UNIT 7 FACTOR MARKETS.

UNIT 7 FACTOR MARKETS

MODULE 69: INTRODUCTION AND FACTOR DEMAND

The Economy’s Factors of Production
A factor of production is any resource that is used by firms to produce goods and services, items that are consumed by households. Factors of production are bought and sold in factor markets, and the prices in factor markets are known as factor prices. What are these factors of production, and why do factor prices matter? 3

The Factors of Production
Economists divide factors of production into four principal classes: Land: a resource provided by nature Labor: the work done by human beings Physical capital: which consists of manufactured resources such as buildings, equipment, tools and machines Human capital: the improvement in labor created by education and knowledge that is embodied in the workforce 4

The Allocation of Resources
Factor prices play a key role in the allocation of resources among producers due to two features that make these markets special: Demand for the factor, which is derived from the firm’s output choice (derived demand) Factor markets are where most of us get the largest shares of our income 5

Factor Incomes and the Distribution of Income
The factor distribution of income is the division of total income among labor, land, and capital. Factor prices, which are set in factor markets, determine the factor distribution of income. Labor receives the bulk—more than 70 percent—of the income in the modern U.S. economy. Although the exact share is not directly measurable, much of what is called compensation of employees is a return to human capital. 6

The Factor Distribution of Income and Social Change in the
Industrial Revolution Novels by Jane Austen and Charles Dickens seem to be describing quite different societies. Austen’s novels, set around 1800, describes a world in which the leaders of society are land-owning aristocrats. Dickens’ novels describe a world in which businessmen, especially factory owners, are in control. This shift reflects a dramatic transformation in the factor distribution of income. The Industrial Revolution, which took place between the late eighteenth and the mid-nineteenth centuries, changed England from a mainly agricultural country to an urbanized and industrial one. The share of national income from land fell from 20% to 9%, but that from capital rose from 35% to 44% during the same time period.

The Factor Distribution of Income in the United States
In the United States, payments to labor account for most of the economy’s total income. In 2007, compensation of employees accounted for most income earned in the United States—about 70% of the total. Most of the remainder—consisting of earnings paid in the form of interest, corporate profits, and rent—went to owners of physical capital. Finally, proprietors’ income—9.3% of the total—went to individual owners of businesses as compensation for the labor and capital expended in their businesses. 8

The Factor Distribution of Income in the United States
What we call compensation of employees is really a return on human capital. A surgeon isn’t just applying the services of a pair of ordinary hands. He is also supplying the result of many years and thousands of dollars invested in training and experience. Economists believe that human capital has become the most important factor of production in modern economies. 9

Factor Distribution of Income in U.S. in 2007
Interest 5.4% Corporate profits 14.3% Compensation of employees 70.4% Rent 0.6% Figure Caption: Figure 20-1: Factor Distribution of Income in the United States in 2007 In 2007, compensation of employees accounted for most income earned in the United States—about 70% of the total. Most of the remainder—consisting of earnings paid in the form of interest, corporate profits, and rent—went to owners of physical capital. Finally, proprietors’ income—9.3% of the total—went to individual owners of businesses as compensation for their labor and capital expended in their businesses. Proprietors’ income 9.3%

Marginal Productivity and Factor Demand
All economic decisions are about comparing costs and benefits. For a producer, it could be deciding whether to hire an additional worker. But what is the marginal benefit of that worker? We will use the production function, which relates inputs to output to answer that question. We will assume throughout this chapter that all producers are price-takers—they operate in a perfectly competitive industry. 11

The Production Function for George and Martha’s Farm
(a) Total Product (b) Marginal Product of Labor Quantity of wheat (bushels) Marginal product of labor (bushels per worker) 100 TP 19 17 80 15 13 60 11 9 40 7 5 20 MPL Figure Caption: Figure 20-2: The Production Function for George and Martha’s Farm Panel (a) shows how the quantity of output of wheat on George and Martha’s farm depends on the number of workers employed. Panel (b) shows how the marginal product of labor depends on the number of workers employed. 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 Quantity of labor (workers) Quantity of labor (workers)

Value of the Marginal Product
What is George and Martha’s optimal number of workers? That is, how many workers should they employ to maximize profit? As we know from earlier chapters, a price-taking firm’s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price. Once we determine the optimal quantity of output, we can go back to the production function and find the optimal number of workers. There is also an alternative approach based on the value of the marginal product… 13

