In recent years, some policymakers have proposed requiring firms to give workers certain fringe benefits. For example, in 1993, President Clinton proposed requiring firms to provide
health insurance to their workers. Let’s consider the effects of such a policy on the labor market.
a. Suppose that a law required firms to give each worker $3 of fringe benefits for every hour that the worker is employed by the firm. How does this law affect the marginal profit that firm earns from each worker?
Wouldn't this decrease the marginal profit by three dollars per worker.
How does the law affect the demand curve for labor? Draw your answer on a graph with the cash wage on the vertical axis.
Wouldn't it be two demand curves D1 being the prior situation without the fringe benefits and D2 being the situation with the fringe benefits. So wouldn't that mean that D2 would be to the left of D1.
b. If there is no change in labor supply, how would this law affect employment and wages?
Wouldn't employment and wages decrease because of the law.
c. Why might the labor supply curve shift in response to this law?
Wouldn't the labor supply curve shift because it cost the firms more money to employ the workers which eats into their profits.
Would this shift in labor supply raise or lower the impact of the law on wages and employment?
Wouldn't this mean that there would be an increase impact of the law on wages and employment.
d. As Chapter 6 discussed, the wages of some workers, particularly the unskilled and inexperienced, are kept above the equilibrium level by minimum-wage laws. What effect would a fringe-benefit mandate have for these workers? Wouldn't the effect be a reduction in employing these workers.
a) I think you are correct, in the short run. (cept $3 per worker per hour).
a2) I think you are correct, with the vertical distance between D1 and D2 being $3.
b) again correct.
c) The labor supply reflects the willingness of workers to work. The new law would cause the labor supply to shift to the right (increase) because for each hour worked they get w+3 wages instead of just w.
Relative to b) cash wages drop, employment rises. In fact, I would argue, the final equilibrium (except for minimum wage workers) would be about where things started in the first place. Total employment goes back to where it was, cash wages, drops by about $3 per hour, but total compensation stays about where it started.
d) you are correct.
Thank you for your input! It seems like you have a good understanding of the effects of requiring firms to provide fringe benefits to workers. Just to summarize:
a) The law would indeed decrease the marginal profit that firms earn from each worker by $3. This is because the firms now have to allocate $3 of fringe benefits per hour per worker.
b) If there is no change in labor supply, then employment and wages would decrease due to the additional cost of providing fringe benefits.
c) The labor supply curve might shift in response to this law because the cost of employing workers increases. Firms may need to offer higher wages or benefits to attract a sufficient number of workers.
This shift in the labor supply curve would increase the impact of the law on wages and employment. It may lead to higher wages being offered by firms to compensate for the increased cost of providing fringe benefits.
d) For minimum-wage workers who are already receiving wages above the equilibrium level due to minimum-wage laws, the effect of a fringe-benefit mandate could be a reduction in employment opportunities for these workers. This is because firms may find it more expensive to maintain the same level of employment while also providing the mandated fringe benefits.
Overall, requiring firms to provide fringe benefits can have various effects on the labor market, including changes in profits, wages, and employment.
a) Yes, you are correct. The law would decrease the marginal profit by $3 per worker.
b) Yes, that is correct. The law would likely lead to a decrease in employment and wages.
c) Yes, the labor supply curve would shift because the increased cost to firms of providing fringe benefits may discourage some workers from entering the labor market or reduce their willingness to work. This would result in a shift of the labor supply curve to the left.
This shift in labor supply would actually lower the impact of the law on wages and employment. With a decrease in labor supply, firms may face a shortage of workers and would need to offer higher wages to attract workers. Therefore, the impact of the law on wages and employment would be reduced compared to the initial impact.
d) A fringe-benefit mandate may have a similar effect as raising the minimum wage for unskilled and inexperienced workers. It would increase the cost of employing such workers and could result in a reduction in their employment opportunities. Therefore, a fringe-benefit mandate may have a negative effect on the employment prospects for these workers.