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“Contemporary Labor Economics”: Book Summary Essay

The book, “Contemporary Labor Economics” by McConnell, Brue, and Macpherson discusses comprehensive issues surrounding labor economics and variable that interact within its parameter. Factually, the authors are specific on theoretical perspectives, trial of these theories and presentation of their results in an interesting gesture.

Chapters seven, eight, nine, and ten dwell in compensation analysis, wage structure, mobility and unionization of labor variable and their effect in perfect and imperfect markets based on different assumptions.

Thus, this reflective treatise attempts to explicitly review these chapters and identify specific issues discusses by the authors on compensation analysis, wage structure, mobility and its components, and unionization variables. Besides, the paper identifies assumptions presented by these authors and how the same can be related to the contemporary labor market behavior.

Chapter Seven

The main topic of discussion in this chapter is the operation of fringe benefits and variable that affects it when being portioned to total compensation effect. Fringe benefits and wage earnings are identified as the main components of compensation summation.

However, fringe benefits are apportioned a larger share in the total compensation matrix due to the fact that their influence has experienced a consistent growth over the last decade in the labor market. These fringe benefits are classified as social security, unemployment compensation and employee’s compensation for every unit of labor given.

In classification, these fringe benefits assume the form of insurance benefits, paid leaves, and legally acquired benefits to a worker for every unit of labor delivered against the revenue realized. Besides these, retirement benefits and savings are included in the summation of the fringe benefits accrued by a worker.

However, the type and form of fringe benefits are never universal. Rather, they are influenced by the type of industry in which labor operates, ration and occupational groups. This is due to the fact that governments and other agencies have introduced laws and regulations aimed at pushing for higher and reliable compensation.

In most instances, the authors opine that blue collar employees have a larger share of the legally, construed benefits than their counterparts in white collar jobs as redistribution economics operate.

In a bid to extrapolate this relationship, the authors discuss the theory of optimal fringe benefits as a certain reason for the experienced growth over the last decades. Reflectively, the variables interacting within the parameters of this theory are leisure and income within the normal indifference curve.

Consequently, the resulting isoprofit curve becomes flexible to different bundles of budget constraints that might be present at each level of computation. Further, the authors assert that indifference curve is a product of various fringe benefits and wage rates that interact simultaneously to yield same utility level for each worker.

When all other factors are held constant, higher swing of the indifference curve indicate higher levels of utility. Irrespective of the inclination of the indifference curve, it is apparent that levels of tax advantage determine the resultant fringe benefit accrued.

Specifically, to support this notion, the authors prove that benefits accrued from pension plans are taxable upon confirmation of receivership by an employee. Besides, the principle, dividends and interest which are part of the summation of pensions, are best achieved through pretax accumulation on the fringe benefits.

The authors identify the need for intrinsic substitution as a component of the decision science aimed at managing the fringe benefits. In such case, the forgone alternative would be forfeiting leisure related savings for health and pension needs which are characterized as basic for every worker.

The adoption of this thought is influenced by the fact that basic needs are more critical than the secondary needs in the matrix of fringe benefits. Besides, the long term effects of purchasing the basic needs is greater than that of opting to acquire secondary needs upfront.

Another important concept addressed by these authors is the employer’s isoprofit curve. This curve addresses the interaction between labor efficiency and pay schemes. This curve measures the wages and fringe benefits as they interact at every level of the profit baseline.

Tax advantages to employers, scale of economies, and efficiency are major factor that led to growth of fringe benefits. Therefore, as fringe benefits increase, the authors opine that workers utility will increase in the same ratio. In drawing the curve, the initial assumptions are that the market operates within a normal profit margin in total employment and product market as part of the overall compensation effect per worker.

Generally, the authors are optimistic that substantial changes for each cluster of wages and benefits are negligible within the ‘employer’s isoprofit curve’. The same relationship functions in the Wage-Fringe optimum.

As performance and pay interact in the labor market, the authors indicate that there is a proportional relationship between performance and pay for each unit of labor given to a firm (principal) against the compensation offered.

Unbalance relationship between pay and performance may result in principal-agent problem which might culminate in under utilization of labor units since the agent (employee) may opt to increase leisure through reduced efforts in work.

In order to avoid this unwanted scenario, the authors propose different forms of incentive compensation such as tournament pay, royalties, profits, and bonuses plans. In most cases, employers control these incentives and limit them as a fraction of the total revenue after factoring cost of production and each labor unit.

When implementing these incentive plans, it is important to concentrate on personal performance bonuses as opposed to team bonuses which promote joyride attitude among workers since the process has no specific measure for distributing incentives. The firm can also opt for equity compensation under which employees are encouraged to take ownership of the firm in form of stocks.

