Labor and Labor markets

Labor includes work done for employers and work done in a person’s own household, but labor markets deal only with work that is done for some form of financial compensation. Labor markets include all the means by which workers find jobs and by which employers locate workers to staff their businesses. A number of factors influence labor and labor markets in the United States, including immigration, discrimination, labor unions, unemployment, and income inequality between the rich and poor.

The official definition of the U.S. labor force includes people who are at least 16 years old and either working, waiting to be recalled from a layoff, or actively looking for work within the past 30 days. In 1998 the U.S. labor force included nearly 138 million people, most of them working in full-time or part-time jobs.

Most people in the United States receive their income as wages and salaries paid by firms that have hired individuals to work as their employees. Those wages and salaries are the prices they receive for the labor services they provide to their employers. Like other prices, wages and salaries are determined primarily by market forces.

Labor Supply and Demand

The wages and salaries that U.S. workers earn vary from occupation to occupation, across geographic regions, and according to workers’ levels of education, training, experience, and skill. As with goods and services purchased by consumers, labor is traded in markets that reflect both supply and demand. In general, higher wages and salaries are paid in occupations where labor is more scarce—that is, in jobs where the demand for workers is relatively high and the supply of workers with the qualifications and ability to do that work is relatively low. The demand for workers in particular occupations depends largely on how much the work they do adds to a firm’s revenues. In other words, workers who create more products or higher-priced products will be worth more to employers than workers who make fewer or less valuable products. The supply of workers in any occupation is affected by the amount of time and effort required to enter that occupation compared to other things workers might do.

Workers seeking higher wages often learn skills that will increase the likelihood of finding a higher-paying job. The knowledge, skills, and experience a worker has acquired are the worker’s human capital. Education and training can clearly increase workers’ human capital and productivity, which makes them more valuable to employers. In general, more educated individuals make more money at their jobs. However, a greater level of education does not always guarantee higher wages. Certain professions that demand a high level of education, such as teaching elementary and secondary school, are not high-paying. Such situations arise when the number of people with the training to do that job is relatively large compared with the number of people that employers want to hire. Of course this situation can change over time if, for example, fewer young people choose to train for the profession.

Supply and demand factors change in labor markets, just as they do in markets for goods and services. As a result, occupations that paid high wages and salaries in the past sometimes become outdated, while entirely new occupations are created as a result of technological change or changes in the goods and services consumers demand. For example, blacksmiths were once among the most skilled workers in the United States; today, computer programmers and software developers are in great demand.

The process of creative destruction carries over from product markets to labor markets because the demand for particular goods and services creates a demand for the labor to produce them. Conversely, when the demand for particular goods or services decreases, the demand for labor to produce them will also fall. Similarly, when new technologies create new products or new ways of producing existing products, some workers will have new job opportunities, but other workers might have to retrain, relocate, or take new jobs.

Factors Affecting Labor Markets

Changes in society and in the makeup of the population also affect labor markets. For example, starting in the 1960s it became more common for married women to work outside the home. Unprecedented numbers of women—many with little previous job experience and training—entered the labor markets for the first time during the 1970s. As a result, wages for entry-level jobs were pushed down and did not rise as rapidly as they had in the past. This decline in entry-level wages was further fueled by huge numbers of teens who were also entering the labor market for the first time. These young people were the children of the baby boom of 1946 to 1964, a period in which the birth rate increased dramatically in the United States. So, two changes—one affecting women’s roles in the labor market, the other in the makeup of the age of the workforce—combined to affect the labor market.

The baby boomers’ effects have continued to reverberate through the U.S. economy. For example, starting salaries for people with college degrees became depressed when large numbers of baby boomers started graduating from college. And as workers born during the boom have aged, the work force in the United States has grown progressively older, with the percentage of workers under the age of 25 falling from 20.3 percent in 1980 to 14.3 percent in 1997.

By the 1990s, the women and baby boomers who first entered the job market in the 1970s had acquired more experience and training. Therefore, the aging of the labor force was not affecting entry-level jobs as it once did, and starting salaries for college graduates were rising rapidly again. There will be, however, other kinds of labor market and public policy issues to face when the baby boomers begin to retire in the early decades of the 21st century.

Factors Affecting Labor Markets - Immigration

Labor markets in the United States have also been significantly affected by the immigration of families and workers from other nations. Most families and workers in the United States can trace their heritage to immigrants. In fact, before the 20th century, while the United States was trying to settle its frontiers, it allowed essentially unlimited immigration. In these periods the U.S. economy had more land and other natural resources than it was able to use, because labor was so scarce. Immigration served as one of the main remedies for this shortage of labor.

