# Labor Markets and Income

## Introduction to Labor Markets and Income

In a market economy like the United States, income comes from ownership of the means of production: resources or assets.  More precisely, one’s income is a function of two things:   the quantity of each resource one owns, and the value society places on those resources.
Recall from the chapter on Production, Costs, and Industry Structure, each factor of production has an associated factor payment.  For the majority of us, the most important resource we own is our labor.  Thus, most of our income is wages, salaries, commissions, tips and other types of labor income. Your labor income depends on how many hours you work and the wage rate an employer will pay you for those hours.  At the same time, some people own real estate, which they can either use themselves or rent out to other users.  Some people have financial assets like bank accounts, stocks and bonds, for which they earn interest, dividends or some other form of income.

Each of these factor payments, like wages for labor and interest for financial capital, is determined in their respective factor markets.  For the rest of this chapter, we will focus on labor markets, but other factor markets operate similarly.  Later in Chapter 17 we will describe how this works for financial capital.


# Labor Markets and Income

## The Theory of Labor Markets

The labor market, like all markets, has a demand and a supply.  Why do firms demand labor?  Why is an employer willing to pay you for your labor?  It’s not because the employer likes you or is socially conscious.  Rather, it’s because your labor is worth something to the employer--your work brings in revenues to the firm.  How much is an employer willing to pay?  That depends on the skills and experience you bring to the firm.
If a firm wants to maximize profits, it will never pay more (in terms of wages and benefits) for a worker than the value of their marginal productivity to the firm.  We call this the first rule of labor markets.
Suppose a worker can produce two widgets per hour and the firm can sell each widget for $4 each.  Then the worker is generating $8 per hour in revenues to the firm, and a profit-maximizing employer will pay the worker up to, but no more than, $8 per hour, because that is what the worker is worth to the firm.
Recall the definition of marginal product.  Marginal product is the additional output a firm can produce by adding one more worker to the production process.  Since employers often hire labor by the hour, we’ll define marginal product as the additional output the firm produces by adding one more worker hour to the production process.  In this chapter, we assume that workers in a particular labor market are homogeneous—they have the same background, experience and skills and they put in the same amount of effort.  Thus, marginal product depends on the capital and technology with which workers have to work.
A typist can type more pages per hour with an electric typewriter than a manual typewriter, and the typist can type even more pages per hour with a personal computer and word processing software.  A ditch digger can dig more cubic feet of dirt in an hour with a backhoe than with a shovel.
Thus, we can define the demand for labor as the marginal product of labor times the value of that output to the firm.
On what does the value of each worker’s marginal product depend?  If we assume that the employer sells its output in a perfectly competitive market, the value of each worker’s output will be the market price of the product. Thus,
Demand for Labor = MPL x P = Value of the Marginal Product of Labor
We show this in , which is an expanded version of
Note that the value of each additional worker is less than the value of the ones who came before.

### Demand for Labor in Perfectly Competitive Output Markets

The question for any firm is how much labor to hire.
We can define a Perfectly Competitive Labor Market as one where firms can hire all the labor they want at the going market wage.  Think about secretaries in a large city.  Employers who need secretaries can probably hire as many as they need if they pay the going wage rate.
Graphically, this means that firms face a horizontal supply curve for labor, as Figure 14.3 shows.
Given the market wage, profit maximizing firms hire workers up to the point where: Wmkt = VMPL

### Demand for Labor in Imperfectly Competitive Output Markets

If the employer does not sell its output in a perfectly competitive industry, they face a downward sloping demand curve for output, which means that in order to sell additional output the firm must lower its price.  This is true if the firm is a monopoly, but it’s also true if the firm is an oligopoly or monopolistically competitive.  In this situation, the value of a worker’s marginal product is the marginal revenue, not the price.  Thus, the demand for labor is the marginal product times the marginal revenue.
The Demand for Labor = MPL x MR = Marginal Revenue Product
Everything else remains the same as we described above in the discussion of the labor demand in perfectly competitive labor markets.  Given the market wage, profit-maximizing firms will hire workers up to the point where the market wage equals the marginal revenue product, as  shows.

### What Determines the Going Market Wage Rate?

In the chapter on Labor and Financial Markets, we learned that the labor market has demand and supply curves like other markets.  The demand for labor curve is a downward sloping function of the wage rate.  The market demand for labor is the horizontal sum of all firms’ demands for labor.  The supply of labor curve is an upward sloping function of the wage rate.  This is because if wages for a particular type of labor increase in a particular labor market, people with appropriate skills may change jobs, and vacancies will attract people from outside the geographic area.  The market supply of labor is the horizontal summation of all individuals’ supplies of labor.
Like all equilibrium prices, the market wage rate is determined through the interaction of supply and demand in the labor market.  Thus, we can see in  for competitive markets the wage rate and number of workers hired.
The FRED database has a great deal of data on labor markets, starting at
the wage rate and number of workers hired.

The United States Census Bureau for the Bureau of Labor Statistics publishes The Current Population Survey, which is a monthly survey of households (you can find a link to it by going to the FRED database found in the previous link), which provides data on labor supply, including numerous measures of the labor force size (disaggregated by age, gender and educational attainment), labor force participation rates for different demographic groups, and employment.  It also includes more than 3,500 measures of earnings by different demographic groups.
The Current Employment Statistics, which is a survey of businesses, offers alternative estimates of employment across all sectors of the economy.
The FRED database, found in the previous link, also has a link labeled "Productivity and Costs" has a wide range of data on productivity, labor costs, and profits across the business sector.

### Key Concepts and Summary

A firm demands labor because of the value of the labor’s marginal productivity.  For a firm operating in a perfectly competitive output market, this will be the value of the marginal product, which we define as the marginal product of labor multiplied by the firm’s output price.  For a firm which is not perfectly competitive, the appropriate concept is the marginal revenue product, which we define as the marginal product of labor multiplied by the firm’s marginal revenue.  Profit maximizing firms employ labor up to the point where the market wage is equal to the firm’s demand for labor.  In a competitive labor market, we determine market wage  through the interaction between the market supply and market demand for labor.

### Self-Check Questions

### Review Questions

### References

AFL-CIO. “Training and Apprenticeships.” http://www.aflcio.org/Learn-About-Unions/Training-and-Apprenticeships.
Cook, Lisa D. 2020. "Policies To Broaden Participation in the Innovation Process." The Hamilton Project. https://www.hamiltonproject.org/assets/files/Cook_PP_LO_8.13.pdf.
Darity Jr., William A. 1998. "Evidence of Discrimination in Employment: Codes of Color, Codes of Gender." Journal of Economic Perspectives 12 (2): 63–90.
Central Intelligence Agency. “The World Factbook.” https://www.cia.gov/library/publications/the-world-factbook/index.html.
Clark, John Bates. Essentials of Economic Theory: As Applied to Modern Problems of Industry and Public Policy. New York: A. M. Kelley, 1907, 501.
United Auto Workers (UAW). “About: Who We Are.” http://www.uaw.org/page/who-we-are.
United States Department of Labor: Bureau of Labor Statistics. “Economic News Release: Union Members Summary.” Last modified January 23, 2013. http://www.bls.gov/news.release/union2.nr0.htm.
United States Department of Labor, Bureau of Labor Statistics. 2015. “Economic News; Union Members Summary.” Accessed April 13, 2015. http://www.bls.gov/news.release/union2.nr0.htm.