The value of the marginal product of a factor is the extra value of output generated by employing one more unit of that factor. Value of the marginal product of labor = VMPL = P × MPL The general rule is that a profit-maximizing, price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price. 14

To maximize profit, George and Martha will employ workers up to the point at which, for the last worker employed, VMPL = W. 15

The Value of the Marginal Product Curve
The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed. 16

The Value of the Marginal Product Curve
Wage rate, VMPL Optimal point $400 300 A Market wage rate 200 Value of the marginal product value curve Figure Caption: Figure 20-3: The Value of the Marginal Product Curve This curve shows how the value of the marginal product of labor depends on the number of workers employed. It slopes downward because of diminishing returns to labor in production. To maximize profit, George and Martha choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 workers, shown by point A. The value of the marginal product curve of a factor is the producer’s individual demand curve for that factor. 100 VMPL 1 2 3 4 5 6 7 8 Quantity of labor (workers) Profit-maximizing number of workers

Shifts of the Factor Demand Curve
What causes factor demand curves to shift? There are three main causes: Changes in prices of goods Changes in supply of other factors Changes in technology 18

Shifts of the Value of the Marginal Product Curve
(a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate Market wage rate A B C A $200 $200 Figure Caption: Figure 20-4: Shifts of the Value of the Marginal Product Curve Panel (a) shows the effect of an increase in the price of wheat on George and Martha’s demand for labor. The value of the marginal product of labor curve shifts upward, from VMPL1to VMPL2. If the market wage rate remains at $200, profit-maximizing employment rises from 5 workers to 8 workers, shown by the movement from point A to point B. Panel (b) shows the effect of a decrease in the price of wheat. The value of the marginal product of labor curve shifts downward, from VMPL1to VMPL3. At the market wage rate of $200, profit-maximizing employment falls from 5 workers to 2 workers, shown by the movement from point A to point C. VMPL 1 VMPL VMPL 2 3 VMPL 1 5 8 2 5 Quantity of labor (workers) Quantity of labor (workers)

MODULE 70: THE MARKETS FOR LAND AND CAPITAL

Land and Capital If we maintain the assumption that the markets for goods and services are perfectly competitive, the result that was derived for the labor market also applies to other factors of production. To maximize profit, the land owner will rent (or demand) more land up until the value of the marginal product of an acre of land is equal to the rental rate per acre. The decision of whether to rent (or demand) an additional piece of capital comes down to a comparison of the additional cost of the equipment and the value of the additional output.

Land and Capital The supply of land is relatively steep because finding new supplies of land is often difficult and expensive. The supply of capital is relatively responsive to price, so the curve is somewhat elastic.

Demand, the Rental Rate, and Economic Rent

Demand, the Rental Rate, and Economic Rent
Think of economic rent like producer surplus (only its in the factor market)

The Marginal Productivity Theory of Income Distribution
We have learned that when the markets for goods and services and the factor markets are perfectly competitive, factors of production will be employed up to the point at which the value of the marginal product is equal to their price. What does this say about the factor distribution of income? 26

Getting Marginal Productivity Right
The most common source of error is to forget that the relevant value of the marginal product is the equilibrium value, not the value of the marginal products you calculate on the way to equilibrium. It’s important to be careful about what the marginal productivity theory of income distribution says: all units of a factor get paid the factor’s equilibrium value of the marginal product—the additional value produced by the last unit of the factor employed. 27

Help Wanted! The highly-skilled senior mechanists of Hamill Manufacturing are well- paid compared to other workers in manufacturing. Doesn’t the marginal productivity theory of income distribution imply that the machinists should be paid the revenue they generate? No. The theory says that they will be paid the value of the marginal product of the last machinist hired and due to diminishing returns of labor, that value will be lower than the overall average. Secondly, a worker’s equilibrium wage rate includes other benefits such as job security, training new hires, etc., so in the end, it does appear that the marginal productivity theory of income distribution does hold. 28

MODULE 71: THE MARKET FOR LABOR

The Supply of Labor Decisions about labor supply result from decisions about time allocation: how many hours to spend on different activities. Leisure is time available for purposes other than earning money to buy marketed goods. In the following graph, the individual labor supply curve shows how the quantity of labor supplied by an individual depends on that individual’s wage rate. 30