When implanting compensation plans, it is important for the firm to consider the efficiency of each labor unit against the wage payments. These units should be quantified in line with performance targets and revenue accrued. In order to achieve this, the authors propose introduction of regulatory agents such as supervisors who work alongside the employees.

As a result, the fractional reduction of labor cost per unit on the budget of an employer is referred to as the resultant wage efficiency matrix. This matrix is dependent on homogeneous labor inputs wages at market-clearing parameters. Conclusively, this chapter introduces the aspect of theories in explaining the interaction between compensation and efficiency of labor units within and without the equilibrium.

Chapter Eight

The wage structure forms the main topic of discussion in this chapter. Reflectively, the authors state that equilibrium and transitional wage differentials offer valid explanation on the elicit labor differential persistence in the labor markets. Interestingly, the authors relate homogeneous jobs to perfect competition within the labor market.

In the ideal, workers will have limited option apart from changing jobs until optimal satisfaction is achieved through creation of a theoretical balanced characterized by identical wage payment across same industry. However, in reality labor wage rate variances are persistent in both empirical and casual rates despite the theoretical balance.

These variances are attributed to inconsistency between casual and empirical wage rate reviews. The authors state that nonwage factors such as fringe benefits, job location, job status, wage advancement prospects, earnings regularity, and risk of death or injury in a job have substantial influence on supply decisions since they form part of wage differentials.

Consequently, their intrinsic influence forms part of the overall wage differentials that are part of the generated labor supply effect.

Skills and experience are as important as the nonwage factors on wage differentials. In the ideal scenario, that is, all other factors are held constant, when there is a decision crisis involving review of wages in a production line, a rational employer would opt for increasing wages paid to highly skilled workers an employee retention strategy.

The rate of wage increase will be higher for the highly skilled than what the low skilled counterparts eventually get. Efficiency of wage theories offers a better explanation on the above scenario.

These theories are based on the same notion that higher turnover of labor units translate into higher wages paid, even though the ratio may not be proportional in perfect and imperfect labor markets.

Besides, labor environments with limited quantifiable variables for reviewing performance are a recipe for high wages given to employees since the principal may not be in a position to measure efficiency of each labor unit against wage compensation.

Further, the authors concur that heterogeneous workers are responsible for the continuous wage disparities since the group competes on the nonwage aspects of work within a varying stock capitals that are of human nature. Consequently, the quantifiable result would be unbalanced labor preferences within differing market consistency on every unit of labor.

The authors propose hedonic theory of wages to classify this form of interaction between workers that have wage preference variances when interacted with ideal job amenities of nonwage nature.

The most likely effect would be the standard labor market’s inability to churn wage differentials that are sustainable for employees sharing similar capital stocks of human nature and counterparts with varying capital stocks of human nature.

Market information placement in presented as another vital determinant of wage differentials. Market information influences the behavior of the labor market, its efficiency, and optimal operation. Thus, imperfect and costly market labor information is a major contributor towards persistent labor differentials at micro and macro levels of the labor market.

Besides, when their effect is long term, then outcome may assume the form of long-lasting differential wage imbalances that are transitional from a period to another. Consequently, wage structure immobilites such as institutional, geographic, and institutional may last longer than usual.

Reflectively, these immobilites are clear indicators of differences in wage rates within a similar industry for workers with same educational level, skills, and experience.

Chapter Nine

The baseline issue of this chapter is the determinants of mobility and their influence on labor market variables. The two major types of mobility are categorized as occupational geographical mobility. Reflectively, occupational mobility depends on labor units and profession of the worker.

On the other hand, geographical mobility is influenced by location and change of the same due to changes in geographical location of labor provision environment. In the process of changing occupational and geographical location, the underlying decision science is the overall effect of the same on capital structure of a worker.

Generally, overall expected outcome is measured as a ratio of total cost of investment on the relocation. For instance, transportation expenses, psychic costs, and forgone income during transition form part of the cost matrix.

The main factors that influence every geographical pr occupational migration are family status, distance, educational level, likelihood to move, and age of the worker. The chances of moving and age are often inversely proportional since older people prefer a settled life than younger people.

Family status and education attainment share a positive relationship with mobility forces in the labor markets. However, likelihood of movement and distance to cover share a negatively skewed relationship to mobility intentions.

Specifically, the unemployed have a more likelihood to migrate than the employed. In addition, when the destination exhibits higher chances of unemployment, then movement towards that location may be very minimal in the mobility decision framework.

As a variable of the market labor mobility, efficiency in ‘allocative’ contributors is significant in balancing distribution of labor units between low and high employment values. Reflectively, then value of marginal product determines forms the regulatory effect on perfect competition and costless movement.

The two components will swing until the regulator balances for employments sharing sale efficiency on ‘allocativeness’. However, this interaction holds in a labor market with perfect knowledge of all determinant variables operating in a similar employment industry.

