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Fig. Ill Equilibrium in the Competitive Labor Marlcet




-"""" \ d=i:mrp,


firm is a price-taker in the labor market (You can ignore the marking labelled AFC along the firms labor supply curve for now). As Figure III illustrates, the firm will hire n"" workers at the wage rate of W*.


Our model allows us to account for the differences in wage rates between different types of workers. Consider the wage rates paid to watchmakers and lemon pickers in Figures IV and V. Virtually anyone can pick lemons, but only a few people know how to make watches, so the supply of lemon pickers is very large reladve to the supply of watchmjJcers. On the other hand, the demand for lemon pickers (MPP x P) is low compared to the demand for watchmakers because the price of lemons, P, is relathely low. Thus, with low reladve demand and high reladve supply, the wage rate for lemon pickers, Wj, is very low compared to the wage rate Wy, for watchmakers.

Income has nothing to do with whether a person is a capitalist or a worker Some types of wage earners make enormous salaries, whereas many capitalists are far from wealthy. For example, the wages of professional athletes are immense, while the capitalist owners of many small businesses barely scratch out a living. Looking at large corporations such as the firms in the auto industry, we find enormous salaries going to corporate managers, whereas the capitalist stockholders of these firms are usually ordinary people saving for retirement In these two high wage occupations, the demand for these specialized forms of labor is relatively high compared to the supply.

Profitability Ukewise has nothing to do with whether a firms labor force is highly paid. As we saw

in Section V, competitive firms will continue to enter or exit an industry until rates of return on investment equalize. For example, if profitability in one industry is higher than in others, new entrants will pour into the industry, increase the supply, and drive down prices until further entry becomes unprofitable. On the other hand, if industry profits are low, firms will exit, driving up prices until the return on investment again becomes normal. The whole process is independent of whether wages in the industry are high or low; that is why we often find considerable entry into industries - such as computers - marked by extremely high rates of pay.

But perhaps the most decisive evidence that business does not make super-normal profits in low wage industries is that firms often seek to withdraw

from precisely these industries, despite the Marxist claim that they can exploit workers there. For example, Appalachian coal mining and agriculture have been notoriously low wage industries for years. Yet, when we look at the history of these industries, instead of seeing entry by other firms eager to reap fat profits by exploiting workers, we watch existing businesses uninterruptedly exit

Similarly, when we look at destitute Third World nations whose poverty is said to be caused by foreign multinational exploitation of labor, we often find investment pouring out of, not into these countries. Further, those countries in the Third World which have enjoyed the highest rates of economic growth, notably the countries in the Pacific Rim, deliberately attract foreign nationals through low taxation policies. After all, foreign companies transfer capital, technology, and other much needed know-how to

Fig. IV Lemon Piclcers

Fig. V Watchmakers

these countries, opening options which would otherwise be absent. Conversely, it is precisely in those Third World economies, such as Cuba where major industries are government owned and policy is hostile to muldnadonals, where we find stagnadon and poverty.

As we saw in Secdon III, resources - including human resources - tend to flow toward their highest valued uses. In labor markets, this means out-migra-don of labor from countries which thwart the market into reladvely capitalist countries where its allowed to flourish. Oftendmes, the capitalist country recei\ing these immigrants is struggling itself or treats them with racial hostility. Even the officially racist, but capitalist, country of South Africa draws in-migration of blacks from its government planned and economically stagnant neighbors. Marxist economies, on the,other hand, must either lock their workers in or lose them to the capitalist countries. In-migradon to such places is nil.

Such results run directly contrary to the empirical implications of the exploitation theory. After all, if foreign nationals can impoverish a country, we ought to find rising poverty, rather than rising prosperity, in those countries where foreign nationals operate most freely. Conversel), we should also discover rapid economic growth, not stagnation and out-migration, in government planned economies such as North Korea and Cuba.

Nonetheless, despite the falsification of the exploitation model by empirical reality, the theory retains its psychic appeal. People with axes to grind -some University Professors not the least among them -find it comforting to believe that misfortunes stem fi-om the evil deeds of others, especially foreigners, businessmen, and other people unlike themselves.