# Labor Markets and Income

## Wages and Employment in an Imperfectly Competitive Labor Market

In the chapters on market structure, we observed that while economists use the theory of perfect competition as an ideal case of market structure, there are very few examples of perfectly competitive industries in the real world.  What about labor markets?  How many labor markets are perfectly competitive?  There are probably more examples of perfectly competitive labor markets than perfectly competitive product markets, but that doesn’t mean that all labor markets are competitive.
When a job applicant is bargaining with an employer for a position, the applicant is often at a disadvantage—needing the job more than the employer needs that particular applicant. John Bates Clark (1847–1938), often named as the first great American economist, wrote in 1907: “In the making of the wages contract the individual laborer is always at a disadvantage. He has something which he is obliged to sell and which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity.”
To give workers more power, the U.S. government has passed, in response to years of labor protests, a number of laws to create a more equal balance of power between workers and employers. These laws include some of the following:
1. Setting minimum hourly wages
2. Setting maximum hours of work (at least before employers pay overtime rates)
3. Prohibiting child labor
4. Regulating health and safety conditions in the workplace
5. Preventing discrimination on the basis of race, ethnicity, gender, sexual orientation, and age
6. Requiring employers to provide family leave
7. Requiring employers to give advance notice of layoffs
8. Covering workers with unemployment insurance
9. Setting a limit on the number of immigrant workers from other countries
 lists some prominent U.S. workplace protection laws. Many of the laws listed in the table were only the start of labor market regulations in these areas and have been followed, over time, by other related laws, regulations, and court rulings.
There are two sources of imperfect competition in labor markets.  These are demand side sources, that is, labor market power by employers, and supply side sources: labor market power by employees.  In this section we will discuss the former.  In the next section we will discuss the latter.
A competitive labor market is one where there are many potential employers for a given type of worker, say a secretary or an accountant. Suppose there is only one employer in a labor market.  Because that employer has no direct competition in hiring, if they offer lower wages than would exist in a competitive market, employees will have few options.  If they want a job, they must accept the offered wage rate.  Since the employer is exploiting its market power, we call the firm a monopsony, a term introduced and widely discussed by Joan Robinson (though she credited scholar Bertrand Hallward with invention of the word). The classical example of monopsony is the sole coal company in a West Virginia town.  If coal miners want to work, they must accept what the coal company is paying.  This is not the only example of monopsony. Think about surgical nurses in a town with only one hospital.  A situation in which employers have at least some market power over potential employees is not that unusual.  After all, most firms have many employees while there is only one employer. Thus, even if there is some competition for workers, it may not feel that way to potential employees unless they do their research and find the opposite.
How does market power by an employer affect labor market outcomes?  Intuitively, one might think that wages will be lower than in a competitive labor market.  Let’s prove it.  We will tell the story for a monopsonist, but the results will be qualitatively similar, although less extreme, for any firm with labor market power.
Think back to monopoly.  The good news for the firm is that because the monopolist is the sole supplier in the market, it can charge any price it wishes.  The bad news is that if it wants to sell a greater quantity of output, it must lower the price it charges.  Monopsony is analogous.  Because the monopsonist is the sole employer in a labor market, it can offer any wage that it wishes.  However, because they face the market supply curve for labor, if they want to hire more workers, they must raise the wage they pay.  This creates a quandary, which we can understand by introducing a new concept: the marginal cost of labor.   The marginal cost of labor is the cost to the firm of hiring one more worker.  However, here is the thing: we assume that the firm is determining how many workers to hire in total.  They are not hiring sequentially.  Let’s look how this plays out with the example in .
There are a couple of things to notice from the table.  First, the marginal cost increases faster than the wage rate.  In fact, for any number of workers more than one, the marginal cost of labor is greater than the wage.  This is because to hire one more worker requires paying a higher wage rate, not just for the new worker but for all the previous hires also.  We can see this graphically in Figure 14.7.
If the firm wants to maximize profits, it will hire labor up to the point Lm where DL = VMP (or MRP) = MCL, as  shows.  Then, the supply curve for labor shows the wage the firm will have to pay to attract Lm workers.   Graphically, we can draw a vertical line up from Lm to the Supply Curve for the label and then read the wage Wm off the vertical axis to the left.
How does this outcome compare to what would occur in a perfectly competitive market?  A competitive market would operate where DL = SL, hiring Lc workers and paying Wc wage.  In other words, under monopsony employers hire fewer workers and pay a lower wage.  While pure monopsony may be rare, many employers have some degree of market power in labor markets.  The outcomes for those employers will be qualitatively similar though not as extreme as monopsony.

### Key Concepts and Summary

A monopsony is the sole employer in a labor market.  The monopsony can pay any wage it chooses, subject to the market supply of labor.  This means that if the monopsony offers too low a wage, they may not find enough workers willing to work for them.  Since to obtain more workers, they must offer a higher wage, the marginal cost of additional labor is greater than the wage.  To maximize profits, a monopsonist will hire workers up to the point where the marginal cost of labor equals their labor demand.  This results in a lower level of employment than a competitive labor market would provide, but also a lower equilibrium wage.

### Critical Thinking Questions

### References

Clune, Michael S. “The Fiscal Impacts of Immigrants: A California Case Study.” In The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration, edited by James P. Smith and Barry Edmonston. Washington, DC: National Academy Press, 1998, 120–182. http://www.nap.edu/openbook.php?record_id=5985&page=120.
Smith, James P. “Immigration Reform.” Rand Corporation: Rand Review. http://www.rand.org/pubs/periodicals/rand-review/issues/2012/fall/leadership/immigration-reform.html.
U.S. Department of Homeland Security: Office of Immigration Statistics. “2011 Yearbook of Immigration Statistics.” September 2012. http://www.dhs.gov/sites/default/files/publications/immigration-statistics/yearbook/2011/ois_yb_2011.pdf.


# Labor Markets and Income

## Market Power on the Supply Side of Labor Markets: Unions

A labor union is an organization of workers that negotiates with employers over wages and working conditions. A labor union seeks to change the balance of power between employers and workers by requiring employers to deal with workers collectively, rather than as individuals.  As such, a labor union operates like a monopoly in a labor market.  We sometimes call negotiations between unions and firms collective bargaining.
The subject of labor unions can be controversial. Supporters of labor unions view them as the workers’ primary line of defense against efforts by profit-seeking firms to hold down wages and benefits. Critics of labor unions view them as having a tendency to grab as much as they can in the short term, even if it means injuring workers in the long run by driving firms into bankruptcy or by blocking the new technologies and production methods that lead to economic growth. We will start with some facts about union membership in the United States.

### Facts about Union Membership and Pay

According to the U.S. Bureau of Labor and Statistics, about 10.3% of all U.S. workers belong to unions. This represents nearly a 50% reduction since 1983 (the earliest year for which comparable data are available), when union members were 20.1% of all workers. Following are some facts about unions for 2021 (note that we are using the population categories and group names utilized in the data collection and publication):
1. 10.6% of U.S. male workers belong to unions; 9.9% of female workers do
2. 10.7% of White workers, 12.3% of Black workers, and 9.8 % of Hispanic workers belong to unions
3. 11.8% of full-time workers and 5.7% of part-time workers are union members
4. 4.4% of workers ages 16–24 belong to unions, as do 13.2% of workers ages 45-54
5. Occupations in which relatively high percentages of workers belong to unions are the federal government
(26.0% belong to a union), state government (29.9%), local government (41.7%); transportation and utilities
(17.6%); natural resources, construction, and maintenance (15.9%); and production, transportation, and material moving (13.3%)
6. Occupations that have relatively low percentages of unionized workers are agricultural workers (1.7%), financial services (1.9%), professional and business services (2.2%), leisure and hospitality (2.2%), and wholesale and retail trade (4.5%)

In summary, the percentage of workers belonging to a union is higher for men than women; higher for Black than for White or Hispanic people; higher for the 45–64 age range; and higher among workers in government and manufacturing than workers in agriculture or service-oriented jobs.  lists the largest U.S. labor unions and their membership.
In terms of pay, benefits, and hiring, U.S. unions offer a good news/bad news story. The good news for unions and their members is that their members earn about 20% more than nonunion workers, even after adjusting for factors such as years of work experience and education level. The bad news for unions is that the share of U.S. workers who belong to a labor union has been steadily declining for 50 years, as  shows. About one-quarter of all U.S. workers belonged to a union in the mid-1950s, but only 10.3% of U.S. workers are union members today. If you leave out government workers (which includes teachers in public schools), only 6.1% of the workers employed by private firms now work for a union.
The following section analyzes the higher pay union workers receive compared the pay rates for nonunion workers. The section after that analyzes declining union membership levels. An overview of these two issues will allow us to discuss many aspects of how unions work.

### Higher Wages for Union Workers

How does a union affect wages and employment?  Because a union is the sole supplier of labor, it can act like a monopoly and ask for whatever wage rate it can obtain for its workers.  If employers need workers, they have to meet the union’s wage demand.