The Supply of Labor A rise in the wage rate causes both an income and a substitution effect on an individual’s labor supply. The substitution effect of a higher wage rate induces longer work hours, other things equal. This is countered by the income effect: higher income leads to a higher demand for leisure, a normal good. If the income effect dominates, a rise in the wage rate can actually cause the individual labor supply curve to slope the “wrong” way: downward. 31

The Individual Labor Supply Curve
(b) The Income Effect Dominates (a) The Substitution Effect Dominates Wage rate Wage rate Individual labor supply curve $20 $20 10 10 Figure Caption: Figure 20-10: The Individual Labor Supply Curve When the substitution effect of a wage increase dominates the income effect, the individual labor supply curve slopes upward, as in panel (a). Here a rise in the wage rate from $10 to $20 per hour increases the number of hours worked from 40 to 50. But when the income effect of a wage increase dominates the substitution effect, the individual labor supply curve slopes downward, as in panel (b). Here the same rise in the wage rate reduces the number of hours worked from 40 to 30. Individual labor supply curve 40 50 30 40 Quantity of leisure (hours) Quantity of leisure (hours)

Why You Can’t Find a Cab When Its Raining
According to a study published in the Quarterly Journal of Economics, cab drivers go home early when it’s raining. The hourly wage rate of a taxi driver depends on the weather. When it’s raining, drivers earn more per hour. It seems that the income effect of this higher wage rate outweighs the substitution effect. However, if drivers thought in terms of the long run, they would realize that rainy days and nice days tend to average out, implying that their high incomes on a rainy day don’t really affect their long-run income very much. The study seems to show clear evidence of a labor supply curve that slopes downward instead of upward, thanks to income effects.

Shifts of the Labor Supply Curve
The market labor supply curve is the horizontal sum of the individual supply curves of all workers in that market. It shifts for four main reasons: changes in preferences and social norms changes in population changes in opportunities changes in wealth 34

The Decline of the Summer Job
Come summertime, resort towns along the New Jersey shore find themselves facing a recurring annual problem: a serious shortage of lifeguards. In recent years, a growing number of young Americans have chosen not to take summer jobs. One explanation for the decline is that more students feel they should devote their summers to additional study. Another important factor is increasing household affluence, which has resulted in many teenagers no longer feeling the pressure to contribute to household finances by taking summer jobs. The income effect has led to a reduced labor supply. Another factor points to the substitution effect: increased competition from immigrants, who are now taking on the teenagers’ jobs, such as delivering pizzas and mowing lawns. This has led to a decline in wages so teenagers forgo summer work and consume leisure instead. 35

All Producers Face the Same Wage Rate
(a) Farmer Jones (b) Farmer Smith Wage rate Wage rate Farmer Jones's VMPL Farmer Smith’s VMPL wheat corn = P x MPL = P x MPL corn wheat wheat corn Market wage rate $200 $200 VMPL corn VMPL Figure Caption: Figure 20-5: All Producers Face the Same Wage Rate Although Farmer Jones grows wheat and Farmer Smith grows corn, they both compete in the same market for labor and so must pay the same wage rate, $200. Each producer hires labor up to the point at which VMPL= $200: 5 workers for Jones, 7 workers for Smith. wheat 5 7 Quantity of labor (workers) Quantity of labor (workers) Profit-maximizing number of workers Profit-maximizing number of workers

When the Product Market is Not Perfectly Competitive
If the market is not perfectly competitive, there is a price effect, so that the price of the output must go down to increase output sold. To determine the demand for workers in this situation, the monopolist must multiply the marginal product of labor by the marginal revenue to get the marginal revenue product of labor or MRPL.

Firm Labor Supply in a Perfectly Competitive Labor Market

When the Labor Market is Not Perfectly Competitive
When the labor market is imperfectly competitive, firms use the marginal factor cost, or the additional cost of hiring one more unit of the factor of production, to determine how much to hire. The marginal factor cost of labor (MFCL), is the additional cost of hiring one more unit of labor. The labor supply curve faced by a firm is upward sloping and the marginal factor cost is above the market wage. A firm in an imperfectly competitive labor market is large enough to affect the market wage. For example, a monopsonist is a single buyer of a factor.