Generally, immigration raises national output and income levels. These changes occur because immigration increases the number of workers in the economy, which allows employers to produce more goods and services. Capital resources in the economy may also become more valuable as immigration increases. The number of workers available to work with machines and tools increases, as does the number of consumers who want to buy goods and services.

However, wages for jobs that are filled by large numbers of immigrants may decrease. This wage decline stems from greater competition for these jobs and from the fact that many immigrants are willing to work for lower wages than other U.S. workers.

Immigration into the United States is now regulated by a system of quotas that limits the number of immigrants who can legally enter the country each year. In 1964 Congress changed immigration policies to give preference to those with families already in the United States, to refugees facing political persecution, and to individuals with other humanitarian concerns. Before that time, more weight had been placed on immigrants’ labor-market skills. Although this change in policy helped reunite families, it also increased the supply of unskilled labor in the nation, especially in the states of California, Florida, and New York. In 1990 Congress modified the immigration legislation to set a separate annual quota for immigrants with job skills needed in the United States. But people with family members who are already U.S. citizens remain the largest category of immigrants, and U.S. immigration law still puts less focus on job skills than do immigration laws in many other market economies, including Canada and many of the nations of Western Europe.

Factors Affecting Labor Markets - Discrimination

Women and many minorities have long faced discrimination in U.S. labor markets. Employed women earn less, on average, than men with similar levels of education. In part this wage disparity reflects different educational choices that women and men have made. In the past, women have been less likely to study engineering, sciences, and other technical fields that generally pay more. In part, the wage differences result from women leaving the job market for a period of years to raise children. Another reason for the disparity in wages between men and women is that there is still a considerable degree of occupational segregation between males and females—for example, nurses are much more likely to be females and dentists males. But even after allowing for those factors, studies have generally found that, on average, women earn roughly 10 percent less than men even in comparable jobs, with equal levels of education, training, and experience.

Analysis of wage discrimination against black Americans leads to similar conclusions. Specifically, after controlling for differences in age, education, hours worked, experience, occupation, and region of the country, wages for black men are roughly 10 percent lower than for white men, though occupational segregation appears to be less common by race than by gender. Issues other than wage discrimination are also important to note for black workers. In particular, unemployment rates for black workers are about twice as high as they are for white workers. Partly because of that, a much lower percentage of the U.S. black population is employed than the white population.

Hispanic workers generally receive wages about 5 percent lower than white workers, after adjusting for differences in education, training, experience, and other characteristics that affect workers’ productivity. Some studies suggest that differences in the ability to speak English are particularly important in understanding wage differences for Hispanic workers.

The differences between the earnings of white males and earnings of females and minorities slowly decreased in the closing decades of the 20th century. Some laws and regulations prohibiting discrimination seem to have helped in this process. A large part of those gains occurred shortly after the adoption of the 1964 Civil Rights Act, which among other things, outlawed discrimination by employers and unions. Many economists worry that the discrimination that remains may be more difficult to identify and eliminate through legislation.

Discrimination in competitive labor markets is economically inefficient as well as unfair. When workers are not paid based on the value of what they add to employers’ production and profit levels, society loses opportunities to use labor resources in their most valuable ways. As a result, fewer goods and services are produced. If employers discriminate against certain groups of workers, they will pay for that behavior in competitive markets by earning lower profits. Similarly, if workers refuse to work with (or for) coworkers of a different gender, race, or ethnic background, they will have to accept lower wages in competitive markets because their discrimination makes it more costly for employers to run their businesses. And if customers refuse to be served by workers of a certain gender, race, or ethnicity in certain kinds of jobs, they will have to pay higher prices in competitive markets because their discrimination raises the costs of providing these goods and services.

Those who are discriminated against receive lower wages and often experience other forms of economic hardship, such as more frequent and longer periods of unemployment. Beyond that, the lower wage rates and restricted career opportunities they face will naturally affect their decisions about how much education and training to acquire and what kinds of careers to pursue. For that reason, some of the costs of discrimination are paid over very long periods of time, sometimes for a worker’s entire life.

It is clear that there is still discrimination in the U.S. economy. What is not always so clear is how much that discrimination costs the economy as a whole, and that it costs not only those who are discriminated against, but also those who practice discrimination.

Factors Affecting Labor Markets - Unions

Many U.S. workers belong to unions or to professional associations (such as the National Education Association for teachers) that act like unions. These unions and associations represent groups of workers in collective bargaining with employers to agree on contracts. During this bargaining, workers and employers establish wages and fringe benefits, such as health care and pension benefits, for different types of jobs. They also set grievance procedures to resolve labor disputes during the life of the contract and often address many other issues, such as procedures for job transfers and promotions of workers.