What are the limits on how much higher pay union workers can receive? To analyze these questions, let’s consider a situation where all firms in an industry must negotiate with a single union, and no firm is allowed to hire nonunion labor. If no labor union existed in this market, then equilibrium (E) in the labor market would occur at the intersection of the demand for labor (D) and the supply of labor (S) as we see in .  This is the same result as we showed in Figure 14.6 above.  The union can, however, threaten that, unless firms agree to the wages they demand, the workers will strike. As a result, the labor union manages to achieve, through negotiations with the firms, a union wage of Wu for its members, above what the equilibrium wage would otherwise have been.
This labor market situation resembles what a monopoly firm does in selling a product, but in this case a union is a monopoly selling labor to firms. At the higher union wage Wu, the firms in this industry will hire less labor than they would have hired in equilibrium. Moreover, an excess supply of workers want union jobs, but firms will not be hiring for such jobs.
From the union point of view, workers who receive higher wages are better off. However, notice that the quantity of workers (Qd) hired at the union wage Wu is smaller than the quantity Qe that the firm would have hired at the original equilibrium wage. A sensible union must recognize that when it pushes up the wage, it also reduces the firms’ incentive to hire. This situation does not necessarily mean that union workers are fired. Instead, it may be that when union workers move on to other jobs or retire, they are not always replaced, or perhaps when a firm expands production, it expands employment somewhat less with a higher union wage than it would have done with the lower equilibrium wage. Other situations could be that a firm decides to purchase inputs from nonunion producers, rather than producing them with its own highly paid unionized workers, or perhaps the firm moves or opens a new facility in a state or country where unions are less powerful.
From the firm’s point of view, the key question is whether union workers’ higher wages are matched by higher productivity. If so, then the firm can afford to pay the higher union wages and, the demand curve for “unionized” labor could actually shift to the right. This could reduce the job losses as the equilibrium employment level shifts to the right and the difference between the equilibrium and the union wages will have been reduced. If worker unionization does not increase productivity, then the higher union wage will cause lower profits or losses for the firm.
Union workers might have higher productivity than nonunion workers for a number of reasons. First, higher wages may elicit higher productivity. Second, union workers tend to stay longer at a given job, a trend that reduces the employer’s costs for training and hiring and results in workers with more years of experience. Many unions also offer job training and apprenticeship programs.
In addition, firms that are confronted with union demands for higher wages may choose production methods that involve more physical capital and less labor, resulting in increased labor productivity.  provides an example. Assume that a firm can produce a home exercise cycle with three different combinations of labor and manufacturing equipment. Say that the firm pays labor $16 an hour (including benefits) and the machines for manufacturing cost $200 each. Under these circumstances, the total cost of producing a home exercise cycle will be lowest if the firm adopts the plan of 50 hours of labor and one machine, as the table shows. Now, suppose that a union negotiates a wage of $20 an hour including benefits. In this case, it makes no difference to the firm whether it uses more hours of labor and fewer machines or less labor and more machines, although it might prefer to use more machines and to hire fewer union workers. (After all, machines never threaten to strike—but they do not buy the final product or service either.)
In the final column of the table, the wage has risen to $24 an hour. In this case, the firm clearly has an incentive for using the plan that involves paying for fewer hours of labor and using three machines. If management responds to union demands for higher wages by investing more in machinery, then union workers can be more productive because they are working with more or better physical capital equipment than the typical nonunion worker. However, the firm will need to hire fewer workers.
In some cases, unions have discouraged the use of labor-saving physical capital equipment—out of the reasonable fear that new machinery will reduce the number of union jobs. For example, in 2015, the union representing longshoremen who unload ships and the firms that operate shipping companies and port facilities staged a work stoppage that shut down the ports on the western coast of the United States. Two key issues in the dispute were the desire of the shipping companies and port operators to use handheld scanners for record-keeping and computer-operated cabs for loading and unloading ships—changes which the union opposed, along with overtime pay. President Obama threatened to use the Labor Management Relations Act of 1947—commonly known as the Taft-Hartley Act—where a court can impose an 80-day “cooling-off period” in order to allow time for negotiations to proceed without the threat of a work stoppage. Federal mediators were called in, and the two sides agreed to a deal in February 2015. The ultimate agreement allowed the new technologies, but also kept wages, health, and pension benefits high for workers. In the past, presidential use of the Taft-Hartley Act sometimes has made labor negotiations more bitter and argumentative but, in this case, it seems to have smoothed the road to an agreement.
In other instances, unions have proved quite willing to adopt new technologies. In one prominent example, during the 1950s and 1960s, the United Mineworkers union demanded that mining companies install labor-saving machinery in the mines. The mineworkers’ union realized that over time, the new machines would reduce the number of jobs in the mines, but the union leaders also knew that the mine owners would have to pay higher wages if the workers became more productive, and mechanization was a necessary step toward greater productivity.
In fact, in some cases union workers may be more willing to accept new technology than nonunion workers, because the union workers believe that the union will negotiate to protect their jobs and wages, whereas nonunion workers may be more concerned that the new technology will replace their jobs. In addition, union workers, who typically have higher job market experience and training, are likely to suffer less and benefit more than non-union workers from the introduction of new technology. Overall, it is hard to make a definitive case that union workers as a group are always either more or less welcoming to new technology than are nonunion workers

### The Decline in U.S. Union Membership

The proportion of U.S. workers belonging to unions has declined dramatically since the early 1950s. Economists have offered a number of possible explanations:

1. The shift from manufacturing to service industries
2. The force of globalization and increased competition from foreign producers
3. A reduced desire for unions because of the workplace protection laws now in place
4. U.S. legal environment that makes it relatively more difficult for unions to organize workers and expand their membership
Let’s discuss each of these four explanations in more detail.
A first possible explanation for the decline in the share of U.S. workers belonging to unions involves the patterns of job growth in the manufacturing and service sectors of the economy as  shows. The U.S. economy had about 15 million manufacturing jobs in 1960. This total rose to 19 million by the late 1970s and then declined to 17 million in 2013. Meanwhile, the number of jobs in service industries (including government employment) rose from 35 million in 1960 to over 118 million by 2013, according to the Bureau of Labor Statistics. Because over time unions were stronger in manufacturing than in service industries, the growth in jobs was not happening where the unions were. It is interesting to note that government workers comprise several of the biggest unions in the country, including the American Federation of State, County and Municipal Employees (AFSCME); the Service Employees International Union; and the National Education Association.  lists the membership of each of these unions. Outside of government employees, however, unions have not had great success in organizing the service sector.
A second explanation for the decline in the share of unionized workers looks at import competition. Starting in the 1960s, U.S. carmakers and steelmakers faced increasing competition from Japanese and European manufacturers. As sales of imported cars and steel rose, the number of jobs in U.S. auto manufacturing fell. This industry is heavily unionized. Not surprisingly, membership in the United Auto Workers, which was 975,000 in 1985, had fallen to roughly 390,000 by 2015. Import competition not only decreases the employment in sectors where unions were once strong, but also decreases the bargaining power of unions in those sectors. However, as we have seen, unions that organize public-sector workers, who are not threatened by import competition, have continued to see growth.
A third possible reason for the decline in the number of union workers is that citizens often call on their elected representatives to pass laws concerning work conditions, overtime, parental leave, regulation of pensions, and other issues. Unions offered strong political support for these laws aimed at protecting workers but, in an ironic twist, the passage of those laws then made many workers feel less need for unions.
These first three possible reasons for the decline of unions are all somewhat plausible, but they have a common problem. Most other developed economies have experienced similar economic and political trends, such as the shift from manufacturing to services, globalization, and increasing government social benefits and regulation of the workplace. Clearly there are cultural differences between countries as to their acceptance of unions in the workplace. The share of the population belonging to unions in other countries is very high compared with the share in the United States.  shows the proportion of workers in a number of the world’s high-income economies who belong to unions. The United States is near the bottom, along with France and Spain. The last column shows union coverage, defined as including those workers whose wages are determined by a union negotiation even if the workers do not officially belong to the union. In the United States, union membership is almost identical to union coverage. However, in many countries, the wages of many workers who do not officially belong to a union are still determined by collective bargaining between unions and firms.
These international differences in union membership suggest a fourth reason for the decline of union membership in the United States: perhaps U.S. laws are less friendly to the formation of unions than such laws in other countries. The close connection between union membership and a friendly legal environment is apparent in the history of U.S. unions. The great rise in union membership in the 1930s followed the passage of the National Labor Relations Act of 1935, which specified that workers had a right to organize unions and that management had to give them a fair chance to do so. The U.S. government strongly encouraged forming unions during the early 1940s in the belief that unions would help to coordinate the all-out production efforts needed during World War II. However, after World War II came the passage of the Taft-Hartley Act of 1947, which gave states the power to allow workers to opt out of the union in their workplace if they so desired. This law made the legal climate less encouraging to those seeking to form unions, and union membership levels soon started declining.

The procedures for forming a union differ substantially from country to country. For example, the procedures in the United States and those in Canada are strikingly different. When a group of workers wishes to form a union in the United States, they announce this fact and set an election date when the firm's employees will vote in a secret ballot on whether to form a union. Supporters of the union lobby for a “yes” vote, and the firm's management lobbies for a “no” vote—often even hiring outside consultants for assistance in swaying workers to vote “no.” In Canada, by contrast, a union is formed when a sufficient proportion of workers (usually about 60%) signs an official card saying that they want a union. There is no separate “election date.” The management of Canadian firms is limited by law in its ability to lobby against the union. In addition, although it is illegal to discriminate and fire workers based on their union activity in the United States, the penalties are slight, making this a not so costly way of deterring union activity. In short, forming unions is easier in Canada—and in many other countries—than in the United States.
In summary, union membership in the United States is lower than in many other high-income countries, a difference that may be due to different legal environments and cultural attitudes toward unions.

### Key Concepts and Summary

A labor union is an organization of workers that negotiates as a group with employers over compensation and work conditions. Union workers in the United States are paid more on average than other workers with comparable education and experience. Thus, either union workers must be more productive to match this higher pay or the higher
pay will lead employers to find ways of hiring fewer union workers than they otherwise would. American union membership has been falling for decades. Some possible reasons include the shift of jobs to service industries; greater competition from globalization; the passage of worker-friendly legislation; and U.S. laws that are less favorable to organizing unions.