When the Product Market is Not Perfectly Competitive

Supply of Labor and Marginal Factor Cost in an Imperfectly Competitive Market

Equilibrium in the Imperfectly Competitive Labor Market
Firms should hire workers until: MRPL = MFCL

Equilibrium in the Imperfectly Competitive Labor Market

Perfectly Competitive Resource Market
Land, Labor, and Capital 44

Perfectly Competitive Labor Market
Resource Markets Perfect Competition Monopsony Perfectly Competitive Labor Market Characteristics: Many small firms are hiring workers No one firm is large enough to manipulate the market. Many workers with identical skills Wage is constant Workers are wage takers Firms can hire as many workers as they want at a wage set by the industry 45

Workers have trade-off between work and leisure
DEMAND RE-DEFINED What is Demand for Labor? Demand is the different quantities of workers that businesses are willing and able to hire at different wages. What is the Law of Demand for Labor? There is an INVERSE relationship between wage and quantity of labor demanded. What is Supply for Labor? Supply is the different quantities of individuals that are willing and able to sell their labor at different wages. What is the Law of Supply for Labor? There is a DIRECT (or positive) relationship between wage and quantity of labor supplied. Workers have trade-off between work and leisure 46

Who demands labor? FIRMS demand labor.
Demand for labor shows the quantities of workers that firms will hire at different wage rates. As wage falls, Qd increases. As wage increases, Qd falls. Wage DL Quantity of Workers 47

Where do you get the Market Demand?
McDonalds Burger King Other Firms Market Wage QLDem $12 1 $10 2 $8 3 $6 5 $4 7 Wage QLDem $12 $10 1 $8 2 $6 3 $4 5 Wage QLDem $12 9 $10 17 $8 25 $6 42 $4 68 Wage QLDem $12 10 $10 20 $8 30 $6 50 $4 80 P P P P $8 $8 $8 $8 D D D D Q Q Q Q 3 2 25 30

Who supplies labor? Individuals supply labor.
Supply of labor is the number of workers that are willing to work at different wage rates. Higher wages give workers incentives to leave other industries or give up leisure activities. Labor Supply Wage As wage increases, Qs increases. As wage decreases, Qs decreases. Quantity of Workers 49

Equilibrium Wage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters Wage Labor Supply $30hr Labor Demand Quantity of Workers 50

Shifters 51

Resource Demand Example 1: Example 2: Derived Demand-
If there was a significant increase in the demand for pizza, how would this affect the demand for cheese? Cows? Milking Machines? Veterinarians? Vet Schools? Etc. Example 2: An increase in the demand for cars increases the demand for… Derived Demand- The demand for resources is determined (derived) by the products they help produce. 52

“You’ve got to learn computers!”
Real Life Application Top 5 Fastest Growing Jobs ( ) Computer Software Engineers, Applications Computer Support Specialists Computer Software Engineers, Systems Computer Systems Administrators Data Communications Analyst Top 5 Fastest Declining Jobs Railroad Switch Operators Shoe Machine Operators Telephone Operators Radio Mechanics Loan Interviewers WHY? “You’ve got to learn computers!”

3 Shifters of Resource Demand
1.) Changes in the Demand for the Product Price increase of the product increases the demand for the resource. 2.) Changes in Productivity of the Resource Technological advances in resources make the resource more profitable 3.) Changes in Price of Other Resources Substitute Resources Ex: What happens to the demand for assembly line workers if price of robots falls? Complementary Resources Ex: What happens to the demand nails if the price of lumber increases significantly?

Identify the Resource and Shifter (ceteris paribus): Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. Increase in the price for plastic piping causes the demand for copper piping to _________. Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber. For shipping companies, __________ in price of trains leads to decrease in demand for trucks. Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers. Substantial increase in education and training leads to an ___________ in demand for skilled labor.

Identify the Resource and Shifter (ceteris paribus): Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. Increase in the price for plastic piping causes the demand for copper piping to _________. Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber. For shipping companies, __________ in price of trains leads to decrease in demand for trucks. Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers. Substantial increase in education and training leads to an ___________ in demand for skilled labor. increase increase decrease decrease increase increase

Resource Supply Shifters
Supply Shifters for Labor Number of qualified workers Education, training, & abilities required Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? 3. Personal values regarding leisure time and societal roles. Ex: Why did the US Labor supply increase during WWII? Why do some occupations get paid more than others?

Supply and Demand For Surgeons Supply and Demand For Gardeners
With your partner... Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560. Supply and Demand For Surgeons Supply and Demand For Gardeners SL Wage Rate Wage Rate SL DL DL Quantity of Workers Quantity of Workers

Highest Pay Undergraduate Degrees

Does having an education mean that you will automatically have a higher income?

