2. Labor Markets
Supply and Demand

3. Wages Wage = Price of labor including fringe benefits
Real wage = adjustment for inflation

5. Determining the Demand Curve
(Within a Competitive Firm)
Product market reminders!
The additional quantity produce from the addition of one more worker (input)
MP =
Marginal Product is drawn as…
MP creates the principle of….
Input
Output
Diminishing Marginal Returns
A firm will produce where…
MR = MC
TR =
P x Q

6. Labor Demand
= the relationship b/n the quantity of labor demanded by firms and wage
Derived Demand = demand for an input is derived from demand for the product produced with that input

7. Marginal Revenue Product of Labor
Change in Total Revenue when one additional unit of labor is employed
Change TR or P x MP of Labor (MPL)
Change L
MPL = increase in quantity produced when labor increased by one unit
MRP = increase in Total Revenue when labor increased by one unit

8. How many workers should a firm hire?
A firm will hire workers such that MRP = Wage
(if no fractional unit, then when MRP > Wage)

9. Demand Curve for Labor Downward sloping
Derived from downward sloping MRP curve
As wage decreases quantity labor demanded increases
Movements along the curve
Shifts occur because of two reasons
Change in the Price of the good produced
Change in the MP of labor
* MRP = MP x P

10. How does this apply to firms with Market Power?
Same concept
Price and output still inversely related
MRP declines more sharply
MRP = MR x MP
Firm is not a price taker

12. Labor Supply Substitution Effect Income Effect
Higher the wage, the more attractive work is to the alternatives
Income Effect
The higher the wage, the less hours worked to earn the same amount
Q of Labor
Wage
Labor Supply
Q of Labor
Wage
Labor Supply
What would it look like if Substitution Effect = Income Effect?

13. Backward Bending Labor Supply Curve
Income Effect dominates in this region
Wage
Income and Substitution effect cancel out
Substitution Effect Dominates
Q of Labor

15. Discrimination in the Labor Market
Firms that discriminate pay less than Marginal Product of Labor
Wage
Labor Supply
Wage Deserved
Wage 2
Wage
Actual Marginal Revenue Product
New firms acts as if MRP is lower than it is
Firms acts as if MRP is lower than it is QL
QL2
QL Deserved
Number of Minority Workers
In theory, discrimination will ultimately end as new firms see they can discriminate & save money, but by less than the previous firm.

16. Minimum Wage Skilled Workers Unskilled Workers
Labor Demand
Labor Supply
Skilled Workers
Q of Labor
Wage
Unskilled Workers
Wage
Labor Supply
Labor Demand
Q of Labor
Minimum wage acts as a price floor creating a surplus of workers aka unemployment. Raises wages, but decreases quantity employed. No impact on the wage of the skilled worker.

17. Labor Unions
Two suggested reasons why wages are higher for those in a union
Restricted Supply  limit membership – shifts labor supply leftward raising wages
Increased Productivity  provide a way to improve relations w/in work place  more productive worker = higher wages

18. Labor Unions Restricted Supply Increased Productivity S2 S S MRP2 MRP
Wage 2
Wage 2
Wage
Wage
MRP2
MRP
MRP
QL2 QL QL
QL2

19. Monopsony & Bilateral Monopoly
Monopsony = a single buyer of a particular good/service in a market (keeps wage artificially low b/c there’s no competition)
Bilateral Monopoly = one buyer and one seller in a market P
MRC = Marginal Resource Cost
&
MFC = Marginal Factor Cost
The additional cost from hiring one more worker
Choose Q from MRC = MRP, but wage dictates supply of labor
MRC = MFC
SL = Wage
Wage
MRP QL Q