The Impact On Internet Professionals

Let's start by exploring the market for a particular type of worker increasingly hired by Internet firms: business attorneys. Online retailers and other Internet firms hire these attorneys to advise on patent, tax, and labor policies; to write and negotiate contracts with business partners, suppliers, and investors; and to prepare official filings for the SEC and other government agencies.

Panel (a) of Figure 3 shows us what has been happening in this labor market in recent years. In the figure, we assume that the labor market for Internet attorneys is perfectly competitive.

We begin our analysis in 1999. The labor demand curve for that year, LD999, sloped downward: the lower the salary, the more attorneys dot.com firms would want to hire. The labor supply curve LS999 is the short-run labor supply curve for that year. It tells us the amount of labor supplied by those who were already attorneys qualified to work in Internet firms. The curve slopes upward: At higher salaries, more qualified business attorneys offer their services to Internet firms.

In 1999, the labor market was in equilibrium at point A, with the typical entry-level Internet lawyer earning about $100,000 per year. But between 1999 and 2000, things changed. As more dot.com firms were established, they entered this labor market to hire attorneys, shifting the labor demand curve rightward, to L D000. The labor supply curve, however, did not shift during this time period, since one year is too short a time for people to acquire law degrees or change their specialty from, say, family law to business law. In the short run, then, the shift in labor demand labor market effects of growth in online retailing

FIGURE 3

(a) Internet Attorneys

(b) Sales Staff at Traditional Retailers

Annual Wage

Is L2010

Is L2010

Annual Wage

L3 Number of Attorneys

Annual Wage

$25,000 23,000

11999

L2010

L3 Number of Attorneys

11999

11999

L2010

11999

Annual Wage

$25,000 23,000

Number of Sales Staff

Number of Sales Staff

Panel (a) shows the market for Internet attorneys. In 1999, the labor supply and demand curves intersected at point A to determine an annual wage of $100,000. However, as more Internet firms set up business, the demand for attorneys increased, shifting the demand curve rightward to LD000. In the short-run equilibrium at point B, the annual wage is higher— $150,000 per year. Eventually, though, this high wage will attract additional lawyers, and the market supply curve will shift to Lf010. Simultaneously, the growth of online retailing will continue to shift the demand curve to the right. In the figure, long-run equilibrium is re-established at point C, with a wage of $125,000.

Panel (b) depicts the labor market for less-skilled workers in traditional retailing, where labor demand is decreasing. In the new short-run equilibrium at point F, the annual wage drops to $20,000. In the long run, some workers leave this industry, shifting the supply curve to Lf010. At the same time, the demand curve will continue to shift leftward as traditional retailers exit the industry. In the new long-run equilibrium at point H, fewer unskilled workers are employed in the traditional retail sector.

caused the equilibrium to move along the short-run labor supply curve to point B, with a new salary of $150,000. This change in salary might seem unrealistically large for one year, but it is an accurate representation of actual events: Salary and other compensation for new Internet attorneys from good law schools actually did rise by about 50 percent between 1999 and 2000.

But point B is not the long-run equilibrium in this market. Over the long run, the high salaries of Internet attorneys will cause entry into this profession. More college graduates will choose law school over, say, medical school, and more law students will choose specialties in business law. Within a few years—as these new business lawyers hit the market—the labor supply curve for Internet lawyers will begin shifting rightward. If this were the only change occurring, the salary would fall back toward its initial level. But, as we discussed earlier in this chapter, there is another change we can expect over this period: continued entry by new dot.com firms. This will shift the labor demand curve farther and farther rightward over time.

When the number of Internet firms and business lawyers stabilizes—the figure assumes this occurs in the year 2010—the labor supply and labor demand curves will stop shifting. At that point, with L2010 and LD2010, the new, long-run equilibrium is at point C. Notice that, in our diagram, the long-run compensation of Internet lawyers is higher than in 1999, but lower than in 2000. But that need not be our result. If the dot.com sector grows large enough (and the labor demand curve shifts far enough rightward), the salary could end up higher than its initial value. (You'll be asked to diagram this case in end-of-chapter Problem 6.)

Our analysis applies not just to Internet attorneys, but also to many types of professional labor needed by online retailers and other Internet firms. More generally, the demand for highly skilled workers needed by Internet firms is increasing, causing salaries for these workers to soar. The rise in salaries acts as a market signal—telling individuals that society would be better off if they took jobs in Internet firms. Entry of new workers would ordinarily bring salaries back down somewhat. But continued entry by dot.com firms will work against the drop in salaries. In the new long-run equilibrium, there will be more highly skilled professionals working at Internet firms, earning higher salaries than initially, but not necessarily as high as in the short run.

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