1. Chapter 3 The Demand for Labor

2. Short Run Labor Demand Short run Marginal Product of Labor (MPL )
short enough period of time that capital is fixed
Marginal Product of Labor (MPL )
increase in output (Q) from adding one unit of labor (L), holding other inputs constant.
Law of Diminishing Marginal Returns
Holding other inputs constant, as the amount of a single input increases, its marginal product will eventually decrease.
Marginal Revenue (MR)
increase in total revenue (TR) from producing one more unit of output.

3. Short Run Labor Demand MR for a firm
identical to price if firm sells its product in a perfectly competitive industry.
MR=P(1-1/e) where e=elasticity of product demand if firm faces a downward sloping product demand curve. [e expressed as positive number.]
If firm sells product in a perfectly competitive industry, e is infinite and MR=P.
As a firm increases the sales of its product, MR generally falls. The steeper the product demand curve is, the steeper the MR curve.

4. Relationship between product demand and MR
Short Run Labor Demand
Relationship between product demand and MR
Perfectly competitive product market
Monopolistic product market
D=MR D MR

5. Short Run Labor Demand Marginal Revenue Product of Labor (MRPL)
increase in total revenue from adding one more unit of labor, ceteris paribus.
MPL* MR
MRPL will fall as L increases for 2 reasons:
MPL decreases as L increases due to Law of diminishing marginal returns
MR falls as L (and output) increases unless the firm is in a competitive product market.

6. Short Run Labor Demand Marginal Expense of Labor (MEL )
increase in total cost (TC) from adding one more unit of labor
DTC / DL
If a firm is in a competitive labor market,
MEL=W
If firm is in a monoposonistic labor market
MEL>W.

7. Short Run Labor Demand
Competitive labor market

8. Short Run Labor Demand
Monopsonistic Labor Market

9. Short Run Labor Demand
Profit maximization: L where MRPL = MEL

10. Short Run Labor Demand Assume competitive product and labor markets
Analyze the effect of an increase in product demand on
employment in market, at firm.
firm profits (change in area between MRPL and MEL)
labor’s rents (area between W& LS)
Analyze the effect of an increase in labor supply on
firm profits

11. Short Run Labor Demand
Use short run supply/demand model to discuss winners/losers from:
More open immigration laws
NAFTA/CAFTA
Increase in minimum wage
Start here wed

12. Long Run Labor Demand In the LR, all inputs can be varied.
Assume two inputs: L and K.
In the LR, the profit maximizing condition
MRPL = MEL
MRPK = MEK
If the firms purchase their labor and capital in competitive markets,
MEL = W
MEK = C.
where W=wage rate
C =cost per period of a unit of K.

13. Long Run Labor Demand
If the firms sell their products in competitive product markets,
MRPL=P*MPL
MRPK=P*MPK
Using these facts, the profit maximizing conditions can be rewritten as:
P*MPL = W
P*MPK = C
Which can be rewritten as:
W/MPL = C/MPK = P
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14. Long Run Labor Demand
Long run effect of an increase in price of capital on labor.
substitution effect: for every given level of output, use more labor and less capital.
scale effect: an increase in price of capital reduces product supply, reduces equilibrium quantity produced, and reduces amount of labor employed.
L & K are
gross substitutes if subst effect > scale effect
gross complements if subst effect < scale effect

15. Long Run Labor Demand
When there are more than two inputs, any pair can be classified as gross substitutes or complements depending on whether the scale or substitution effect dominates.

16. Long Run Labor Demand Other Applications of Labor Demand Models.
Minimum wages and monopsony.
Effect of a payroll tax.
does it matter whether tax is levied on employer or employee?
how does the elasticity of labor supply affect incidence of tax?
how does the elasticity of labor demand affect incidence of tax?
Effects of employment subsidies.
given to employers.
given to employees.
Financing medical payments for black lung disease.
tax on coal workers' wages (surface versus land)
tax on coal (unions versus management)