The Labor Market Chapter 29

The Labor Market  Supply of labor – number of people willing to work at different wage-levels  Demand for labor – number of workers needed by companies at different wage levels Chapter 29 2

Employment Measures  Unemployment Rate  Average Work Week Chapter 29 3

The Labor Market  Labor market determines real wages Chapter 29 4

The Labor Market Chapter 29 5

Determinants of Labor Demand  Product demand  Productivity  A change in price of substitutes of labor (machines) Chapter 29 6

Labor Demand  Regardless of how many people are willing to work, it is up to employers to decide the demand for labor. Chapter 29 7

Derived Demand  The demand for labor and other factors of production depend on the demand for final goods and services. Chapter 29 8

The Labor-Demand Curve  The number of workers hired is not completely dependent upon the demand for the product.  The quantity of labor demanded also depends on its price (the wage rate). Chapter 29 9

The Labor-Demand Curve  Marginal Physical Product (MPP) is the change in total output associated with one additional unit of input.  Marginal Revenue Product (MRP) - the change in total revenue associated with one additional unit of input. Chapter 29 10

MRC – Marginal Resource Cost  If a firm hires a new employee at a higher wage, they must increase wages of existing workers to preserve morale.  Thus, it costs more than just the 1 person’s wages to hire a person Chapter 29 11

The Hiring Decision  Marginal revenue product determines how much labor will be hired.  This is a MC < MB situation. Chapter 29 12

Forecasting Work Requirements 1. Determine expected production for department for specific time period  10,000 T-shirts per month 2. Determine how many labor hours it will take to meet production goal  Each worker makes 10/hr  10,000/10 = 1000 hours 3. Convert work hours to work days  With 8 hr shifts  1000/8 = 125 days 4. Divide needed workdays by workdays-per-period  With 20 workdays/month  125/20 = 6.25 people Chapter 29 13

Forecasting Work Requirements 5. Make allowances for absences, training, and leaves  Round up to 7 people 6. Search for other ways to meet your schedule  i.e. overtime, transfers, borrow employees, temps  instead of 7 line workers to do 6.25 work, hire 6 & work a little overtime Chapter 29 14

Staffing Goal  Your goal: make sure employees on hand matches workload Chapter 29 15

Overstaffing  Costs increase  Flexibility increase  Efficiency drops  Coaching & training opportunities may be taken Chapter 29 16

Understaffing  Can get you behind schedule  Costs may end up higher as you try to make up the difference  Can bring out creativity Chapter 29 17

Incentives to Hire  Changes in Productivity  More work from each worker  Changes in Product Price  More money from each item sold Chapter 29 18

Labor Supply  The willingness and ability to work specific amounts of time at alternative wage rates in a given time period. Chapter 29 19

Determinants of Labor Supply  Work conditions  Benefits  A change in price of goods & services Chapter 29 20

Income vs. Leisure  The opportunity cost of working is the amount of leisure time that must be given up in the process.  Higher wage rates are needed to compensate for the increasing opportunity cost of labor.  The marginal utility of income may decline as you earn more. Chapter 29 21

Wages  Nominal Wages – amount of money received per hour, day, week, month or year  Real Wages – purchasing power of nominal wage – the goods & services you can buy  Depends on nominal wages and prices of goods & services Chapter 29 22

Real Wages  If nominal wage increases 8% in a year and prices increase 5% in the same year, real income increased 3%.  An increase in Productivity increases real wages.  Real wage increases leads to inflation. Chapter 29 23

Substitution Effect of Wages  An increased wage rate encourages people to work more hours  A worker might also respond to higher wage rates by working less, not more. Chapter 29 24

Income Effect of Wages  An increased wage rate allows a person to reduce hours worked without losing income. Chapter 29 25

An Individual’s Labor Supply Chapter 29 26

Market Labor Supply  The market labor supply is the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period.  The labor supply curve shifts when the determinates of labor supply change. Chapter 29 27

Shifts in Market Supply  Over time, the labor supply curve has shifted leftward:  A rise in living standards.  Income transfer programs that provide economic security when not working.  Increased diversity and attractiveness of leisure activities. Chapter 29 28

Institutional Constraints  A worker’s responsiveness to wage changes is often constrained by institutional constraints such as specified work hours such as 8 – 5 shifts. Chapter 29 29

Monopsony  The firm has monopolistic hiring power  Company employs large portion of labor for the area  Labor force is relatively immobile  The firm becomes a wage-setter: ▪ work here or starve Chapter 29 30

Ologopsony  3 or 4 firms in the area  They could compete using high wages to attract the best labor  They could cooperate & secretly set low wages. (incentive to cheat) Chapter 29 31

Unions  Unions were formed to counter monopsony power.  Collective bargaining to force employers to improve wages & work conditions  Higher wages unions bring may lead to higher unemployment Chapter 29 32

Minimum Wage  The lowest hourly wage an employer is allowed to pay a worker.  Currently for the U.S. = $7.25/hr.  Individual States Individual States Chapter Source:

Minimum Wage  $7.25 x 40 hours = $290/week  $290 x 4.3 weeks = $1,250/month  $290 x 50 weeks = $14,500/year Chapter 29 34

Case Against Raising Minimum Wage  Wages must be raised for many workers.  Causes unemployment  Helps teenagers rather than low-skilled workers Chapter 29 35

Case For Raising Minimum Wage  Removes monopsony power – all companies are paying better  Higher wages leads to increased labor supply  Higher wages leads to increased sales & more jobs  Increase in productivity will offset the extra wages paid – happy workers! Chapter 29 36

Satisfaction  According to Maslow: job satisfaction and job dissatisfaction are not opposites.  Job Dissatisfaction comes from pay & benefits  meeting basic needs of survival & safety  Job Satisfaction is determined by the work itself  meeting upper-level psychological needs: Affiliation, Power & achievement. Chapter 29 37

Efficiency Wage  A company’s wages are above the equilibrium wage.  The theory:  Increase in productivity will offset the extra wages paid  Increased loyalty  Reduced absenteeism & tardiness  More choice in workers Chapter 29 38

Efficiency Wage Chapter 29 39

Efficiency Wage  In Practice  Temporary effect only  Lowers employment Chapter 29 40

Efficiency Wage Result Chapter New S S

Wage Differentials  Different jobs pay different wages  Determined by supply & demand of skills  Almost everyone can cook French Fries  Few people can hit baseballs like Albert Pujols  Since there are fewer homerun hitters, the supply is low, thus wages are high.  The “Superstar” effect Chapter 29 42

Income Profiles Chapter Source: Economics by Boyes & Melvin

College Income Premium (ratio) Chapter Source: Economics by Boyes & Melvin

Human Capital  Why go though 8 years of Medical school (& buy malpractice insurance) to become a doctor if you will make the same money as a used car salesman?  You want the smartest people to become doctors (job is important) so you give incentives. Chapter 29 45

Employment Discrimination  Employer  Limits pool of workers to choose from – must pay higher wages  Worker  May not want to work with people of other race/sex. Leads to lower wage.  Consumer  May have preference for who serves them – this leads to higher prices Chapter 29 46