Economics for Today Irvin B. Tucker Chapter 11 Labor Markets Lecture Slides Economics for Today Irvin B. Tucker © 2011 South-Western, a part of Cengage Learning

What is the purpose of this chapter? To explain how wages are determined in labor markets To analyze the distribution of income in the U.S. To define poverty, antipoverty programs, and discrimination in the U.S. © 2011 South-Western, a part of Cengage Learning

What is a production function? Recall from Chapter 7 that this is a graph that shows the relationship between the amount of resources employed and a firm’s total product (the next four slides are review) © 2011 South-Western, a part of Cengage Learning

Exhibit 7.2(a) Production Function Total Output 50 40 Total product (bushels of grapes per day) 30 Total Output 20 10 1 2 3 4 5 6 Quantity of Labor (number of workers per day) © 2011 South-Western, a part of Cengage Learning 4

What is marginal product? The change in total output that occurs by adding one unit of a variable input (labor), with all other inputs used being held constant © 2011 South-Western, a part of Cengage Learning

What is the law of diminishing returns? As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative © 2011 South-Western, a part of Cengage Learning

Law of Diminishing Returns 1 2 3 4 5 6 Exhibit 7(b) Marginal Product Curve 12 10 8 Marginal Product (bushels of gapes per day) 6 4 Law of Diminishing Returns 2 MP 1 2 3 4 5 6 Quantity of Labor (number of workers per day) © 2011 South-Western, a part of Cengage Learning 7

What is marginal revenue product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource © 2011 South-Western, a part of Cengage Learning

How do we measure MRP in perfect competition? Marginal revenue product is equal to the marginal product of labor times the price of the product MRP = P X MP © 2011 South-Western, a part of Cengage Learning

What is the demand curve for labor? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus The demand curve for labor is equal to the marginal revenue product of labor © 2011 South-Western, a part of Cengage Learning

Decrease in quantity of labor demanded Increase in quantity of labor demanded Decrease in wage Rate Increase in wage Rate © 2011 South-Western, a part of Cengage Learning

How many workers will a firm hire to maximize its profits? It will continue hiring workers as long as the last worker’s MRP is greater than the worker’s wage © 2011 South-Western, a part of Cengage Learning

Why will a firm hire the workers up to the point where MRP = Wage rate? Because the firm’s revenue from hiring each worker is greater than the wage paid to each worker © 2011 South-Western, a part of Cengage Learning

1 © 2011 South-Western, a part of Cengage Learning

Exhibit 2 Demand Curve for Labor Wage Rate (dollars per day) 350 A B 280 Initial Wage Rate c 210 Wage Rate (dollars per day) D 140 New Wage Rate E 70 MRP = demand 5 1 2 3 4 Quantity of Labor 15 (workers per day) © 2011 South-Western, a part of Cengage Learning

What is derived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce © 2011 South-Western, a part of Cengage Learning

What does the supply curve of labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus © 2011 South-Western, a part of Cengage Learning

Decrease in quantity of labor supplied Increase in quantity of labor supplied Decrease in wage Rate Increase in wage Rate © 2011 South-Western, a part of Cengage Learning

S Exhibit 3 The Market Supply Curve of Labor B 280 A 140 5 10 15 20 25 new wage rate 280 Wage Rate (dollars per day) A initial wage rate 140 5 10 15 20 25 30 35 40 45 50 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 19

In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor © 2011 South-Western, a part of Cengage Learning

S D 420 350 280 E Wage Rate (dollars per day) 140 70 0 10 20 30 Exhibit 4(a) Labor Market Supply and Demand Electronic components labor market 420 S 350 280 E Wage Rate (dollars per day) 210 Equilibrium Wage rate 140 70 D 0 10 20 30 40 50 60 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 21

Why is the firm’s supply curve horizontal at the equilibrium? In a competitive labor market, a firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal © 2011 South-Western, a part of Cengage Learning

S D 4 5 Exhibit 4(b) Computech’s Equilibrium Wage 420 350 280 Equilibrium Wage rate 280 Wage Rate (dollars per day) E S 210 140 70 D 0 1 2 4 5 3 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 23

How do unions attempt to raise wages? Increase demand for labor Decrease supply for labor Collective bargaining

What is featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker. The result is an increase in the demand for labor. © 2011 South-Western, a part of Cengage Learning

Increase in wages and employment Increase in the demand for labor Union featherbeds © 2011 South-Western, a part of Cengage Learning

Exhibit 5 A Union causes an increase in the demand for labor 420 S 350 E2 280 E1 Wage Rate per day 210 D2 140 D1 20 40 30 50 60 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 27

What else can unions do to raise wages? Decrease the supply of labor by restricting union membership or professional standards © 2011 South-Western, a part of Cengage Learning

Exhibit 6 A Union causes a decrease in the supply of labor 420 S2 350 E2 S1 280 E1 Wage Rate per day (dollars) 210 D 140 10 20 30 40 50 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 29

How else can unions raise wages? Collective bargaining, which is the process of negotiations between the union and management concerning wages and working conditions © 2011 South-Western, a part of Cengage Learning

Exhibit 7 Union Collective Bargaining Causes a Wage Rate Increase 350 Unemployment S Union Wage 280 E 210 Equilibrium Wage Wage Rate (dollars per day) 140 D 70 10 20 30 40 50 Quantity of Labor (thousands of workers per day) © 2011 South-Western, a part of Cengage Learning 31

Exhibit 8 Factors Causing Changes in Labor Demand Unions Prices of substitute goods Technology Demand for final products Marginal product of labor © 2011 South-Western, a part of Cengage Learning

Exhibit 8 Factors Causing Changes in Labor Supply Unions Demographic trends Expectations of future income Changes in immigration laws Education and training © 2011 South-Western, a part of Cengage Learning

What has happened to union membership since WWII? Union power has declined © 2011 South-Western, a part of Cengage Learning

Percentage of nonfarm workers in unions Exhibit 9 Union Membership, 1930-2009 40 Percentage of nonfarm workers in unions 30 20 10 1930 1940 1950 1960 1970 1980 1990 2000 2011 Year © 2011 South-Western, a part of Cengage Learning

How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries © 2011 South-Western, a part of Cengage Learning

Percentage 0f civilian employees in unions Exhibit 10 Union Membership for Selected Countries, 2009 82% 76% Percentage 0f civilian employees in unions 35% 29% 30% 26% 22% 12% United States Japan Canada Germany United Kingdom Italy Denmark Sweden © 2011 South-Western, a part of Cengage Learning

A labor market in which a single firm hires labor What is a monopsony? A labor market in which a single firm hires labor © 2011 South-Western, a part of Cengage Learning

What is the reason for a monopsony? The absence of other firms in the area competing for a relatively immobile labor force © 2011 South-Western, a part of Cengage Learning

What is marginal factor cost? MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor © 2011 South-Western, a part of Cengage Learning

What does the monopsonist have to do to hire additional workers? It has to raise the wage rate for all workers, therefore the MFC exceeds the wage rate © 2011 South-Western, a part of Cengage Learning

  Exhibit 11 A Monopsonist Determines Its Wage Rate C 24 21 18 15 E Marginal factor cost (MFC) 21 18 15 Wage rate (dollars per hour) E Labor supply 12 C D 9 Labor demand (MRP)  6 B  3 A 1 2 3 4 5 Quantity of labor (workers per hour) © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning

What conclusion can we make? A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market © 2011 South-Western, a part of Cengage Learning

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