39.1 – Introduction to the Orthodox Theory of Labor Markets
The Increasing Value of a College Degree
Working your way through college used to be fairly common in the United States. According to a 2015 study by the Georgetown Center on Education and the Workforce, 40% of college students work 30 hours or more per week.
At the same time, the cost of college seems to rise every year. The data show that the cost of tuition, fees, room and board has more than doubled since 1984. Thus, even full time employment may not be enough to cover college expenses anymore. Working full time at the federal minimum wage–40 hours per week, 52 weeks per year—earns $15,080 before taxes, which is less than the $28,840 the College Board estimates it cost in 2023 for a year of college with in-state status at a public university ($46,730 for out-of-state students). The result of these costs is that student loan debt topped $1.73 trillion that year.
Despite these disheartening figures, the value of a bachelor’s degree has never been higher. How do we explain this? This chapter will tell us.
Chapter Objectives
In this chapter, you will learn about:
- Labor markets
- How wages are determined in an imperfectly competitive labor market
- How unions affect wages and employment
- How labor market outcomes are determined under Bilateral Monopoly
- Theories of Employment Discrimination, and
- How Immigration affects labor market outcomes
Orthodox economics holds that in a market economy like the United States, income comes from ownership of the means of production: resources or assets. More precisely, one’s income is a function of two things: the quantity of each resource one owns, and the value society places on those resources. Recall from the chapter on “Cost Assumptions for Profit Maximizing Firms“, each factor of production has an associated factor payment. For the majority of us, the most important resource we own is our labor. Thus, most of our income is wages, salaries, commissions, tips and other types of labor income. Your labor income depends on how many hours you have to work and the wage rate an employer will pay you for those hours. At the same time, some people own real estate, which they can either use themselves or rent out to other users. Some people have financial assets like bank accounts, stocks and bonds, for which they earn interest, dividends or some other form of income.
Each of these factor payments, like wages for labor and interest for financial capital, is determined in their respective factor markets. For the rest of this chapter, we will focus on the orthodox theory of labor markets, but other factor markets operate similarly. In Chapter “Financial Markets” we describe how this works for financial capital.
References
Cesare, Nicholas. 2024. “How Much Student Loan Debt Does the Average Borrower Still Have?” Newsweek. Accessed January 29, 2024. Student Loan Debt Statistics for 2023: The Average Amount Borrowers Owe (newsweek.com)
The College Board. 2023. “Trends in College Prices and Student Aid, 2023.” Accessed January 29, 2024. Trends in College Pricing 2023 (collegeboard.org)