Why do people with only high school degrees make less money on average?
Employers assume they have low productivity and will generate less additional revenue. 61

Market Imperfections

What are other reasons for differences in wage?
Labor Market Imperfections- Insufficient/misleading job information- This prevents workers from seeking better employment. Geographical Immobility- Many people are reluctant or too poor to move so they accept a lower wage Unions Collective bargaining and threats to strike often lead to higher that equilibrium wages Wage Discrimination- Some people get paid differently for doing the same job based on race or gender (Very illegal!).

Perfectly Competitive Labor Market and Firm
SL Wage Wage ? $10 DL Q Q 5000 Firm Industry

MRP = MRC Continue to hire until…
How do you know how many resources (workers) to employ? Continue to hire until… MRP = MRC

Side-by-side graph showing Market and Firm
SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

The MRP of a resource equals the Demand.

Individual Firms Wage SL=MRC DL=MRP Qe Q 68

Example: You hire workers to mow lawns. The wage for each worker is set at $100 a day. Each lawn mowed earns your firm $50. If you hire one work, he can mow 4 laws per day. If you hire two workers, they can mow 5 lawns per day together. What is the MRC for each worker? What is the first worker’s MRP? What is the second worker’s MRP? How many workers will you hire? How much are you willing to pay the first worker? How much will you actually pay the first worker? What must happen to the wage in the market for you to hire the second worker? $200 $50 $200 (Up to the amount he generates) $50 (The wage set by the market) 69

To maximize profit how many workers should you hire?
You’re the Boss You and your partner own a business. Assume the you are selling the goods in a perfectly competitive PRODUCT market so the price is constant at $10. Assume that you are hiring workers in a perfectly competitive RESOURCE market so the wage is constant at $20. Also assume the wage is the ONLY cost. To maximize profit how many workers should you hire? 70

Use the following data: How much is each worker worth?
Price = $10 Wage = $20 Total Product (Output) Workers 1 2 3 4 5 6 7 7 17 24 27 29 30 *Hint* How much is each worker worth? 71

Use the following data:
Price = $10 Wage = $20 Total Product (Output) Units of Labor 1 2 3 4 5 6 7 7 17 24 27 29 30 What is happening to Total Product? Why does this occur? Where are the three stages? 72

Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 This shows the PRODUCTIVITY of each worker. Why does productivity decrease? 73

Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 Price constant because we are in a perfectly competitive market. 74

Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Marginal Revenue Product Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70 100 30 20 10 -30 This shows how much each worker is worth 75

How many workers should you hire?
Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Marginal Revenue Product Marginal Resource Cost Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70 100 30 20 10 -30 20 How many workers should you hire? 76

Review Who demands in the Resource Market?
Who supplies in the Resource Market? Define Derived Demand The demand for resources is determined (derived) by the products they help produce. 4. Identify the Shifters of Resource Demand Derived Demand Productivity of the Resources Price of related resources

Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers

Wage is set by the market
Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry?
SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry?
SL Wage Wage SL1 SL=MRC WE W1 SL1=MRC1 DL=MRP DL Q Qe Q1 Q QE Q1 Industry Firm

Combining Resources Up to this point we have analyzed the use of only one resource. What about when a firm wants to combine different resources?

Least Cost Rule $10 $5 MP MP (Workers)
How much additional output does each resource generate per dollar spent? $10 $5 # Times Going MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, what combination of robots and workers will maximize output?

If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule MPx = MPy $10 $5 Px Py Resource x Resource y # Times Going MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, the best combination is 2 robots and 3 workers

Profit Maximizing Rule for Combining Resources
1 MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y

Practice: What should the firm do – hire more, hire less, or stay put?
1. MRPL = $15; PL = $6; MRPC = $10; PC = $10 2. MRPL = $5; PL = $10; MRPC = $10; PC = $15 3. MRPL = $25; PL = $20; MRPC = $15; PC = $15 4. MRPL = $12; PL = $12; MRPC = $50; PC = $40 5. MRPL = $20; PL = $15; MRPC = $100; PC =$40 MORE STAY PUT LESS LESS MORE STAY PUT STAY PUT MORE MORE MORE

Shifter Review 3 Resource Demand Shifters (Based on MRP)
Demand (price) of the product Productivity of the resource Price of related resources 3 Resource Supply Shifters Number of qualified workers Education, training, & abilities required Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? 3. Personal values and traditions regarding leisure time and societal rolls. Ex: Why did the US Labor supply increase during WWII?