### Critical Thinking Questions

### References

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Donovan, Theresa. Jurist. “Federal Judge Rejects Class Status in Wal-Mart Discrimination Suit.” Last modified August 5, 2013. http://jurist.org/paperchase/2013/08/federal-judge-rejects-class-status-in-wal-mart-discrimination-suit.php.
Harris, Elizabeth A. “Labor Panel Finds Illegal Punishments at Walmart.” The New York Times, November 18, 2013. http://www.nytimes.com/2013/11/19/business/labor-panel-finds-illegal-punishments-at-walmart.html?_r=1&.
Kolesnikova, Natalia A., and Yang Liu. Federal Reserve Bank of St. Louis: The Regional Economist. “Gender Wage Gap May Be Much Smaller Than Most Think.” Last modified October 2011. http://www.stlouisfed.org/publications/re/articles/?id=2160.
Podmolik, Mary Ellen. “HUD Finds Housing Discrimination ‘Hidden’ But Prevalent.” Chicago Tribune: Business, June 12, 2013. http://articles.chicagotribune.com/2013-06-12/business/ct-biz-0612-housing-discrimination-20130612_1_renters-testers-chicago-area.
Spreen, Thomas Luke. United States Department of Labor: Bureau of Labor Statistics. “Recent College Graduates in the U.S. Labor Force: Data from the Current Population Survey.” Monthly Labor Review (February, 2013). http://www.bls.gov/opub/mlr/2013/02/art1full.pdf .
U.S. Bureau of Labor Statistics: BLS Reports. 2014.  “Women in the Labor Force: A Databook (Report 1052).” Accessed April 13, 2015. http://www.bls.gov/opub/reports/cps/women-in-the-labor-force-a-databook-2014.pdf.
U.S. Equal Employment Opportunity Commission, “Walmart to Pay More than $11.7 Million to Settle EEOC Sex Discrimination Suit.” Last modified March 1, 2010. http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm.
United States Census Bureau. 2014. “Table 1. Educational Attainment of the Population 18 Years and Over, by Age, Sex, Race, and Hispanic Origin: 2014.” Accessed April 13, 2015. http://www.census.gov/hhes/socdemo/education/data/cps/2014/tables.html.
United States Department of Labor: Bureau of Labor Statistics. “News Release: Usual Weekly Earnings of Wage and Salary Workers (Third Quarter 2013).” November 1, 2013. http://www.bls.gov/news.release/pdf/wkyeng.pdf.
Warner, Judith. 2014. “Fact Sheet: The Women’s Leadership Gap: Women’s Leadership by the Numbers.” Center for American Progress. Accessed March 16, 2015. https://www.americanprogress.org/issues/women/report/2014/03/07/85457/fact-sheet-the-womens-leadership-gap/.
Weinberger, Catherine J., and Lois Joy. “The Relative Earnings of Black College Graduates, 1980–2001.” In Race and Economic Opportunity in the 21st Century, edited by Marlene Kim. New York: Routledge, 2007. http://www.econ.ucsb.edu/~weinberg/grads.pdf.


# Labor Markets and Income

## Bilateral Monopoly

What happens when there is market power on both sides of the labor market, in other words, when a union meets a monopsony?  Economists call such a situation a bilateral monopoly.
 is a combination of Figure 14.6 and Figure 14.11. A monopsony wants to reduce wages as well as employment, Wm and L* in the figure. A union wants to increase wages, but at the cost of lower employment, Wu and L* in the figure.  Since both sides want to reduce employment, we can be sure that the outcome will be lower employment compared to a competitive labor market.  What happens to the wage, though, is based on the monopsonist’s relative bargaining power compared to the bargaining power of the union.  The actual outcome is indeterminate in the graph, but it will be closer to Wu if the union has more power and closer to Wm if the monopsonist has more power.

### Key Concepts and Summary

A bilateral monopoly is a labor market with a union on the supply side and a monopsony on the demand side.  Since both sides have monopoly power, the equilibrium level of employment will be lower than that for a competitive labor market, but the equilibrium wage could be higher or lower depending on which side negotiates better.  The union favors a higher wage, while the monopsony favors a lower wage, but the outcome is indeterminate in the model.

### Review Questions


# Labor Markets and Income

## Employment Discrimination

Barriers to equitable participation in the labor market drive down economic growth. When certain populations are underrepresented, underpaid, or mistreated in a labor market or industry, the negative outcomes can effect the larger economy. For example, many science and technology fields were either unwelcoming or overtly unaccepting of women and people of color. Some major contributors to these fields overcame these challenges. Mexican-American scientist Lydia Villa-Komaroff, for example, faced overt discrimination when her college advisor told her not to pursue chemistry because women didn't "belong" in chemistry. She pursued biology instead; she developed the first instance of synthetic insulin (the chemical that people with diabetes need in order to survive) through a process that has saved million of lives and is credited with launching the entire industry of biotechnology—one of the most important in the U.S. economy. But for every Villa-Komaroff, there have been thousands of women who were prevented from making those contributions. Beyond the personal impact on those people, consider the impact on those scientific fields, our overall quality of life, and the economy itself. Economist Lisa D. Cook has quantified the costs of these innovation losses. She estimates that GDP could be as much as 4.4% higher if women and people from minority populations were fully able to participate in the science and technology innovation process.
Discrimination involves acting on the belief that members of a certain group are inferior or deserve less solely because of a factor such as race, gender, or religion. There are many types of discrimination but the focus here will be on discrimination in labor markets, which arises if workers with the same skill levels—as measured by education, experience, and expertise—receive different pay or have different job opportunities because of their race or gender. Much of the data collected and published on these topics are limited in terms of the diversity of people represented, and focus particularly on binary gender, single-race, and single-ethnicity identities. While these characterizations do not capture the diversity of Americans, the findings are important in order to understand discrimination and other practices, and to consider the impacts of policies and changes. Also, while sex and gender are different, many data sets, laws, court decisions, and media accounts use the terms interchangeably. For consistency, we will use the terminology found in the source material and government data.

### Earnings Gaps by Race and Gender

A possible signal of labor market discrimination is when an employer pays one group less than another.  shows the average wage of Black workers as a ratio of the average wage of White workers and the average wage of female workers as a ratio of the average wage of male workers. Research by the economists Francine Blau and Laurence Kahn shows that the gap between the earnings of women and men did not move much in the 1970s, but has declined since the 1980s. Detailed analysis by economists Kerwin Kofi Charles and Patrick Bayer show that the gap between the earnings of Black and White people diminished in the 1970s, but grew again so that current differences are as wide as they were nearly 70 years ago. In both gender and race, an earnings gap remains.
An earnings gap between average wages, in and of itself, does not prove that discrimination is occurring in the labor market. We need to apply the same productivity characteristics to all parties (employees) involved. Gender discrimination in the labor market occurs when employers pay people of a specific gender less despite those people having comparable levels of education, experience, and expertise. (Read the Clear It Up about the sex-discrimination suit brought against Walmart.) Similarly, racial discrimination in the labor market exists when employers pay racially diverse employees less than their coworkers of the majority race despite having comparable levels of education, experience, and expertise. To bring a successful gender discrimination lawsuit, an employee must prove the employer is paying them less than an employee of a different gender who holds a similar job, with similar educational attainment, and with similar expertise. Likewise, someone who wants to sue on the grounds of racial discrimination must prove that the employer pays them less than an employee of another race who holds a similar job, with similar educational attainment, and with similar expertise.
The FRED database includes earnings data at
earnings by age, gender and race/ethnicity.
As stated previously and as we will see below, not every instance of a wage gap or employment inequity is a product of overt discrimination on the part of individual employers. Significant overall issues in societies, such as inequitable education or housing segregation, can lead to earning gaps and limitations on economic mobility. However, these wider issues usually affect people from minority populations and/or those who have been historically underrepresented in positions of power. Economist William A. Darity Jr., whose work is discussed in more detail below, indicates that individualized employer racism still exists, but it is largely practiced in "covert and subtle forms."

### Investigating the Female/Male Earnings Gap

As a result of changes in law and culture, women began to enter the paid workforce in substantial numbers in the mid- to late-twentieth century. As of February 2022, 56.0% of women aged 20 and over held jobs, while 67.6% of men aged 20 and over did. Moreover, along with entering the workforce, women began to ratchet up their education levels. In 1971, 44% of undergraduate college degrees went to women. As of the 2018–19 academic year, women earned 57% of bachelor’s degrees. In 1970, women received 5.4% of the degrees from law schools and 8.4% of the degrees from medical schools. By 2017, women were receiving just over 50% of the law degrees, and by 2019, 48% of the medical degrees. There are now slightly more women than men in both law schools and medical schools. These gains in education and experience have reduced the female/male wage gap over time. However, concerns remain about the extent to which women have not yet assumed a substantial share of the positions at the top of the largest companies or in the U.S. Congress.
There are factors that can lower women’s average wages. Women are likely to bear a disproportionately large share of household responsibilities. A mother of young children is more likely to drop out of the labor force for several years or work on a reduced schedule than is the father. As a result, women in their 30s and 40s are likely, on average, to have less job experience than men. In the United States, childless women with the same education and experience levels as men are typically paid comparably. However, women with families and children are typically paid about 7% to 14% less than other women of similar education and work experience. Meanwhile, married men earn about 10% to 15% more than single men with comparable education and work experience. This circumstance or practice is often referred to as the "motherhood penalty" and the "fatherhood bonus."
Another aspect of the gender pay gap relates to work that isn’t actually paid, such as household chores, caring for children and other family members, and cooking. Studies have found that globally and within the United States, women undertake far more of this work than do men; even women who work full time and/or bring in the majority of family income take on more of this unpaid work than the men in their households.
Economists study many aspects of sex- and gender-based earnings gaps, often revealing unexpected causes and impacts. For example, economists Jessica Pan, Jonathan Guryan, and Kerwin Kofi Charles analyzed decades of sociological and employment data and uncovered that the amount of sexism in the U.S. state where a woman was born is an indicator of the woman's earnings throughout her life, even if she moves away from her home state. In other words, women born in states with more pronounced sexist attitudes earn less, no matter where they live later on. Other economists showed that from 1950–2000, as women's representation increased in the workforce, jobs that became occupied by women experienced wage reductions relative to jobs being done by men—an outcome often referred to as "devaluation." The value of this research and similar investigations comes from the deeper understanding of the origins of the earnings gap, so that workers, employers, and governments can take steps to address them.

