Introduction to Labor Economics Graphs and Tables Handout #1

Figure A-3.1: Demand Curve for Labor D L $60 $50 $ W

Figure A-3.2a: Input Market-The Scale Effect W L L 0 =50 L 1 = 100 W 0 = $50 W 1 = $40 Input Market D

Figure A-3.2b: Output Market-The Scale Effect P Q S S’ Q 0 Q 1 P0P0 P1P1 Output Market D

Explanation of Figures A-3.2a and A-3.2b – (1) The decrease in wages is a _________in the cost of production and causes the supply of output to __________. – (2) This _________in output causes the firm to __________its demand for all inputs. – This is the scale effect.

Summary Table 1 Two input Markets, Capital and Labor. Look at Labor Market where wage changes CauseChange in the wage EffectMovement along demand curve LanguageIncrease or decrease in the quantity demanded of labor NoteScale and Substitution Effects work together (in the same direction)

Figure A-3.3: An Increase in Demand for Labor L W D0D0 D1D1 $30 $60 $ (1) An Increase in Demand (2) An Increase in the Quantity Demanded At Each Wage

Figure A-3.4a: Increase in the Demand for Miners Market for Miners L W D0D0 D1 D1

Figure A-3.4b: Change in Demand for Auto Workers Market for Auto Workers L W D0D0

Summary Table 2 Two input Markets, Capital and Labor. Look at Labor Market and see a change in the price of Capital CauseChange in the price of one of the things held constant such as the price of Capital EffectShift Labor demand curve LanguageIncrease or decrease in the demand for labor NoteScale and Substitution Effects work in opposite directions

Figure A-3.5: Supply Curve of Labor W L S $10 $20 50 $30 100

Figure A-3.6: An Increase in the Supply of Labor W L S0S0 S1S1 $ (1) Increase in Supply (2) Increase in the Quantity Supplied At Each Wage $10.00 $0.00

Figure A-3.7: The Market for Labor W L S D $35.00 $60.00 $

Figure A-3.8a: Excess Supply of Labor W L S D ES $35.00 $ ES = L S - L D = $60.00 $10.00

Figure A-3.8b: Excess Supply of Labor W L S D ES $35.00 $ New ES = L S - L D = $60.00 $10.00 $40.00

Figure A-3.9a: Excess Demand for Labor W L S D ED $35.00 $ $60.00 $10.00 ED = L D - L S =

Figure A-3.9b: Excess Demand for Labor W L S D ED $35.00 $ $60.00 $10.00 ED = L D - L S = $30.00

Figure A-3.10: The Market for Steel Workers W L S D W 0 L0L0

Figure A-3.11: The Market for Labor as an Efficient Price Rationing Mechanism W L S D $35.00 $60.00 $

Figure A-3.12a: The Market for Labor: Illustrating Employers’ Gains from Trade for One Unit W L S D $35.00 $60.00 $ $ Employer Gains For 50 th unit

Figure A-3.12b: The Market for Labor: Illustrating Employers’ Gains from Trade from All Units W L S D $35.00 $60.00 $ Employer Gains for all units hired Employer Gains = Area ahk = Total a h k

Explanation for Figure A-3.12a and Figure A-3.12b – 1. In Figure A-3.12a, the difference between the demand price ($50) and the actual price ($35) yields $15 gains from trade (GFT) for the Employer of the 50 th unit of labor hired. – 2. In Figure A-3.12b, we must add together all the GFT from all units of labor hired by all Employers to get the total Employers’ GFT. This yields the triangular area which can be thought of as the total gains from trade (GFT) for Employers for hiring 125 workers.

Figure A-3.12c: The Market for Labor: Illustrating a Worker’s Gains from Trade W L S D $35.00 $60.00 $ $20.00 Gains from Trade for the 50 th worker

Figure A-3.12d: The Market for Labor: Illustrating Workers’ Gains from Trade W L S D $35.00 $60.00 $ Worker Gains from Trade for all 125 workers Total Gains from Trade for Workers = Area hkg k h g

Explanation for Figure A-3.12c and Figure A-3.12d 1. In Figure A-3.12c, the difference between the actual price ($35) and the supply price ($20) yields $15 Rent for the 50 th worker. Think of this as the gains from trade by the 50 th Worker. 2. In Figure A-3.12d, we must add together all the Workers’ GFT from all units of labor hired to get the total Workers’ GFT. This yields the triangular area which can be thought of as the entire gains to trade for the 125 Workers hired.

Figure A-3.13a: The Market for Labor—Maximizing Gains from Trade W L S D $35.00 $60.00 $ a g Area ahg = Area ahk + Area khg = Total Gains from Trade h k

Figure A-3.13b: The Market for Labor- Illustrating Welfare Losses (WL) W L S D $35.00 $60.00 $ $30.00 $40.00 $50.00 D’ a b c e f g h WL = Area bhf k

Explanation of the Welfare Loss 1. Maximizing Gains from Trade with No Tax Workers’ Gains from Trade = Area khg Employers’ Gains from Trade = Area akh Total Gains from Trade = Area ahg 2. Gains from Trade with Tax Workers’ Gains from Trade with Tax = Area abc Employers’ Gains from Trade with Tax = Area efg TaxRev = Area cbfe Total Gains from Trade with Tax + TaxRev = Area abfg WL = Area bhf

Figure A-3.13c: The Market for Labor- Illustrating Welfare Losses (WL) W L S D w0w0 L 1 L 0 w1w1 w2w2 D’ a b f g h

Explanation of Graph 1. Initial Conditions WL = Area bhf Workers’ Gains from Trade After Tax = Area w 1 fg Employers’ Gains from Trade After Tax = Area abw 2 2. After the Decrease in Taxes/Regulations New WL = Workers’ Gains from Trade After Decr Tax = Employers’ Gains from Trade After Decr Tax =

Figure A-3.14a: Towns in Nineteenth Century Britain W LL W S D S D W1W1 L1L1 W0W0 L0L0 Towns where infant mortality is higher or corporal punishment is used in factories Towns where infant mortality is lower or corporal punishment is not used in factories

Figure A-3.14b: Towns in Nineteenth Century Britain W LL W S D S D W1W1 L 1 ’ L 1 W0W0 L 0 L 0 ’ Towns where infant mortality is higher or corporal punishment is used in factories Towns where infant mortality is lower or corporal punishment is not used in factories S’ W1’W1’ W0’W0’ NOTE: W 1 ’ - W 0 ’ > W 1 - W 0

Figure A-3.19: The Volunteer Army W L W L D S S D $20K 3M $15K 50M MILITARY MARKETCIVILIAN MARKET

Figure A-3.20: The Draft W L W L D S S D $20K $15K 48M 50M MILITARY MARKETCIVILIAN MARKET $5K 1M 3M 5M S’ $18K

Explanation of Areas in Figure A Areas = Gains to Government 2. Areas = Losses to Soldiers 3. Area 5 = Net Loss = WL 4. Area 1 = 5. Area 2 = 6. Area 3 = 7. Areas 4 +5 =