlie predictions about how workers and firms will respond to various incentives
Rationality
Behavioral predictions in economics flow more or less directly from the two fundamental assumptions of s……. And R……….
Economists usually assume that when making these choices, employees and employers are guided by their desires to m……. U…… Or p…..
What is more important to the economic theory of behavior is not the particular goal of either employees or employers, rather it’s that economic actors weigh the costs and benefits of various alternative transactions in the context of achieving some goal or other
The theory underlying positive economics should be judged on the basis of its predictions, not its assumptions.
Scarcity and rationality
(Applies to both workers and employers)
Maximize utility or profit
Anytime we attempt to explain a complex set of behaviors and outcomes using a few fundamental influences, we have created a m….
Model
Models are not intended to capture every complexity of behavior; instead, they are created to strip away random and idiosyncratic factors so that the focus is on general principles.
A physical model- average tendencies
Calculated estimate, based on known information
Understanding normative economics begins with the realization that there are two kinds of economic transactions.
One kind is entered into voluntary because…?
All parties to the transaction gain
The role of the labor market is to facilitate these v…….., m……. a……….. Transactions
Voluntary, mutually advantageous transactions
Pareto (economic) efficiency
If the market is successful in facilitating all possible mutually beneficial transactions
The word e……… Is used by economists in a very specialized sense to denote a condition in which all mutually beneficial transactions have been concluded.
This definition of the word is more comprehensive than its normal connotation of cost minimization.
Efficiency
If p….. E……… Were actually attained, no more transactions would be undertaken voluntarily because they would NOT be mutually advantageous.
Pareto efficiency
Understanding normative economics begins with the realization that there are two kinds of economic transactions.
The second kind of transaction is in which one or more parties L…
These transactions often involve the R…………. Of I….., for gain at the expense of others
Lose
Redistribution of income (not entered into voluntarily unless motivated by charity, in which case the donors gain nonpecuniary satisfaction)
- otherwise, redistribution transactions are mandated by government through tax and expenditure policies
- while markets facilitate voluntary transactions, the government’s job is often to make certain transactions mandatory.
Normative economics
Use this to judge “what should be”
Any normative statement (what ought to exist) is based on some underlying value.
G……… P……. Affecting the labor market are often based on the widely shared, but not universally agreed upon, value that society should try to make the distribution of income more equal
Normative economics
Government policies
- welfare, minimum wage laws, and restrictions on immigration are all policies based on distributional considerations.
- other labor market policies are intended either to change or to overrule the choices workers make in maximizing their utility
-underlying value= workers should not be allowed to place themselves or their families at risk of physical or financial harm
(Wearing protective devices like hard hats and earplugs,=seen as meritorious in certain settings that is required of workers even if they would choose otherwise)
Policies seeking to R……….. I….. Or force the consumption of meritorious goods are often controversial because…?
Some workers will feel worse off when the policies are adopted.
-these transactions must be governmentally mandated because they will not be entered into voluntarily
Pareto improving
Policies or transactions from which all affected parties
Promote Pareto Efficiency
These policies or transactions can be justified on the grounds that they unambiguously enhance social welfare; therefore they can be unanimously supported
These policies are of special interest to economists because economics is largely the study of market behavior-voluntary transactions in the pursuit of self-interest.
A transaction can unanimously supported when one of the following occurs:
A) all parties who are affected by the transaction ….
B) some parties …. No one else …..
C) some parties gain and some lose from the transaction, but…?
A) all parties who are affected by the transaction gain
B) some parties gain No one else loses
C) some parties gain and some lose from the transaction, but the gainers fully compensate the losers
-when “C” happens, it is said to become “B”
Many economists argue that compensation must take place for a government policy to be justified on the grounds that it promotes P….. E………
Pareto efficiency
Economists often judge a transaction by whether the g…. of the beneficiaries exceed the costs borne by the l….., making it possible that there would be no l…..
Gains, losers
When the compensation of losers IS possible but DOES NOT take place there are in fact losers
Market failure: i……..
People may be i……. Of some important facts, leading them to make decisions that are not in their self interest
Ignorant
Market failures
1) i……..
2) t………. B…….
3) e…………
4) p….. G….
5) p…. D………
Market failures
1) ignorance
2) transaction barriers
3) externalities
4) public goods
5) price distortion
Market failure: t………. B…….
Often created by what?
Transaction barrier
There may be some barrier to the completion of a transaction
Often created by laws that prohibit certain transactions.
(Women’s rights for employment)
-Society as a whole can suffer losses when transactions that are mutually beneficial are prohibited by government
Another barrier may be the expense of completing the transactions.