### Investigating the Earnings Gap Related to Race and Ethnicity

Black people experienced blatant labor market discrimination during much of the twentieth century. Until the passage of the Civil Rights Act of 1964, it was legal in many states to refuse to hire a Black worker, regardless of the credentials or experience of that worker. Moreover, Black people were often denied access to educational opportunities, which in turn meant that they had lower levels of qualifications for many jobs. At least one economic study has shown that the 1964 law is partially responsible for the narrowing of the gap in Black–White earnings in the late 1960s and into the 1970s. For example, the ratio of total earnings of Black male workers to White male workers rose from 62% in 1964 to 75.3% in 2013, according to the Bureau of Labor Statistics.
However, the earnings gap between Black and White workers has not changed as much as the earnings gap between men and women has in the last half century. The remaining racial gap seems related both to continuing differences in education levels and to the presence of discrimination.  shows that the percentage of Black people who complete a four-year college degree remains substantially lower than the percentage of White people who complete college. According to the U.S. Census, both White and Black people have higher levels of educational attainment than Hispanic people and lower levels than Asian people. The lower average levels of education for Black workers surely explain part of the earnings gap. In fact, Black women who have the same levels of education and experience as White women receive, on average, about the same level of pay. One study shows that White and Black college graduates have identical salaries immediately after college; however, the racial wage gap widens over time, an outcome that suggests the possibility of continuing discrimination. Other researchers conducted a field experiment by responding to job advertisements with fictitious resumes using names that were either commonly associated with Black/African American people or names commonly associated with White people; they found that the White-associated names received 50 percent more callbacks for interviews. This is suggestive of discrimination in job opportunities. Further, as the following Clear It Up feature explains, there is evidence to support that discrimination in the housing market is connected to employment discrimination.

### Competitive Markets and Discrimination

Gary Becker (1930–2014), who won the Nobel Prize in economics in 1992, was one of the first to analyze discrimination in economic terms. Becker pointed out that while competitive markets can allow some employers to practice discrimination, it can also provide profit-seeking firms with incentives not to discriminate. Given these incentives, Becker explored the question of why discrimination persists.
If a business is located in an area with a large minority population and refuses to sell to minorities, it will cut into its own profits. If some businesses run by bigoted employers refuse to pay women and/or minorities a wage based on their productivity, then other profit-seeking employers can hire these workers. In a competitive market, if the business owners care more about the color of money than about the color of skin, they will have an incentive to make buying, selling, hiring, and promotion decisions strictly based on economic factors.
Do not underestimate the power of markets to offer at least a degree of freedom to oppressed groups. In many countries, cohesive minority population groups like Jewish people and emigrant Chinese people have managed to carve out a space for themselves through their economic activities, despite legal and social discrimination against them. Many immigrants, including those who come to the United States, have taken advantage of economic freedom to make new lives for themselves. However, history teaches that market forces alone are unlikely to eliminate discrimination. After all, discrimination against African Americans persisted in the market-oriented U.S. economy during the century between the ratification of the 13th Amendment, which abolished slavery in 1865, and the passage of the Civil Rights Act of 1964—and has continued since then, too.
Why does discrimination persist in competitive markets? Gary Becker sought to explain this persistence. Discriminatory impulses can emerge at a number of levels: among managers, among workers, and among customers. Consider the situation of a store owner or manager who is not personally prejudiced, but who has many customers who are prejudiced. If that manager treats all groups fairly, the manager may find it drives away prejudiced customers. In such a situation, a policy of nondiscrimination could reduce the firm’s profits. After all, a business firm is part of society, and a firm that does not follow the societal norms is likely to suffer.
As economist William A. Darity Jr. points out, however, the "prejudiced customer" rationale falls apart when considering the many jobs that have no customer contact. Darity examined several theories regarding the persistence of employment discrimination, including rationales regarding group membership and employers' lack of information about candidates of other genders or races. Darity also directly studies and interprets others' work on discrimination in other countries, such as wage disparities between Sikh and Hindu men in India. Darity concludes that the competitive forces of the market have not been enough to overcome employment and wage discrimination, and, on their own, are unlikely to end such discrimination in the future.

### Public Policies to Reduce Discrimination

A first public policy step against discrimination in the labor market is to make it illegal. For example, the Equal Pay Act of 1963 said that employers must pay men and women who do equal work the same. The Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex, or national origin. The Age Discrimination in Employment Act of 1967 prohibited discrimination on the basis of age against individuals who are 40 years of age or older. The Civil Rights Act of 1991 provides monetary damages in cases of intentional employment discrimination. The Pregnancy Discrimination Act of 1978 was aimed at prohibiting discrimination against people in the workplace who are planning pregnancy, are pregnant, or are returning after pregnancy. Passing a law, however, is only part of the answer, since discrimination by prejudiced employers may be less important than broader social patterns and systems.
The 1964 Civil Rights Act created an important government organization, the Equal Employment Opportunity Commission, to investigate employment discrimination and protect workers who filed complaints against employers. Economist Phyllis Ann Wallace, who had previously worked for U.S. intelligence services, was appointed as the commission's chief of technical studies. In this role she collected and organized a massive amount of public and private sector data, as well as mentored and directed economists and other analysts in their investigations.
These laws against discrimination have reduced the gender wage gap. A 2007 Department of Labor study compared salaries of men and women who have similar educational achievement, work experience, and occupation and found that the gender wage gap is only 5%.
In the case of the earnings gap between Black people and White people (and also between Hispanic people and White people), probably the single largest step that could be taken at this point in U.S. history to close the earnings gap would be to reduce the gap in educational attainment. Part of the answer to this issue involves finding ways to improve the performance of schools, which is a highly controversial topic in itself. In addition, the education gap is unlikely to close unless Black and Hispanic families and peer groups strengthen their culture of support for educational attainment.
Affirmative action is the name given to active efforts by government or businesses that give special rights to minorities in hiring and promotion to make up for past discrimination. Affirmative action, in its limited and not especially controversial form, means making an effort to reach out to a broader range of minority candidates for jobs. In its more aggressive and controversial form, affirmative action required government and companies to hire a specific number or percentage of minority employees. However, the U.S. Supreme Court has ruled against state affirmative action laws. Today, the government applies affirmative action policies only to federal contractors who have lost a discrimination lawsuit. The federal Equal Employment Opportunity Commission (EEOC) enforces this type of redress.

### An Increasingly Diverse Workforce

Racial and ethnic diversity is on the rise in the U.S. population and workforce. As  shows, while the White Americans comprised 78% of the population in 2012, the U.S. Bureau of the Census projects that Whites will comprise 69% of the U.S. population by 2060. Forecasters predict that the proportion of U.S. citizens who are of Hispanic background to rise substantially. Moreover, in addition to expected changes in the population, workforce diversity is increasing as the women who entered the workforce in the 1970s and 1980s are now moving up the promotion ladders within their organizations.
Regarding the future, optimists argue that the growing proportions of minority workers will break down remaining discriminatory barriers. The economy will benefit as an increasing proportion of workers from traditionally disadvantaged groups have a greater opportunity to fulfill their potential. Pessimists worry that the social tensions between different genders and between ethnic groups will rise and that workers will be less productive as a result. Anti-discrimination policy, at its best, seeks to help society move toward the more optimistic outcome.
The FRED database includes data on foreign and native born civilian population  and labor force.

### Key Concepts and Summary

Discrimination occurs in a labor market when employers pay workers with the same economic characteristics, such as education,experience, and skill, are paid different amounts because of race, gender, religion, age, or disability status. In the
United States, female workers on average earn less than male workers, and Black workers on average earn less than White workers. There is controversy over to which discrimination
differences in factors like education and job experience can explain these earnings gaps. Free markets can allow discrimination to occur, but the threat of a loss of sales or a loss of productive workers can also create incentives for a firm not to discriminate.
A range of public policies can be used to reduce earnings gaps between men and women or between White and other
racial/ethnic groups: requiring equal pay for equal work, and attaining more equal educational outcomes.

### Self-Check Questions

### Review Questions

### Critical Thinking Questions


# Labor Markets and Income

## Immigration

Most Americans would be outraged if a law prevented them from moving to another city or another state. However, when the conversation turns to crossing national borders and is about other people arriving in the United States, laws preventing such movement often seem more reasonable. Some of the tensions over immigration stem from worries over how it might affect a country’s culture, including differences in language, and patterns of family, authority, or gender relationships. Economics does not have much to say about such cultural issues. Some of the worries about immigration do, however, have to do with its effects on wages and income levels, and how it affects government taxes and spending. On those topics, economists have insights and research to offer.

### Historical Patterns of Immigration

Supporters and opponents of immigration look at the same data and see different patterns. Those who express concern about immigration levels to the United States point to graphics like  which shows total inflows of immigrants decade by decade through the twentieth and into the twenty-first century. Clearly, the level of immigration has been high and rising in recent years, reaching and exceeding the towering levels of the early twentieth century. However, those who are less worried about immigration point out that the high immigration levels of the early twentieth century happened when total population was much lower. Since the U.S. population roughly tripled during the twentieth century, the seemingly high levels in immigration in the 1990s and 2000s look relatively smaller when they are divided by the population.
From where have the immigrants come? Immigrants from Europe were more than 90% of the total in the first decade of the twentieth century, but less than 20% of the total by the end of the century. By the 2000s, about half of U.S. immigration came from the rest of the Americas, especially Mexico, and about a quarter came from various countries in Asia.