Unfortunately, those in the intelligentsia who cling to such discredited nonsense do not suffer any personal detriment from their error. These costs are borne by others, especially those in economic distress for whom the exploitation exponents profess such compassion. Among the imfortimate, the exploitation model causes envy and resentmenq among those better off, it causes arrogance and guilL The worst effects, however, are economic, not psychic. To the considerable extent that "erroneous exploitation theories undermine the incentives of poor people to acquire and utilize human capital wisely, not to mention cause war and xenophobia, they perpetuate, rather than alleviate, poverty and inequality. Although we can present only a brief treatment here, some empirically valid factors which account for income differences over the course of a lifetime and among different groups of people are as follows:

Age. The general pattern of income over the life cycle is presented in Figure VI. Beginning at about age eighteen, earnings continue to rise for most people until age 55; after that, they gradually fall off until retirement age. This pattern has both demand side and supply side aspects. On the demand side, most workers continue to acquire and develop human capital throughout most of their lives, thereby increasing their marginal productivity. On the supply side, the number of hours actually worked tends to rise through middle life. Ultimately, however, the debilities of rising age overcome these two effects so that incomes finally drop.

As the figure shows, income varies sharply over the lifecycle. In 1993 for example, families headed by persons 45 - 54 years old averaged 93% higher incomes

I III- l.dbiii Mrnhrl

than those headed by persons under the age of 25. Much of the wage differendak between ethnic groups can be accounted for by age. For example, Jews are among the wealthiest of American ethnic groups, while Puerto Ricans are among the poorest. A pordon - but by no means all - of these differences can be explained by the greater age of the Jewish populadon. About half of the Jews are over 45 years old, but only 12% of the Puerto Ricans are this old.

Raw Ability. Some individuals are simply born with more innate human talent than others. Other things constant, such traits as intelligence, looks, health, and a host of other inherited characterisdcs can increase productivity. Even here, however, the economic emironment can play a key role. An IQ of 140 would have been of no significant advantage to an illiterate .serf in the Middle Ages, whereas today it would usually be a plus.

Human Capital. Many people are more productive simply because they - or others - have expended resources in mzddng themselves so. The acquisition of human capiul takes many forms. Formal education and on-the-job training are two of the more obvious examples, but much human capital is developed through the efforts of ones parents. Instilling such personal traits as discipline, responsibility, thrift, honesty, consideration, and the like is a cosdy undertaking for parents. Insofar as offspring acquire such trzuts, they become more productive.

Like other t\pes of investment activities, the development of human capital responds to incentives. Oftentimes welfare programs designed to help "people in distress" or "those with the greatest need," reward the recipients for failing to act responsibly in activities

including human reproduction, education, work, and even fundamental selfcontrol. For example, would the maternity wards of welfare hospitals be filled wii], a high and rising number of fifteen year old unwed mothers - giving birth to the next generation of welfare recipients - without subsidizadon under the .id fd Dependent Children program? On die other hand, those parents who are most concerned that their offspring develop human capital often limit themselves to baring that small number of children who can be raised under their high standards. For example, blacks, hispanics, and whites of upper socioeconomic status have long had fertility rates too low to e\en reproduce themselves. Transferring the wealth of self-supporting and productive parents to those on the dole reduces the number of well-raised children and increases the number of poorly rai.sed ones; at the same time it increases the number of dependent individuals while decreasing the abilit) of societ) to support them.

Risk and Working Condidons. Certain jobs are inherendy dangerous or unpleasant. In order to attract workers from safer or more agreeable occupations, employers compensate with higher pay. For example, oil well drillers are better paid than other construction workers because of the relatively greater hazards of well drilling. Similarly, the construction industry as a whole is highly cyclical; to compensate workers for accepting the risk of long periods of unemployment, salaries must be high. Otherwise, the construction labor force would enter less economically risky professions. Other jobs are simply unpleasant. The wages of painters, for example, must be high enough to compensate them for the uiipleasanuiess of smelling paint all day. In general, the better the various emplo)ment alternatives open to such groups, the higher the compensation for risk and hardship must be.

Inheritance. Some individuals enjoy high incomes because they have inherited physical capital from deceased parents. The extent to which inheritance affects the overall distribution of wealth is, however, surprisingly small. For one diing, almost everyone inherits some wealth; only when inheritances are highly unequal does inheritance play a major role in generating income inequality. More importantly, physical capital wears out and has to be replenished; much ofthe value of physical assets is gone after twenty years. Therefore, inheritance can have at most only a transitory effect on income. But some of the most compelling evidence that inheritance does not account for much income inequality arises out of the devastation

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