David R. Henderson  

A Rare Disagreement with Bryan Caplan

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Last week I highlighted Bryan Caplan's comprehensive notes, homework sets, and keys to homework for the courses he teaches.

While perusing his first homework set for his labor economics course, I came across the following problem:

Using separate supply-and-demand curves, show what happens in a single occupation if employers provide free coffee for workers, and:
A. Workers like coffee, but the caffeine makes them "hyper" and less able to do their job.
B. Workers actively dislike coffee, but it enhances their ability to keep working late at night.

I agree with his answer to A. But he provides the following answer to B:
Labor supply decreases, but labor demand increases.

I think that's wrong. If workers "actively dislike coffee," they won't drink it. So there will be no effect on labor supply.

The effect on labor demand is also interesting. If the employer provides this every day, then he/she will notice that at the end of the day, none of the coffee is being drunk. So the employer will likely get rid of it. But, taking Bryan at his word that the employer is providing something the employees don't like, and assuming that the more workers employed, the more unused coffee is being provided, then the employer regards the cost of the coffee as incremental to the decision to employ a given worker. The employer's demand curve for labor falls.

What if, however, the employer provides a fixed amount of coffee no matter how many workers there are? Why would the employer do this? The coffee is going to be thrown out at the end of the day anyway, so why not waste one gallon of coffee instead of ten gallons? Then the coffee expense is not incremental to hiring an additional employee. Assuming that the coffee expense is not great enough to shut the employer down, there is no effect on the employer's demand for labor.

I might, though, be taking Bryan too literally when he says that workers "actively dislike coffee." Maybe he means that they dislike it but somehow feel compelled to drink it. That would be a pretty nasty employer, but OK. Then his reasoning is correct.

If that's the spirit of the question, then I think I have a better question that gets at Bryan's point without raising the problems I raised with his coffee example. It would be this, for part B:

Using separate supply-and-demand curves, show what happens in a single occupation if employers pipe in music to the workplace, music over which the workers have no control, and:
B. Workers hate the music, but it enhances their ability to keep working late at night.

Then his conclusions about demand and supply curves would follow. Even here, though, I would want to specify some cost of supplying the music and whether the cost varies with the number of employees. (It probably doesn't.)


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CATEGORIES: Labor Market




COMMENTS (7 to date)
Andrea Ostrov Letania writes:

"I think that's wrong. If workers 'actively dislike coffee,' they won't drink it. So there will be no effect on labor supply."

Not necessarily true.

After all, workers actively dislike working, especially working long hours. But they do it anyways to make ends meet and to be able to afford nice stuff.

So, even if they dislike coffee, if coffee helps them work longer, many will drink it.

David R. Henderson writes:

@Andrea Ostrov Letania,
After all, workers actively dislike working, especially working long hours. But they do it anyways to make ends meet and to be able to afford nice stuff.
Exactly. They do it to “make ends meet;” that is, they do it for pay. I don’t think Bryan wants the student to assume that the workers are paid to drink coffee.

Gary writes:

This is a great example of a question where the author didn't make enough of his assumptions explicit. As a student, these drive me nuts.

But I really loved the post. I probably won't make time to go through Bryan's notes any time soon, but would love to see some interesting excerpts.

David Cushman writes:

Yes, the questions do not sufficiently give the assumptions. Take part A. Why are the employers now providing free coffee? Did the workers recently become more productive, thus shifting out the demand for labor, with the employers responding by paying the increase in the equilibrium wage in the form of coffee? If so, are we to answer starting from this point? Or from the point before productivity increased? On the other hand, is the employer simply replacing $5 a day in wages with a cup of coffee that costs $5? Let's take the latter case, which doesn't involve the additional complication of something else happening to get things started in addition to the coffee plan. The coffee makes the workers less productive: the demand for labor falls. Next, almost all workers value receiving $5 in pay in the form of money, with which they can buy anything, more than a $5 cup of coffee, which can never be anything but a $5 cup of coffee (a few workers could be indifferent): the supply of labor also falls. So the provided answer to part A is (also) wrong. (Unless the workers value, say, the thoughtfulness of the employers enough to make up the loss of liquidity value.)

Bryan Caplan writes:

Right you are, David. I did have an if-you-want-this=-job-you-must-drink-this-coffee regime in mind.

DougT writes:

Sort of, "If you like your coffee, you can keep your coffee."

Brent writes:

Arguably, would this not cause *this firm* to *decrease* its demand for labor? It is paying for the coffee, after all, and in return, it hopes to get a more than offsetting increase in productivity. The wage / price paid to workers would thereby need to decrease for it to have been a beneficial decision on the part of the firm. Or, in other words, an individual firm would want to increase productivity in order to use fewer workers and save labor costs.

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