Imperfect Competition: Monopsony
Resource Markets Perfect Competition Monopsony Imperfect Competition: Monopsony Characteristics: One firms hiring workers The firm is large enough to manipulate the market Workers are relatively immobile To hire add Firm is wage maker To hire additional workers the firm must increase Examples: Central American Sweat Shops Midwest small town with a large Car Plant NCAA 88

Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage. Acme Coal Mining Co. Wage rate (per hour) Number of Workers Marginal Resource Cost $4.00 4.50 1 5.00 2 5.50 3 6.00 4 7.00 5 8.00 6 9.00 7 10.00 8

Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage. MRC doesn’t equal wage Acme Coal Mining Co. Wage rate (per hour) Number of Workers Marginal Resource Cost $4.00 - 4.50 1 $4.50 5.00 2 5.50 5.50 3 6.50 6.00 4 7.50 7.00 5 11 8.00 6 13 9.00 7 15 10.00 8 17

If the firm can’t wage discriminate, where is MRC?
Monopsony If the firm can’t wage discriminate, where is MRC? MRC Wage SL WE DL=MRP QE

Identify the wage and quantity of labor that would be hired by this monopsony
MRC $15 Supply of Labor $12 $10 Wage=$9 Quantity= Q2 $9 MRP Q1 Q2 Q3 Quantity

MODULE 73: THEORIES OF INCOME DISTRIBUTION

Median Earnings by Gender and Ethnicity, 2006
Annual median earnings, 2006 $50,000 $45,722 45,000 40,000 35,000 $29,166 30,000 $27,337 $24,893 25,000 20,000 15,000 Figure Caption: Figure 20-8: Median Earnings by Gender and Ethnicity, 2006 The U.S. labor market continues to show large differences across workers according to gender and ethnicity. Women are paid substantially less than men; African-American and Hispanic workers are paid substantially less than White male workers. 10,000 5,000 Female (all ethnicities) African American (male and female) Hispanic (male and female) White male

Marginal Productivity and Wage Inequality
Compensating differentials are wage differences across jobs that reflect the fact that some jobs are less pleasant than others. Compensating differentials, as well as differences in the values of the marginal products of workers that arise from differences in talent, job experience, and human capital, account for some wage disparities. 95

It is clear from the following graph that, regardless of gender or ethnicity, education pays. Those with a high school diploma earn more than those without one, and those with a college degree earn substantially more than those with only a high school diploma. 96

Earnings Differentials by Education, Gender, and Ethnicity
Annual median earnings, 2006 $70,000 No HS degree HS degree College degree 60,000 50,000 40,000 30,000 20,000 Figure Caption: Figure 20-9: Earnings Differentials by Education, Gender, and Ethnicity, 2006 It is clear that, regardless of gender or ethnicity, education pays: those with a high school diploma earn more than those without one, and those with a college degree earn substantially more than those with only a high school diploma. Other patterns are evident as well: for any given education level, White males earn more than every other group, and males earn more than females for any given ethnic group. 10,000 White male White female African-American male African-American female Hispanic man Hispanic female

Market power, in the form of unions or collective action by employers, as well as the efficiency-wage model, also explain how some wage disparities arise. Unions are organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively. 98

According to the efficiency-wage model, some employers pay an above equilibrium wage as an incentive for better performance. Discrimination has historically been a major factor in wage disparities. Market competition tends to work against discrimination. 99

The Economics of Apartheid
Until the peaceful transition to majority rule in 1994, the Republic of South Africa was controlled by its white minority, which imposed an economic system known as Apartheid. This system overwhelmingly favored white interests over those of native Africans and other “non-White” groups. The government instituted “job reservation” laws that ensured that only whites got jobs that paid well. The government also created jobs for whites in government industries. In 1994, Apartheid was abolished. Unfortunately, large racial differences in earnings remain. Apartheid created huge disparities in human capital which will persist for many years to come. 100

So Does Marginal Productivity Theory Work?
The main conclusion you should draw from this discussion is that the marginal productivity theory of income distribution is not a perfect description of how factor incomes are determined, but that it works pretty well. It’s important to emphasize that this does not mean that the factor distribution of income is morally justified. 101

UNIT 7 FACTOR MARKETS.

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