Many studies indicate that wages for union workers in the United States are 10 to 15 percent higher than for nonunion workers in similar jobs and that fringe benefits for union workers also tend to be higher. That compensation difference is an important consideration both for workers thinking about joining unions, and for employers who are concerned about paying higher wages and benefits than their competitors. In some cases, it appears that the higher wages and benefits are paid because union workers are more productive than nonunion workers are. But in other cases unions have been found to decrease productivity, sometimes by limiting the kinds of work that certain employees can do, or by requiring more workers in some jobs than employers would otherwise hire. Economists have not reached definite conclusions on some of these issues, but it is evident that there are many other broad effects of unions on the economy.

Unions and collective bargaining in the United States are markedly different from such organizations and procedures in other industrialized nations. U.S. unions generally practice what is often described as business unionism, which focuses mainly on the direct economic interests of their members. In contrast, unions in Europe and South America focus more on influencing national policy agendas and political parties.

The different focus by U.S. unions partly reflects the special history of unions in the United States, where the first sustained successes were achieved by craft unions representing skilled workers such as carpenters, printers, and plumbers. These skilled workers had more bargaining power and were more difficult for employers to replace or do without than workers with less training. Unions representing these skilled workers were also able to provide special services to employers that allowed both the unions and employers to operate more efficiently. For example, craft unions in large cities often ran apprenticeship programs to train young workers in these occupations. And many craft unions operated hiring halls that employers could call to find trained workers on short notice or for short periods of time.

Most of these craft unions were members of the American Federation of Labor (AFL), founded in 1886. The strong bargaining position of these skilled workers, and the fact that these workers typically earned much higher wages than most other workers, led the AFL unions to focus on wages and other financial benefits for their members. Samuel Gompers, the president of the AFL for nearly all of its first 38 years, once summarized his philosophy of unions by saying, “What do we want? More. When do we want it? Now.”

By contrast, industrial unions—which represent all of the workers at a firm or work site, regardless of their function or trade—were generally not successful in the United States before Congress passed the National Labor Relations Act of 1935. This law, also known as the Wagner Act after its sponsor, Senator Robert F. Wagner of New York, changed the way that unions are recognized as bargaining agents for workers by employers, and made it easier for unions representing all workers to win that recognition. The Wagner Act largely put an end to the violent strikes that often occurred when unions were trying to be recognized as the bargaining agent for employees at some firm or work site. The act established clear procedures for calling and holding elections in which the workers decide whether they want to be represented by a union, and if so by which union. The Wagner Act also established a government agency known as the National Labor Relations Board (NLRB) to hear charges of unfair labor practices. Either employees or employers may file charges of unfair labor practices with the NLRB.

After the Wagner Act was passed, the number of workers who belonged to unions increased rapidly. This trend continued through World War II (1939-1945), when unions successfully negotiated more fringe benefits for their members. These fringe benefits were partly a result of wage and price controls established during the war, which made large wage increases impossible. In the 1950s union strength continued to grow, and the national association of industrial unions, known as the Congress of Industrial Organization (CIO) merged with the AFL.

Since the late 1970s, total union membership has fallen. The percentage of the U.S. labor force that belongs to unions has decreased dramatically in the last half of the 20th century, from more than 25 percent in the mid-1950s to 14 percent in 1999. A number of reasons explain the decline in union representation of the U.S. labor force. First, unions are traditionally strong in manufacturing industries, but since the 1950s manufacturing has accounted for a smaller percentage of overall employment in the U.S. economy. Employment has grown more rapidly in the service sector, particularly in professional services and white-collar jobs. Unions have not had as much success in acquiring new members in the service sector, with the exception of government employees.

Union membership has also declined as the government established laws and regulations that mandate for all workers many of the benefits and guarantees that unions had achieved for their members. These mandates include minimum wage, workplace safety, higher pay rates for overtime, and oversight of the management of pension funds if employers fund or partially fund pensions.

Third, many U.S. firms have become more aggressive in opposing the recognition of unions as bargaining agents for their employees, and in dealing with confrontations involving existing unions. For example, it is increasingly common for firms to hire permanent replacement workers if strikes occur at a firm or work site.

Finally, workers with college degrees held a larger percentage of jobs in the U.S. economy in the late 1990s than in earlier decades. These workers are more likely to be in jobs with some level of managerial responsibilities, and less likely to think of themselves as potential union members.