-unskilled workers facing very limited opportunities in one region might desire to move to take better jobs, or might want to enter job-training programs.. But might lack the funds to do so.
Market failure: e…………
Externalities
When a buyer and a seller agree to a transaction that imposes costs or benefits on people who were NOT party to their decision
-some decisions have costs or benefits that are “external” to the decision makers.
If all transaction costs and benefits fall to the decision makers, then society can be assured that the transaction represents a step toward Pareto efficiency.
If there are costs or benefits to people who were NOT able to influence the decision, then the transaction may not have positive net benefits to society
With externalities:
For is to have confidence that a particular transaction is a step toward Pareto efficiency, the decision must be…?
Voluntarily accepted by all who are affected by it.
If there are externalities to a transaction, people who are affected by it, but can’t influence the ultimate decision, are being forced into a transaction that they may not have been willing to make.
-may be that the cost of transaction is greater than benefits, once all costs and benefits (not just the main decision makers) are accounted for.
Child labor is considered to be an e……….
Externality
Kids can’t make decisions for themselves
If adult figures ignore the best interest of the kids and force them to work instead of go to school, then society is at a loss
What would exist if workers have no mechanism to transfer their costs of being injured at work to their employers, who are making the decisions about how much to spend to reduce workplace risk
Externalities
If these mechanisms don’t exist, then our workplaces will be less safe than they should be, because employers are ignoring at least some costs in making their decisions about risk reduction.
Market failure: p….. G….
Public goods
A special kind of externality called the “free rider problem”
Research findings are an example of a….
Public good.
A good that can be consumed by any number of people at the same time, including those who do not pay
Because nonpayers cannot be excluded from consuming the good, no potential customer will have an incentive to pay
-may cause the provider not to produce this
In the case of public goods, private decision makers ignore the benefits to others when making their decisions because…?
They have no mechanism to “capture” these benefits
As a result, society will under-invest in such goods unless the government, which can compel payments through taxes, steps in to produce the public good.
Market failure: p…. D………
Price distortion
A special barrier to transaction is caused by taxes, subsidies, or other forces that create “incorrect” prices.
Prices powerfully influence the incentives to transact, and the prices asked or received in a transaction should reflect the true preferences of the parties to it.
Price distortion:
When prices become decoupled from preferences, parties may be led to make transactions that are…?
Not socially beneficial or avoid others that would be advantageous
If plumbers charge $25 per hour, but customers must pay an extra $5 of tax to the government, customers who are willing to pay between $25 & $30 per hour and would hire plumbers in the absence of the tax are discouraged from doing so- to the detriment of both parties.
Normative economics and government policy
For other types of transaction barriers, the needed intervention is for the government to either compel or actively promote transactions different from the ones that would be made by “the market”
When the government decides to “replace” a market decision by one of its own, the policy prescription is complicated because?
Of the need to guess what the appropriate transaction could/should be
Could be beneficial or cause major problems
Capital market imperfections
Workers find it difficult to obtain loans that would allow them to obtain Job training or finance them to relocate for a better job because usually all they can offer is their promise to pay it back.
The government responds by?
- making the loans even though it could be risky because allowing workers to acquire new skills or move to where workers are needed would strengthen the overall economy
- they would also have to decide on the appropriate circumstances of approving such loans, like how much to loan.
Performing the benefit-cost analyses needed to intelligently address the problem of externalities requires a solid grasp of economic theory
Efficiency versus equity
The social goal of a more equitable distribution of income is of often paramount importance to political decision makers, and disputes can arise over whether e….. Or e……. E……… Should be the prime consideration in setting policy
Equity or economic efficiency
-one source of dispute is that there is not a unique set of transactions that are Pareto efficient
There are a lot of different sets of transactions that can satisfy our definition of economic efficiency, and questions can arise over which one is more equitable
-second source of dispute over equity and efficiency is rooted in the problem that to achieve more equity, steps away from Pareto efficiency must often be taken
~minimum wage laws block transactions of parties who would be willing to make a lower wage
Normative economics tends to stress e……… Over e….. Considerations, not because it is more important but because…?
Efficiency over equity
Because it can be analyzed more scientifically
For a transaction to be mutually beneficial, all that is required is?
For each party to feel better off
Thus, studying voluntary transactions is useful when taking economic efficiency into account
Equity considerations always involve?
Comparing the welfare lost by some against the utility gained by others
-can’t be scientifically done because we can’t measure happiness
For policy decisions based on considerations of equity, society usually turns to guidance from the ……… …… Not from the …….
Political system.
Not the markets.
