National Content Standards Addressed:

Standard 13 - Income for most people is determined by the market value of the productive resources they sell. What workers earn depends, primarily, on the market value of what they produce and how productive they are.

Standard 15 - Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.

Standard 19 - Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices.

Lesson Objectives (5)

1. In competitive labor markets, wages and benefits are determined by the supply and demand for labor.
   • Employers' decisions reflect the opportunity cost of hiring one worker over another or of using labor rather than other resources like capital.
   • Workers' decisions include consideration of wages, working conditions, welfare or unemployment compensation, and the costs and benefits of other opportunities.

2. The demand for any particular worker is determined by employers’ estimates of his/her productivity.
   • The capital and technology available in the workplace directly-affect worker productivity.
   • Individuals’ productivity reflects, in part, their investment in their human capital; that is, choices they have made about education, training, skill development, and careers.
   • Individuals without skills that others value are more likely to be poor.
   • Examination of data on income by occupation supports the notion that the poor are by and large those with few valued skills.

3. Economic fluctuations may create conditions in which some workers are unable to secure employment.

4. The U.S. government defines the unemployment rate as the percent of the labor force not working.
   • By government definition, the "labor force" consists of those non-institutionalized individuals 16 years or older, who are working or actively seeking work.
   • The U.S. government defines the employment rate as the percent of the non-institutionalized population over the age of 16 that is currently employed.
   • The employment rate and the unemployment rate can be rising at the same time.

5. Government policies may impact the labor market by changing the incentives facing employers and/or workers.
   • Mandated benefits, legal constraints on personnel decisions, and threats of litigation increase the opportunity cost to employers of hiring additional workers.
   • Programs like welfare may create incentives for people not to work, as they decrease the opportunity cost of being unemployed.
   • Trade policies, minimum wage, and other legislation affect employment both in the U.S. and abroad.

Teaching and Discussion Ideas:

Use "Labor Market simulation" (by Professor Pat Fishe) during the lecture. Involve students as employers and workers interacting in a market. (corresponds to lesson objectives #1 and #2)

Sample Interactive Discussion Problems:

Pose a problem in which students must analyze the differences in the labor markets for the same product sold in different locations.

1. The fast food restaurants in suburban Denver, Colorado, hire workers at a $6.50/hr. starting wage. One meal per shift is provided and most workers are held far enough below full time status that they receive no other benefits.

In Keystone, a mountain town serving the huge recreational ski industry of Summit County, less than an hour's drive from Denver, fast food restaurants pay a starting salary of $8.50/hr., and provide one meal per shift, daycare for employees' children, and health insurance for part time workers. Prices for fast food in Keystone are only marginally higher than in Denver restaurants.

What features of the labor markets help to explain the differences in workers' pay and benefits?

Sample Small Group Discussion Problems:

Pose a problem in which students face the decisions that today’s employers confront.

2. Recent legislation and laws currently being discussed include mandated employee benefits - benefits that the law requires employers to provide for their employees, regardless of how much the benefits are valued by employees. Some examples of currently mandated federal or state benefits include:
   • up to 12 weeks a year of unpaid, job-protected leave, with medical
   • benefits for childbirth, adoption, or illness of the employee or a family member;
   • protection against application of a mandatory retirement age; a minimum legal wage;
   • application to part-time employees of all benefits provided to full-time employees; and
   • "reasonable accommodations" to a job or workplace to enable a person with a disability to perform a job.

• Predict the effects of mandated employee benefits.
• is this ever in the interests of employers to provide any benefits?
• is it always in the interests of employees to have fringe benefits?
• is there a difference between mandated benefits and those the employers provide voluntarily?
• What groups would you expect to be better off as a result of mandated benefits?
• What groups would you expect to be worse off?

Definitions

Income - Rent, salaries, wages, interest, and profit; payment received by the owners of resources when those resources are used to make goods and services.

Labor supply - The numbers of individuals willing to work for various wages at a given point in time.

Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.

Marginal cost - The increase in total cost that results from producing an additional unit.

Unemployment - Term describing the condition of those non-institutionalized individuals, over the age of 16, who are actively seeking jobs and unable to find them.

Copyright © 1999 Foundation for Teaching Economics
Permission granted to copy for classroom use.