Unions, however, continue to play many valuable roles in representing their members on economic issues. Equally or perhaps more importantly, unions provide workers with a stronger voice in how work is done and how workers are treated. This is particularly true in jobs where it is difficult to identify clearly how much an individual worker contributes to total output in the production process. During the 1990s, many U.S. manufacturing firms adopted team production methods, in which small groups of workers function as a team. Any member of the team can suggest ideas for different ways of doing jobs. But management is likely to consider more carefully those that are recommended by the union or have union support. Workers may also be more willing to present ideas for job improvements to union representatives than to managers. In some cases, workers feel that the union would consider how the changes can be made without reducing jobs, wages, or other benefits.

Factors Affecting Labor Markets - Unemployment

A persistent problem for the U.S. economy and some of its workers is unemployment—not being able to find a job despite actively looking for work for at least 30 consecutive days. There are three major kinds of unemployment: frictional, cyclical, and structural. Each type of unemployment has different causes and consequences, and so public policies designed to reduce each type of unemployment must be different, too.

Frictional unemployment occurs as a result of labor mobility, when workers change jobs or wait to begin a new job. Labor mobility is, in general, a good thing for workers and the economy overall. It allows workers to look for the best available job for which they are qualified and lets employers find the best-qualified people for their job openings. Because this searching and matching by employees and employers takes time, on any given day in a market economy there will be some workers who are looking for a new job, or waiting to begin a job. Even when economists describe the economy as being at full employment there will be some frictional unemployment (as much as 5 to 6 percent of the labor force in some years). This kind of unemployment is generally not a major economic problem.

Cyclical unemployment occurs when the economy goes into a recession. The basic causes of cyclical unemployment are decreases in the levels of consumption, investment, or government spending in the economy, or a decrease in the demand for goods and services exported to other countries. As national spending and production levels fall, some employers begin to lay off workers. Cyclical unemployment varies greatly according to the health of the economy. Some of the highest unemployment rates for the last decades of the 20th century took place during the recession of 1982 to 1983, when unemployment levels reached almost 10 percent. The highest U.S. unemployment rate of the 20th century occurred in 1933, when the Great Depression left almost 25 percent of the labor force without work.

Sometimes the government can use monetary or fiscal policies to increase spending by businesses and households, for instance by cutting taxes. Or the government can increase its own spending to fight this kind of unemployment. . Perhaps the most famous example of this kind of tax cut in the United States was the one designed in 1963 and passed in 1964 by the administrations of U.S. president John F. Kennedy and his successor, Lyndon B. Johnson.

Structural unemployment occurs when people who are looking for jobs do not have the education or skills to fill the jobs that are currently available. Most policies designed to reduce structural unemployment provide training programs for these workers, or subsidize education and training programs available from colleges and universities, technical schools, or businesses. In some cases, the government provides support for retraining when increased competition from imported goods and services puts U.S. workers out of work or when factories are shut down because production is moved to another state or country.

Unemployment rates also vary sharply by occupation and educational levels. As a group, workers with college degrees experience far lower unemployment rates than workers with less education. In 1998 the unemployment rate for U.S. workers who had not graduated from high school was 7.1 percent; for high school graduates, the rate was 4.0 percent; for those with some college the rate was 3.0 percent; and for college graduates the unemployment rate was only 1.8 percent.

Factors Affecting Labor Markets - Income Inequality

Another issue involving the operation of labor markets in the U.S. economy has been the growing difference between the earnings of high-income and low-income workers at the end of the 20th century. From 1977 to 1997, families who make up the top 20 percent of income groups have seen their money income rise from 40.9 percent of the national income to 47.2 percent. Over the same period, families in the lowest 20 percent of income groups have experienced a decline from 5.5 percent of the national income to 4.2 percent. This trend is the result of several factors.

Wages for skilled workers, those with more education and training, have increased quickly because the supply of these workers in the U.S. has not risen as quickly as demand for these workers. In addition, wages for unskilled labor in the United States have been held down more than in other nations as a result of U.S. immigration policies. The United States has admitted a larger number of unskilled workers than other industrialized nations. Other countries often consider job market factors more heavily in determining who will be allowed to immigrate. As a result, the supply of unskilled workers in the United States has increased faster than in other countries, pushing wages in low-paying jobs lower.

Finally, government assistance programs for low-income families tend to be more extensive and generous in other industrialized market economies than they are in the United States. That is perhaps one of the reasons that workers in those countries are less willing to accept jobs that pay lower wages, and why unemployment rates in those countries are substantially higher than they are in the United States. The exact relationship between those factors has not been determined, however.

It is clear that it has become increasingly difficult for U.S. workers who have not at least completed high school to achieve a high or moderate level of income. In 1996 the average annual income for graduates of four-year colleges was $63,127 for males and $41,339 for females, while the average annual income for those who did not graduate from high school was only $25,283 for males and $17,313 for females.