Labor Markets Supply and Demand

Wages Wage = Price of labor including fringe benefits Real wage = adjustment for inflation

Determining the Demand Curve (Within a Competitive Firm) Product market reminders! The additional quantity produce from the addition of one more worker (input) MP = Marginal Product is drawn as… MP creates the principle of…. Input Output Diminishing Marginal Returns A firm will produce where… MR = MC TR = P x Q

Labor Demand = the relationship b/n the quantity of labor demanded by firms and wage Derived Demand = demand for an input is derived from demand for the product produced with that input

Marginal Revenue Product of Labor Change in Total Revenue when one additional unit of labor is employed Change TR or P x MP of Labor (MPL) Change L MPL = increase in quantity produced when labor increased by one unit MRP = increase in Total Revenue when labor increased by one unit

How many workers should a firm hire? A firm will hire workers such that MRP = Wage (if no fractional unit, then when MRP > Wage)

Demand Curve for Labor Downward sloping Derived from downward sloping MRP curve As wage decreases quantity labor demanded increases Movements along the curve Shifts occur because of two reasons Change in the Price of the good produced Change in the MP of labor * MRP = MP x P

How does this apply to firms with Market Power? Same concept Price and output still inversely related MRP declines more sharply MRP = MR x MP Firm is not a price taker

Labor Supply Substitution Effect Income Effect Higher the wage, the more attractive work is to the alternatives Income Effect The higher the wage, the less hours worked to earn the same amount Q of Labor Wage Labor Supply Q of Labor Wage Labor Supply What would it look like if Substitution Effect = Income Effect?

Backward Bending Labor Supply Curve Income Effect dominates in this region Wage Income and Substitution effect cancel out Substitution Effect Dominates Q of Labor

Discrimination in the Labor Market Firms that discriminate pay less than Marginal Product of Labor Wage Labor Supply Wage Deserved Wage 2 Wage Actual Marginal Revenue Product New firms acts as if MRP is lower than it is Firms acts as if MRP is lower than it is QL QL2 QL Deserved Number of Minority Workers In theory, discrimination will ultimately end as new firms see they can discriminate & save money, but by less than the previous firm.

Minimum Wage Skilled Workers Unskilled Workers Labor Demand Labor Supply Skilled Workers Q of Labor Wage Unskilled Workers Wage Labor Supply Labor Demand Q of Labor Minimum wage acts as a price floor creating a surplus of workers aka unemployment. Raises wages, but decreases quantity employed. No impact on the wage of the skilled worker.

Labor Unions Two suggested reasons why wages are higher for those in a union Restricted Supply  limit membership – shifts labor supply leftward raising wages Increased Productivity  provide a way to improve relations w/in work place  more productive worker = higher wages

Labor Unions Restricted Supply Increased Productivity S2 S S MRP2 MRP Wage 2 Wage 2 Wage Wage MRP2 MRP MRP QL2 QL QL QL2

Monopsony & Bilateral Monopoly Monopsony = a single buyer of a particular good/service in a market (keeps wage artificially low b/c there’s no competition) Bilateral Monopoly = one buyer and one seller in a market P MRC = Marginal Resource Cost & MFC = Marginal Factor Cost The additional cost from hiring one more worker Choose Q from MRC = MRP, but wage dictates supply of labor MRC = MFC SL = Wage Wage MRP QL Q