Lecture 11 Markets for Labor

How can we explain wage differences? Oprah Winfrey has made $260 million per year An aerospace engineer in the U.S. receives $89,000 on average per year A preschool teacher receives $26,000 on average per year What causes these differences? Can we explain them with differences in productivity?

Labor productivity Demand for labor is related to the productivity of the labor Main contributors to variations in labor productivity: The skills of the workers The efficiency with which workers apply their skills The level of effort with which workers work The quantity and the characteristics of the resources available to each worker

Labor supply What is the opportunity cost of paid employment? The opportunity cost of engaging in paid work is the highest value of the time that might otherwise have been spent in alternative uses such as: Household production Education Self-employment Leisure

Labor supply What is the benefit of paid employment? Wages and salaries (extrinsic motivations) Work experience itself (intrinsic motivation) Labor force participation: The percentage of the adult population who are either working at a paid job or seeking paid work

Individual labor supply Assumptions: The worker can find a job that meets his/her desires There is only one kind of paid job The job has no intrinsic motivation

Individual labor supply An upward-sloping individual supply curve for labor A backward-bending individual supply curve for labor

Market labor supply

Market labor demand Demand curve for labor is downward-sloping: When wages are high, employers have incentives to economize on the use of labor When wages are low, employers may be able to expand their productive activities or substitute relatively cheap labor for other inputs

Labor market adjustment

Labor in traditional neoclassical model  

Labor in traditional neoclassical model Example: A firm producing disposable razors

Labor in traditional neoclassical model

Labor in traditional neoclassical model

Explaining variations in wages Market forces and observable productivity differences are only part of the explanation of variation in wages. Other potential sources for variation: Human capital Market power (See the case for monopsony!) Compensating wage differentials Worker motivation Efficiency wages Employee morale Dual labor markets Discrimination