### Economic Effects of Immigration

A surge of immigration can affect the economy in a number of different ways. In this section, we will consider how immigrants might benefit the rest of the economy, how they might affect wage levels, and how they might affect government spending at the federal and local level.
To understand the economic consequences of immigration, consider the following scenario. Imagine that the immigrants entering the United States matched the existing U.S. population in age range, education, skill levels, family size, and occupations. How would immigration of this type affect the rest of the U.S. economy? Immigrants themselves would be much better off, because their standard of living would be higher in the United States. Immigrants would contribute to both increased production and increased consumption. Given enough time for adjustment, the range of jobs performed, income earned, taxes paid, and public services needed would not be much affected by this kind of immigration. It would be as if the population simply increased a little.
Now, consider the reality of recent immigration to the United States. Immigrants are not identical to the rest of the U.S. population. About one-third of immigrants over the age of 25 lack a high school diploma. As a result, many of the recent immigrants end up in jobs like restaurant and hotel work, lawn care, and janitorial work. This kind of immigration represents a shift to the right in the supply of unskilled labor for a number of jobs, which will lead to lower wages for these jobs. The middle- and upper-income households that purchase the services of these unskilled workers will benefit from these lower wages. However, low-skilled U.S. workers who must compete with low-skilled immigrants for jobs will tend to be negatively impacted by immigration.
The difficult policy questions about immigration are not so much about the overall gains to the rest of the economy, which seem to be real but small in the context of the U.S. economy, as they are about the disruptive effects of immigration in specific labor markets. One disruptive effect, as we noted, is that immigration weighted toward low-skill workers tends to reduce wages for domestic low-skill workers. A study by Michael S. Clune found that for each 10% rise in the number of employed immigrants with no more than a high school diploma in the labor market, high school students reduced their annual number of hours worked by 3%. The effects on wages of low-skill workers are not large—perhaps in the range of decline of about 1%. These effects are likely kept low, in part, because of the legal floor of federal and state minimum wage laws. In addition, immigrants are also thought to contribute to increased demand for local goods and services which can stimulate the local low skilled labor market. It is also possible that employers, in the face of abundant low-skill workers, may choose production processes which are more labor intensive than otherwise would have been. These various factors would explain the small negative wage effect that the native low-skill workers observed as a result of immigration.
Another potential disruptive effect is the impact on state and local government budgets. Many of the costs imposed by immigrants are costs that arise in state-run programs, like the cost of public schooling and of welfare benefits. However, many of the taxes that immigrants pay are federal taxes like income taxes and Social Security taxes. Many immigrants do not own property (such as homes and cars), so they do not pay property taxes, which are one of the main sources of state and local tax revenue. However, they do pay sales taxes, which are state and local, and the landlords of property they rent pay property taxes. According to the nonprofit Rand Corporation, the effects of immigration on taxes are generally positive at the federal level, but they are negative at the state and local levels in places where there are many low-skilled immigrants.

### Proposals for Immigration Reform

The Congressional Jordan Commission of the 1990s proposed reducing overall levels of immigration and refocusing U.S. immigration policy to give priority to immigrants with higher skill levels. In the labor market, focusing on high-skilled immigrants would help prevent any negative effects on  low-skilled workers' wages. For government budgets, higher-skilled workers find jobs more quickly, earn higher wages, and pay more in taxes. Several other immigration-friendly countries, notably Canada and Australia, have immigration systems where those with high levels of education or job skills have a much better chance of obtaining permission to immigrate. For the United States, high tech companies regularly ask for a more lenient immigration policy to admit a greater quantity of highly skilled workers under the H1B visa program.
The Obama Administration proposed the so-called “DREAM Act” legislation, which would have offered a path to citizenship for those classified as illegal immigrants who were brought to the United States before the age of 16.  Despite bipartisan support, the legislation failed to pass at the federal level.  However, some state legislatures, such as California, have passed their own Dream Acts.
Between its plans for a border wall, increased deportation of undocumented immigrants, and even reductions in the number of highly skilled legal H1B immigrants, the Trump Administration had a much less positive approach to immigration.  Most economists, whether conservative or liberal, believe that while immigration harms some domestic workers, the benefits to the nation exceed the costs. President Biden has been considerably more positive about immigration than his predecessor. However, given the presence of considerable disagreement within the overall population about the desirability of immigration, it is unlikely that any significant immigration reform will take place in the near future.
The FRED database includes data on the national origin of the civilian population (https://fred.stlouisfed.org/categories/104) and labor force (https://fred.stlouisfed.org/categories/32442).

### Key Concepts and Summary

The recent level of U.S. immigration is at a historically high level if we measure it in absolute numbers, but not if we measure it as a share of population. The overall gains to the U.S. economy from immigration are real but relatively small. However, immigration also causes effects like slightly lower wages for low-skill workers and budget problems
for certain state and local governments.

### Self-Check Question

### Review Questions

### Review Questions

### Critical Thinking Questions


# Poverty and Economic Inequality

## Introduction to Poverty and Economic Inequality

The labor markets that determine the pay that workers receive do not take into account how much income a family needs for food, shelter, clothing, and health care. Market forces do not worry about what happens to families when a major local employer goes out of business. Market forces do not take time to contemplate whether those who are earning higher incomes should pay an even higher share of taxes.
However, labor markets do create considerable income inequalities. In 2020, the median American household income was $67,521 (the median is the level where half of all families had more than that level and half had less). For family households, the median was $86,372; for non-family households, it was $40,464. The Census Bureau also reported that in 2020, there were 37.2 million people living in poverty, representing 11.4% of the population. Think about a family of three—perhaps a single mother with two children—attempting to pay for the basics of life on perhaps $17,916 per year. After paying for rent, healthcare, clothing, and transportation, such a family might have $6,000 to spend on food. Spread over 365 days, the food budget for the entire family would be about $17 per day. To put this in perspective, most cities have restaurants where $17 will buy you an appetizer for one.
This chapter explores how the U.S. government defines poverty, the balance between assisting the poor without discouraging work, and how federal antipoverty programs work. It also discusses income inequality—how economists measure inequality, why inequality has changed in recent decades, the range of possible government policies to reduce inequality, and the danger of a tradeoff that too great a reduction in inequality may reduce incentives for producing output.


# Poverty and Economic Inequality

## Drawing the Poverty Line

Comparisons of high and low incomes raise two different issues: economic inequality and poverty. Poverty is measured by the number of people who fall below a certain level of income—called the poverty line—that defines the income one needs for a basic standard of living. Income inequality compares the share of the total income (or wealth) in society  that different groups receive. For example, one of numerous ways to look at income inequality is to compare the share of income that the top 10% receive to the share of income that the bottom 10% receive.
In the United States, the official definition of the poverty line traces back to a single person: Mollie Orshansky. In 1963, Orshansky, who was working for the Social Security Administration, published an article called “Children of the Poor” in a highly useful and dry-as-dust publication called the Social Security Bulletin. Orshansky’s idea was to define a poverty line based on the cost of a healthy diet.
Her previous job had been at the U.S. Department of Agriculture, where she had worked in an agency called the Bureau of Home Economics and Human Nutrition. One task of this bureau had been to calculate how much it would cost to feed a nutritionally adequate diet to a family. Orshansky found that the average family spent one-third of its income on food. She then proposed that the poverty line be the amount one requires to buy a nutritionally adequate diet, given the size of the family, multiplied by three.
The current U.S. poverty line is essentially the same as the Orshansky poverty line, although the government adjusts the dollar amounts to represent the same buying power over time. The U.S. poverty line in 2021 ranged from $12,880 for a single individual to $26,500 for a household of four people.
 shows the U.S. poverty rate over time; that is, the percentage of the population below the poverty line in any given year. The poverty rate declined through the 1960s, rose in the early 1980s and early 1990s, but seems to have been slightly lower since the mid-1990s. However, in no year in the last six decades has the poverty rate been less than 10.5% of the U.S. population—that is, at best almost one American in nine is below the poverty line. In recent years, the poverty rate peaked at 15.1% in 2010, before dropping to 10.5% in 2019.  compares poverty rates for different groups in 2011. As you will see when we delve further into these numbers, poverty rates are relatively low for White people, for the elderly, for the well-educated, and for male-headed households. Poverty rates for females, Hispanic people, and African Americans are much higher than for White people. While Hispanic people and African Americans have a higher percentage of individuals living in poverty than others, most people in the United States living below the poverty line are White people.
The concept of a poverty line raises many tricky questions. In a vast country like the United States, should there be a national poverty line? After all, according to the Federal Register, the median household income for a family of four was $109,113 in New Jersey and $59,701 in Mississippi in 2017, and prices of some basic goods like housing are quite different between states. The poverty line is based on cash income, which means it does not account for government programs that provide non-cash assistance such as Medicaid (health care for low-income individuals and families) and food aid. Also, low-income families can qualify for federal housing assistance. (We will discuss these and other government aid programs in detail later in this chapter.)
Should the government adjust the poverty line to account for the value of such programs? Many economists and policymakers wonder whether we should rethink the concept of what poverty means in the twenty-first century. The following Clear It Up feature explains the poverty lines set by the World Bank for low-income countries around the world.
Any poverty line will be somewhat arbitrary, and it is useful to have a poverty line whose basic definition does not change much over time. If Congress voted every few years to redefine poverty, then it would be difficult to compare rates over time. After all, would a lower poverty rate change the definition, or is it the case that people were actually better off? Government statisticians at the U.S. Census Bureau have ongoing research programs to address questions like these.

