1. Economics for Today Irvin B. Tucker
Chapter 11 Labor Markets
Lecture Slides
Economics for Today Irvin B. Tucker
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2. What is the purpose of this chapter?
To explain how wages are determined in labor markets
To analyze the distribution of income in the U.S.
To define poverty, antipoverty programs, and discrimination in the U.S.
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3. What is a production function?
Recall from Chapter 7 that this is a graph that shows the relationship between the amount of resources employed and a firm’s total product (the next four slides are review)
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4. Exhibit 7.2(a) Production Function Total Output50 40
Total product (bushels of grapes per day) 30
Total Output 20 10 1 2 3 4 5 6
Quantity of Labor (number of workers per day)
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5. What is marginal product?
The change in total output that occurs by adding one unit of a variable input (labor), with all other inputs used being held constant
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6. What is the law of diminishing returns?
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
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7. Law of Diminishing Returns 1 2 3 4 5 6
Exhibit 7(b) Marginal Product Curve 12 10 8
Marginal Product (bushels of gapes per day) 6 4
Law of Diminishing Returns 2 MP 1 2 3 4 5 6
Quantity of Labor (number of workers per day)
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8. What is marginal revenue product?
The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource
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9. How do we measure MRP in perfect competition?
Marginal revenue product is equal to the marginal product of labor times the price of the product
MRP = P X MP
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10. What is the demand curve for labor?
The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus
The demand curve for labor is equal to the marginal revenue product of labor
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11. Decrease in quantity of labor demanded
Increase in quantity of labor demanded
Decrease in
wage Rate
Increase in
wage Rate
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12. How many workers will a firm hire to maximize its profits?
It will continue hiring workers as long as the last worker’s MRP is greater than the worker’s wage
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13. Why will a firm hire the workers up to the point where MRP = Wage rate?
Because the firm’s revenue from hiring each worker is greater than the wage paid to each worker
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14. 1
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15. Exhibit 2 Demand Curve for Labor Wage Rate (dollars per day)
350 A B
280
Initial Wage Rate c
210
Wage Rate (dollars per day) D
140
New Wage Rate E 70
MRP = demand 5 1 2 3 4
Quantity of Labor 15
(workers per day)
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16. What is derived demand?
The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce
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17. What does the supply curve of labor show?
The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus
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18. Decrease in quantity of labor supplied
Increase in quantity of labor supplied
Decrease in
wage Rate
Increase in
wage Rate
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19. S Exhibit 3 The Market Supply Curve of Labor B 280 A 140 5 10 15 20 25
new wage rate
280
Wage Rate (dollars per day) A
initial wage rate
140 5 10 15 20 25 30 35 40 45 50
Quantity of Labor (thousands of workers per day)
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20. In a perfectly competitive market, what determines the level of wages?
The intersection of the demand for labor and the supply of labor
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21. S D 420 350 280 E Wage Rate (dollars per day) 140 70 0 10 20 30
Exhibit 4(a) Labor Market Supply and Demand
Electronic components labor market
420 S
350
280 E
Wage Rate (dollars per day)
210
Equilibrium Wage rate
140 70 D 30
Quantity of Labor (thousands of workers per day)
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22. Why is the firm’s supply curve horizontal at the equilibrium?
In a competitive labor market, a firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal
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23. S D 4 5 Exhibit 4(b) Computech’s Equilibrium Wage 420 350 280
Equilibrium Wage rate
280
Wage Rate (dollars per day) E S
210
140 70 D 3
Quantity of Labor (thousands of workers per day)
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24. How do unions attempt to raise wages?
Increase demand for labor
Decrease supply for labor
Collective bargaining

25. What is featherbedding?
Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker. The result is an increase in the demand for labor.
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26. Increase in wages and employment Increase in the demand for labor
Union featherbeds
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27. Exhibit 5 A Union causes an increase in the demand for labor
420 S
350 E2
280 E1
Wage Rate per day
210 D2
140 D1 20 40 30 50 60
Quantity of Labor (thousands of workers per day)
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28. What else can unions do to raise wages?
Decrease the supply of labor by restricting union membership or professional standards
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29. Exhibit 6 A Union causes a decrease in the supply of labor
420 S2
350 E2 S1
280 E1
Wage Rate per day (dollars)
210 D
140 10 20 30 40 50
Quantity of Labor (thousands of workers per day)
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30. How else can unions raise wages?
Collective bargaining, which is the process of negotiations between the union and management concerning wages and working conditions
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31. Exhibit 7 Union Collective Bargaining Causes a Wage Rate Increase
350
Unemployment S
Union Wage
280 E
210
Equilibrium Wage
Wage Rate (dollars per day)
140 D 70 10 20 30 40 50
Quantity of Labor (thousands of workers per day)
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32. Exhibit 8 Factors Causing Changes in Labor Demand
Unions
Prices of substitute goods
Technology
Demand for final products
Marginal product of labor
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33. Exhibit 8 Factors Causing Changes in Labor Supply
Unions
Demographic trends
Expectations of future income
Changes in immigration laws
Education and training
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34. What has happened to union membership since WWII?
Union power has declined
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35. Percentage of nonfarm workers in unions
Exhibit 9 Union Membership, 40
Percentage of nonfarm workers in unions 30 20 10
Year
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36. How does union membership in the U.S. compare to other countries?
Union membership is far below that of other industrialized countries
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37. Percentage 0f civilian employees in unions
Exhibit 10
Union Membership for Selected Countries, 2009
82%
76%
Percentage 0f civilian employees in unions
35%
29%
30%
26%
22%
12%
United States
Japan
Canada
Germany
United Kingdom
Italy
Denmark
Sweden
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38. A labor market in which a single firm hires labor
What is a monopsony?
A labor market in which a single firm hires labor
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39. What is the reason for a monopsony?
The absence of other firms in the area competing for a relatively immobile labor force
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40. What is marginal factor cost?
MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor
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41. What does the monopsonist have to do to hire additional workers?
It has to raise the wage rate for all workers, therefore the MFC exceeds the wage rate
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42.   Exhibit 11 A Monopsonist Determines Its Wage Rate C 24 21 18 15 E
Marginal factor cost (MFC) 21 18 15
Wage rate (dollars per hour) E
Labor supply 12 C D 9
Labor demand (MRP)  6 B  3 A 1 2 3 4 5
Quantity of labor
(workers per hour)
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43. © 2011 South-Western, a part of Cengage Learning

44. What conclusion can we make?
A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market
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45. END