Economics

The manager of a major league baseball team argues: “Even if I thought player X was washed up, I couldn’t get rid of him. He’s in the third year of a four-year, $24 million deal. Our team is in no position to eat the rest of his contract.” Analyze the manager’s reasoning using economic theory.

Answer: The manager is ignoring the fact that the cost of the player will be $24 million over the period whether the player is on the team or not. Teams are always better off maximizing profits, even if they are losing money under their current conditions, and the team may be able to generate more profits if it replaced player X. The condition for replacement is that the difference between the marginal revenue product of the new player and that of

player X exceeds the salary of the new player (the marginal expense of continuing player X is zero).

The state of North Carolina has a program for state-subsidized training of disadvantaged workers at its community colleges. Employers adding at least 12 jobs can arrange for a community college to provide a program tailored to the individual firm. The college places ads for new hires and screens the applicants, the firms choose whom they want trained from the list supplied by the college, and the college provides the training (using equipment supplied by the firm). Finally, the firm selects employees from among those who successfully complete the training. Trainees are not paid during the training period. Analyze the likely effects on wages, employment, and hours of work associated with adopting this program.

Answer: This program reduces the hiring and training investments required by firms, thus increasing both employment and wages (firms have fewer investment costs to recoup). The program could reduce the hours each employee works per week, however, because the reduction in training costs creates incentives to substitute workers for hours per worker.