### Key Concepts and Summary

Wages are influenced by Supply and demand in labor markets influence wages. This can lead to very low incomes for some people and very high incomes for others. Poverty and income inequality are not the same thing. Poverty applies to the condition of people who cannot afford the necessities of life. Income inequality refers to the disparity between those with higher and lower incomes. The poverty rate is what percentage of the population lives below the poverty line, which the amount of income that it takes to purchase the necessities of life determines. Choosing a poverty line will always be somewhat controversial.

### Self-Check Questions

### Review Questions

### Critical Thinking Questions

### Problems

### References

Ebeling, Ashlea. 2014. “IRS Announces 2015 Estate And Gift Tax Limits.” Forbes. Accessed March 16, 2015. http://www.forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/.
Federal Register: The Daily Journal of the United States Government. “State Median Income Estimates for a Four-Person Household: Notice of the Federal Fiscal Year (FFY) 2013 State Median Income Estimates for Use Under the Low Income Home Energy Assistance Program (LIHEAP).” Last modified March 15, 2012. https://www.federalregister.gov/articles/2012/03/15/2012-6220/state-median-income-estimates-for-a-four-person-household-notice-of-the-federal-fiscal-year-ffy-2013#t-1.
Luhby, Tami. 2014. “Income is on the rise . . . finally!” Accessed April 10, 2015. http://money.cnn.com/2014/08/20/news/economy/median-income/.
Meyer, Ali. 2015. “56,023,000: Record Number of Women Not in Labor Force.” CNSNews.com. Accessed March 16, 2015. http://cnsnews.com/news/article/ali-meyer/56023000-record-number-women-not-labor-force.
Orshansky, Mollie. “Children of the Poor.” Social Security Bulletin. 26 no. 7 (1963): 3–13. http://www.ssa.gov/policy/docs/ssb/v26n7/v26n7p3.pdf.
The World Bank. “Data: Poverty Headcount Ratio at $1.25 a Day (PPP) (% of Population).” http://data.worldbank.org/indicator/SI.POV.DDAY.
U.S. Department of Commerce: United States Census Bureau. “American FactFinder.” http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml.
U.S. Department of Commerce: United States Census Bureau. “Current Population Survey (CPS): CPS Table Creator.” http://www.census.gov/cps/data/cpstablecreator.html.
U.S. Department of Commerce: United States Census Bureau. “Income: Table F-6. Regions—Families (All Races) by Median and Mean Income.” http://www.census.gov/hhes/www/income/data/historical/families/.
U.S. Department of Commerce: United States Census Bureau. “Poverty: Poverty Thresholds.” Last modified 2012. http://www.census.gov/hhes/www/poverty/data/threshld/.
U.S. Department of Health & Human Services. 2015. “2015 Poverty Guidelines.” Accessed April 10, 2015. http://www.medicaid.gov/medicaid-chip-program-information/by-topics/eligibility/downloads/2015-federal-poverty-level-charts.pdf.
U.S. Department of Health & Human Services. 2015. “Information on Poverty and Income Statistics: A Summary of 2014 Current Population Survey Data.”  Accessed April 13, 2015. http://aspe.hhs.gov/hsp/14/povertyandincomeest/ib_poverty2014.pdf.


# Poverty and Economic Inequality

## The Poverty Trap

Can you give people too much help, or the wrong kind of help? When people are provided with food, shelter, healthcare, income, and other necessities, assistance may reduce their incentive to work, particularly if their work is likely to offer low wages and reduce government assistance. Consider a program to fight poverty that works in this reasonable-sounding manner: the government provides assistance to the those who need it, but as the recipients earn income to support themselves, the government reduces the level of assistance it provides. With such a program, every time a person earns $100, they lose $100 in government support. As a result, the person experiences no net gain for working. Economists call this problem the poverty trap.
Consider the situation a single-parent family faces.  illustrates a single mother (earning $8 an hour) with two children. First, consider the labor-leisure budget constraint that this family faces in a situation without government assistance. On the horizontal axis is hours of leisure (or time spent with family responsibilities) increasing in quantity from left to right. Also on the horizontal axis is the number of hours at paid work, going from zero hours on the right to the maximum of 2,500 hours on the left. On the vertical axis is the amount of income per year rising from low to higher amounts of income. The budget constraint line shows that at zero hours of leisure and 2,500 hours of work, the maximum amount of income is $20,000 ($8 × 2,500 hours). At the other extreme of the budget constraint line, an individual would work zero hours, earn zero income, but enjoy 2,500 hours of leisure. At point A on the budget constraint line, by working 40 hours a week, 50 weeks a year, the utility-maximizing choice is to work a total of 2,000 hours per year and earn $16,000.
Now suppose that a government antipoverty program guarantees every family with a single mother and two children $18,000 in income. This is represented on the graph by a horizontal line at $18,000. With this program, each time the mother earns $1,000, the government will deduct $1,000 of its support.  shows what will happen at each combination of work and government support.
The new budget line, with the antipoverty program in place, is the horizontal and heavy line that is flat at $18,000. If the mother does not work at all, she receives $18,000, all from the government. If she works full time, giving up 40 hours per week with her children, she still ends up with $18,000 at the end of the year. Only if she works 2,300 hours in the year—which is an average of 44 hours per week for 50 weeks a year—does household income rise to $18,400. Even in this case, all of her year’s work means that household income rises by only $400 over the income she would receive if she did not work at all. She would need to work 50 hours a week to reach $20,800.
The poverty trap is even stronger than this simplified example shows, because a working mother will have extra expenses like clothing, transportation, and child care that a nonworking mother will not face, making the economic gains from working even smaller. Moreover, those who do not work fail to build up job experience and contacts, which makes working in the future even less likely.
To reduce the poverty trap the government could design an antipoverty program so that, instead of reducing government payments by $1 for every $1 earned, the government would reduce payments by some smaller amount instead. Imposing requirements for work as a condition of receiving benefits and setting a time limit on benefits can also reduce the harshness of the poverty trap.
 illustrates a government program that guarantees $18,000 in income, even for those who do not work at all, but then reduces this amount by 50 cents for each $1 earned. The new, higher budget line in  shows that, with this program, additional hours of work will bring some economic gain. Because of the reduction in government income when an individual works, an individual earning $8.00 will really net only $4.00 per hour. The vertical intercept of this higher budget constraint line is at $28,000 ($18,000 + 2,500 hours × $4.00 = $28,000). The horizontal intercept is at the point on the graph where $18,000 and 2500 hours of leisure is set.  shows the total income differences with various choices of labor and leisure.
However, this type of program raises other issues. First, even if it does not eliminate the incentive to work by reducing government payments by $1 for every $1 earned, enacting such a program may still reduce the incentive to work. At least some people who would be working 2,000 hours each year without this program might decide to work fewer hours but still end up with more income—that is, their choice on the new budget line would be like S, above and to the right of the original choice P. Of course, others may choose a point like R, which involves the same amount of work as P, or even a point to the left of R that involves more work.
The second major issue is that when the government phases out its support payments more slowly, the antipoverty program costs more money. Still, it may be preferable in the long run to spend more money on a program that retains a greater incentive to work, rather than spending less money on a program that nearly eliminates any gains from working.
The next module will consider a variety of government support programs focused specifically on people experiencing poverty, including welfare, SNAP (Supplemental Nutrition Assistance Program), Medicaid, and the earned income tax credit (EITC). Although these programs vary from state to state, it is generally a true statement that in many states from the 1960s into the 1980s, if poor people worked, their level of income barely rose—or did not rise at all—after factoring in the reduction in government support payments. The following Work It Out feature shows how this happens.

### Key Concepts and Summary

A poverty trap occurs when government-support payments decline as the recipients earn more income. As a result, the recipients do not end up with much more income when they work, because the loss of government support largely or completely offsets any income that one earns by working. Phasing out government benefits more slowly, as well as imposing requirements for work as a condition of receiving benefits and a time limit on benefits can reduce the harshness of the poverty trap.

### Self-Check Questions

### Review Questions

### Critical Thinking Questions

### Problems


# Poverty and Economic Inequality

## The Safety Net

The U.S. government has implemented a number of programs to assist those below the poverty line and those who have incomes just above the poverty line. Such programs are called the safety net, to recognize that they offer some protection for those who find themselves without jobs or income.

