Chapter 1 Introduction

Why study Labor Markets? - Personal gain - would it be wise to train to be a blacksmith in Nebraska? What about a soybean farmer? Or how about being a computer programmer? - Understand public policy - What impact does immigration have on the income of the native workers? Does the minimum wage law increase the employment of workers? These are just of few reasons to study the labor market.

Who are the actors in labor markets? - workers supply labor - firms demand labor - Firms and workers interact in markets, but governments influence the rules of the interaction.

Labor supply - basics Workers try to maximize their well-being, and a consequence of this is that the supply of labor from workers is typically an upward sloping curve. earnings employment S The higher (lower) the earnings, the greater (lower) the quantity of labor supplied.

Labor demand - basics Firms try to maximize their profit, and a consequence of this is that the labor demanded by firms is typically a downward sloping curve. earnings employment D The higher (lower) the earnings, the lower (greater) the quantity of labor demanded. Note: labor demand is said to be a DERIVED DEMAND. It is derived by business firms desire to satisfy customers.

Conflict In markets we have conflict in the sense that demanders want low prices and suppliers want high prices. Through their interaction in the market the conflict is settled and we arrive at what is called an equilibrium. In the labor market the price is the wage, or some measure of earnings. Suppliers are workers and they would like (relatively) high wages. Firms demand labor and they would like (relatively) low wages. Next let’s see how the conflict is settled in the process of reaching an equilibrium.

Equilibrium Equilibrium in economics is generally thought to occur when all participants in the market DO NOT have an incentive to change. Given a supply curve and a demand curve there is typically only one price in which workers and firms have no incentive to change their behavior. That price here is called earnings and the equilibrium earnings occurs where supply and demand are equal - where the curves cross.

equilibrium earnings employment S D e1 e2 e3 e1 is NOT an equilibrium wage because at this wage (earnings) there are more workers than what firms desire. Some workers have an incentive to accept a lower wage to get employed, namely something lower than e1. e3 is NOT an equilibrium wage because at this wage (earnings) there are more firms wanting workers than workers around. Some firms have an incentive to offer a higher wage in order to get workers, namely something higher than e3.

equilibrium Only at e2 on the previous screen is the market in equilibrium. Firms can hirer all the workers they want at e2 and all the workers who want to work at this wage are employed. No one has an incentive to change. At e2 the quantity supplied = the quantity demanded = equilibrium quantity of labor traded. The reason we spend time on the notion of equilibrium is because the equilibrium in our model is a representation of the actual outcome in the world. For example, why do convenience store workers get paid what they do? Because that is where supply and demand are equal!

Change in equilibrium The model we have constructed can also help us see what will happen in the labor market when conditions change. What will happen to the wage and labor employed in the market when more convenience stores open and the demand for labor rises? earnings S D D’ Both earnings and employmnet will rise. employment

To come In the rest of the course we will build on this basic model and explore more sophisticated features of labor markets. Before we move on I want to mention something about values. While within an economic model we can predict and explain what will result in the labor market when, say, a minimum wage is enacted by the government, the economic model is silent about whether or not we should enact a minimum wage. The point about enacting the minimum wage is that we as a society must decide if this is something we value. The model gives us insight as to results that will occur, but the decision is up to us as a society. Please be on the look-out for value issues (normative economic issues) as you read and study labor economics.