Due to similar experience, skills, and educational attainment, the wage rates are likely to balance as the regulator moderate the two determinant variables at constant mobility parameter. Despite the perfect regulation, several interacting externalities are identified as determinants of migration ease.

As a result, these externalities are associated with minimization of gains realized on the migration efficiency matrix. The worst case occurs when pecuniary externalities interact with ‘allocative efficiency’ to further minimize these gains.

The authors propose wage differentials to balance the effect of these externalities. In different labor markets, wage differentials generate a recurring capital and product flows that interact concurrently to initiate an equalized balance on wages in long term. Besides, it minimizes the extent of labor migration.

Adopting a comparative statistics, the authors present data on the position immigrations related to labor within America at more than half a million annually. Interestingly, this figure upsurges yearly.

Due to an influx of the illegal immigrants in the labor market, the authors conclude that they are responsible for the depressed wage rates in the casual labor market. However, their influence is inconsequential, especially at macro level of the labor market.

Chapter Ten

Labor unionization is the main topic of discussion in this chapter. As a result of industrialization, the authors assert that labor management moved from being individual oriented to a group issue. The process occurred gradually has spread across the entire labor markets across the world.

Labor unions command the ratio of 1:9 of the entire world workforce. That is, for every ten workers, one has been unionized. The comparative study indicates that productive industries boast of stronger labor unions than service provision counterparts. The same relationship is indicated in public verse private entities. The former commands better organized labor unions than the latter.

This chapter indicates that determinants of ease of unionization include race, age, and gender. Reflectively, male workers belong to more unions than their female counterparts. Therefore, the more enlightened population in urban industries are likely to being to a labor union than their coworkers in remote rural settings due to dynamics of urban settlement.

The three key components of a typical labor union include the peak line consisting of an organ entrusted with formulating protection policies and pushing for their implementation with employers.

The middle part of the labor union triangle comprises of an organ that negotiates with individual employers on better terms for their members and check the excesses of their principal. The baseline of the labor union triangle comprises of agents entrusted with the duty of recruiting more members and offering legal advice.

The survival of labor unions is currently under threat due to the dynamics of a modern workplace. As nations pass laws to protect employees, the role of labor unions has been greatly reduced. Besides, interaction between the domestic output and demographic structure has made it difficult for labor unions to operate smoothly.

In addition, modern employees have introduced effective public relations programs among their employees who have better avenues for expressing their grievances within moments without necessarily politicizing every conflict.

Besides labor union characteristics, the paper identifies two union models, that is, monopoly union model and ideal model. Under the monopoly union model, the underlying assumption is that the union is responsible for setting the most appropriate wage rates as the firm controls the union’s employment level on the preset wage rate.

Reflectively, this scenario shows that wages are likely to increase as employment levels decline at perfect market interaction parameter. However, the efficiency and practicality of this model is faulted by the authors since it may prove difficult to strike a balanced relationship between the wage rate setters and employment level regulator.

In most case, there is a higher chance that one person may reap absolute benefits as the other party is reduced to a worst-off position.

Reflectively, the ideal model is a moderator of the monopoly model. Also referred to as the efficient contract model, this model offers collective bargain opportunity for the two parties over employment level and wage rates. Since it is a flexible model, both the principal and the agent are given an opportunity to balance their offers before striking a compromise deal.

For instance, the union can lower supply of labor, increase demand for labor and negotiate an equilibrium wage bargain for its members. On the other hand, the principal (employer) has the options of controlling labor supply in order to operate within pareto efficiency brackets.

In conclusion, this chapter identifies conflicts that are predominant in the interaction between the employer and trade union. These conflicts are theorized in the accident strike model which explains the alternative conflict resolution route when the parties cannot reach an agreement.

Therefore, asymmetric information model offers the best explanation for conflict resolution without biasness when the principal and the agent differ.

This Essay on “Contemporary Labor Economics”: Book Summary was written and submitted by user Oscar Chen to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.

Oscar Chen studied at Yale University, USA, with average GPA 3.59 out of 4.0.

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Chen, O. (2019, April 12). “Contemporary Labor Economics”: Book Summary [Blog post]. Retrieved from

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Chen, Oscar. "“Contemporary Labor Economics”: Book Summary." IvyPanda, 12 Apr. 2019,

1. Oscar Chen. "“Contemporary Labor Economics”: Book Summary." IvyPanda (blog), April 12, 2019.


Chen, Oscar. "“Contemporary Labor Economics”: Book Summary." IvyPanda (blog), April 12, 2019.


Chen, Oscar. 2019. "“Contemporary Labor Economics”: Book Summary." IvyPanda (blog), April 12, 2019.


Chen, O. (2019) '“Contemporary Labor Economics”: Book Summary'. IvyPanda, 12 April.

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