### Temporary Assistance for Needy Families

From the Great Depression until 1996, the United States’ most visible antipoverty program was Aid to Families with Dependent Children (AFDC), which provided cash payments to mothers with children who were below the poverty line. Many just called this program “welfare.” In 1996, Congress passed and President Bill Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act, more commonly called the “welfare reform act.” The new law replaced AFDC with Temporary Assistance for Needy Families (TANF).
TANF brought several dramatic changes in how welfare operated. Under the old AFDC program, states set the level of welfare benefits that they would pay to people experiencing poverty, and the federal government guaranteed it would chip in some of the money as well. The federal government’s welfare spending would rise or fall depending on the number of people in need, and on how each state set its own welfare contribution.
Under TANF, however, the federal government gives a fixed amount of money to each state. The state can then use the money for almost any program with an antipoverty component: for example, the state might use the money to give funds to families with low income, or to reduce teenage pregnancy, or even to raise the high school graduation rate. However, the federal government imposed two key requirements. First, if states are to keep receiving the TANF grants, they must impose work requirements so that most of those receiving TANF benefits are working (or attending school). Second, no one can receive TANF benefits with federal money for more than a total of five years over their lifetime. The old AFDC program had no such work requirements or time limits.
TANF attempts to avoid the poverty trap by requiring that welfare recipients work and by limiting the length of time they can receive benefits. In its first few years, the program was quite successful. The number of families receiving payments in 1995, the last year of AFDC, was 4.8 million. November 2020, according to the Congressional Research Service, the number of families receiving payments under TANF was 1.0 million—a decline of nearly 80%.
TANF benefits to poor families vary considerably across states. For example, again according to the Congressional Research Service, in July 2020 the highest monthly payment in New Hampshire to a single mother with one child was $862, while in Mississippi the highest monthly payment to that family was $146. In part, these payments reflect differences in states’ cost of living. As reported by the Department of Health and Human Services, in 1995 total spending on TANF was approximately $19 billion.  Spending increased yearly through 2001, then it was roughly flat at approximately $26 billion until 2005, then it increased again through 2010, where it peaked at nearly $35 billion. It then decreased again to around $30 billion in 2020. When you take into account the effects of inflation, the decline is even greater. Moreover, there seemed little evidence that families were suffering a reduced standard of living as a result of TANF—although, on the other side, there was not much evidence that families had greatly improved their total levels of income, either.

### The Earned Income Tax Credit (EITC)

The earned income tax credit (EITC), first passed in 1975, is a method of assisting the working poor through the tax system. The EITC is one of the largest assistance program for low-income groups, and as of December 2021, about 25 million eligible workers and families received about $60 billion in EITC. For the 2021 tax year, the earned income credit ranges from $1,502 to $6,728 depending on tax-filing status, income, and number of children. The average amount of EITC received nationwide was about $2,411. In 2021, for example, a single parent with two children would have received a tax credit of $5,980 up to a modest income level. The amount of the tax break increases with the amount of income earned, up to a point. The earned income tax credit has often been popular with both economists and the general public because of the way it effectively increases the payment received for work.
What about the danger of the poverty trap that every additional $1 earned will reduce government support payments by close to $1? To minimize this problem, the earned income tax credit is phased out slowly. For example, according to the Tax Policy Center, for a single-parent family with two children in 2013, the credit is not reduced at all (but neither is it increased) as earnings rise from $13,430 to $17,530. Then, for every $1 earned above $17,530, the amount received from the credit is reduced by 21.06 cents, until the credit phases out completely at an income level of $46,227.
 illustrates that the earned income tax credits, child tax credits, and the TANF program all cost the federal government money—either in direct outlays or in loss of tax revenues. CTC stands for the government tax cuts for the child tax credit.
In recent years, the EITC has become a hugely expensive government program for providing income assistance to people below or near the poverty line, costing about $60 billion in 2021. In that year, the EITC provided benefits to about 25 million families and individuals and, on average, is worth about $2,411 per family (with children), according to the Tax Policy Center. One reason that the TANF law worked as well as it did is that the government greatly expanded EITC in the late 1980s and again in the early 1990s, which increased the returns to work for low-income Americans.

### Supplemental Nutrition Assistance Program (SNAP)

Often called “food stamps,” Supplemental Nutrition Assistance Program (SNAP) is a federally funded program, started in 1964, in which each month people receive a card like a debit card that they can use to buy food. The amount of food aid for which a household is eligible varies by income, number of children, and other factors but, in general, households are expected to spend about 30% of their own net income on food, and if 30% of their net income is not enough to purchase a nutritionally adequate diet, then those households are eligible for SNAP.
SNAP can contribute to the poverty trap. For every $100 earned, the government assumes that a family can spend $30 more for food, and thus reduces its eligibility for food aid by $30. This decreased benefit is not a complete disincentive to work—but combined with how other programs reduce benefits as income increases, it adds to the problem. SNAP, however, does try to address the poverty trap with its own set of work requirements and time limits.
Why give debit cards and not just cash? Part of the political support for SNAP comes from a belief that since recipients must spend the  the cards on food, they cannot “waste” them on other forms of consumption. From an economic point of view, however, the belief that cards must increase spending on food seems wrong-headed. After all, say that a family is spending $2,500 per year on food, and then it starts receiving $1,000 per year in SNAP aid. The family might react by spending $3,500 per year on food (income plus aid), or it might react by continuing to spend $2,500 per year on food, but use the $1,000 in food aid to free up $1,000 that it can now spend on other goods. Thus, it is reasonable to think of SNAP cards as an alternative method, along with TANF and the earned income tax credit, of transferring income to those working but still experiencing poverty.
Anyone eligible for TANF is also eligible for SNAP, although states can expand eligibility for food aid if they wish to do so. In some states, where TANF welfare spending is relatively low, a poor family may receive more in support from SNAP than from TANF. In 2021, about 41.5 million people received food aid with total benefits of just over $108 billion, which is an average monthly benefit of about $287 per person per month. SNAP participation increased by 70% between 2007 and 2011, from 26.6 million participants to 45 million. According to the Congressional Budget Office, the 2008-2009 Great Recession and rising food prices caused this dramatic rise in participation. Likewise, between 2019 and 2021, the number of participants in SNAP increased by 5.8 million, the amount per person increased by 67%, and total benefits nearly doubled as a consequence of the sharp recession due to the onset of the COVID-19 pandemic in early 2020.
The federal government deploys a range of income security programs that it funds through departments such as Health and Human Services, Agriculture, and Housing and Urban Development (HUD) (see ). According to the Office of Management and Budget, collectively, these three departments provided an estimated $62 billion of aid through programs such as supplemental feeding programs for women and children, subsidized housing, and energy assistance. The federal government also transfers funds to individual states through special grant programs.
The safety net includes a number of other programs: government-subsidized school lunches and breakfasts for children from low-income families; the Special Supplemental Food Program for Women, Infants and Children (WIC), which provides food assistance for pregnant women and newborns; the Low Income Home Energy Assistance Program, which provides help with home heating bills; housing assistance, which helps pay the rent; and Supplemental Security Income, which provides cash support for people with disabilities and elderly people experiencing poverty.

### Medicaid

Congress created Medicaid in 1965. This is a joint health insurance program between both the states and the federal government. The federal government helps fund Medicaid, but each state is responsible for administering the program, determining the level of benefits, and determining eligibility. It provides medical insurance for certain people with low incomes, including those below the poverty line, with a focus on families with children, the elderly, and people with disabilities. About one-third of Medicaid spending is for low-income mothers with children. While an increasing share of the program funding in recent years has gone to pay for nursing home costs for older people who cannot afford to pay for housing. The program ensures that participants receive a basic level of benefits, but because each state sets eligibility requirements and provides varying levels of service, the program differs from state to state.
In the past, a common problem has been that many low-paying jobs pay enough to a breadwinner so that a family could lose its eligibility for Medicaid, yet the job does not offer health insurance benefits. A parent considering such a job might choose not to work rather than lose health insurance for their children. In this way, health insurance can become a part of the poverty trap. Many states recognized this problem in the 1980s and 1990s and expanded their Medicaid coverage to include people earning up to 135% or even 185% of the poverty line. Some states also guaranteed that children would not lose coverage if their parents worked.
These expanded guarantees cost the government money, of course, but they also helped to encourage those on welfare to enter the labor force. As of 2014, approximately 69.7 million people participated in Medicaid. Of those enrolled, almost half are children. Healthcare expenditures, however, are highest for the elderly population, which comprises approximately 25% of participants. As  (a) indicates, the largest number of households that enroll in Medicaid are those with children. Lower-income adults are the next largest group enrolled in Medicaid at 28%. People who are blind or have a disability account for 16% of those enrolled, and seniors are 9% of those enrolled.  (b) shows how much actual Medicaid dollars the government spends for each group. Out of total Medicaid spending, the government spends more on seniors (20%) and people who are blind or have a disability (44%). Thus, 64% of all Medicaid spending goes to seniors, those who are blind, and people with disabilities. Children receive 21% of all Medicaid spending, followed by adults at 15%.

### Key Concepts and Summary

We call the group of government programs that address poverty the safety net. In the United States, prominent safety net programs include Temporary Assistance to Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), the earned income tax credit (EITC), Medicaid, and the Special Supplemental Food Program for Women, Infants, and Children (WIC).

### Self-Check Questions

### Review Questions

### Critical Thinking Questions

### References

Congressional Budget Office. 2015. “The Effects of Potential Cuts in SNAP Spending on Households With Different Amounts of Income.” Accessed April 13, 2015. https://www.cbo.gov/publication/49978.
Falk, Gene. Congressional Research Service. “The Temporary Assistance for Needy Families (TANF) Block Grant: Responses to Frequently Asked Questions.” Last modified October 17, 2013. http://www.fas.org/sgp/crs/misc/RL32760.pdf.
Library of Congress. “Congressional Research Service.” http://www.loc.gov/crsinfo/about/.
Office of Management and Budget. “Fiscal Year 2013 Historical Tables: Budget of the U.S. Government.” http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf.
Tax Policy Center: Urban Institute and Brookings Institution. “The Tax Policy Briefing Book: Taxation and the Family: What is the Earned Income Tax Credit?” http://www.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfm.