1. 1 © 2010 South-Western, a part of Cengage Learning Chapter 11 Labor Markets Microeconomics for Today Irvin B. Tucker

2. © 2010 South-Western, a part of Cengage Learning 2 What is the purpose of this chapter? To demonstrate that the wage paid to labor and the quantity of labor hired are influenced by the competitiveness of labor markets To demonstrate that the wage paid to labor and the quantity of labor hired are influenced by the competitiveness of labor markets

3. © 2010 South-Western, a part of Cengage Learning 3 What is a production function? A graph that shows the relationship between the amount of resources employed and a firm’s total product A graph that shows the relationship between the amount of resources employed and a firm’s total product

4. © 2010 South-Western, a part of Cengage Learning 4 40 10 124 Production Function 30 20 5 50 63 Total Output Quantity of Labor Total Output

5. © 2010 South-Western, a part of Cengage Learning 5 What is marginal product? The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

6. © 2010 South-Western, a part of Cengage Learning 6 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 The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

7. © 2010 South-Western, a part of Cengage Learning 7 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 As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

8. © 2010 South-Western, a part of Cengage Learning 8 8 2 124 Marginal Product Curve 6 4 5 10 63 Marginal Product Quantity of Labor Law of Diminishing Returns

9. © 2010 South-Western, a part of Cengage Learning 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 Marginal revenue product is equal to the marginal product of labor times the price of the product MRP = P X MP

10. © 2010 South-Western, a part of Cengage Learning 10 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 It will continue hiring workers as long as the last worker’s MRP is greater than the worker’s wage

11. © 2010 South-Western, a part of Cengage Learning 11 Why will a firm hire the last worker if MRP > W? Because the firm’s revenue from hiring the last worker is greater then the amount of money paid to the last worker Because the firm’s revenue from hiring the last worker is greater then the amount of money paid to the last worker

12. © 2010 South-Western, a part of Cengage Learning 12 Why will a firm not hire the last worker if MRP < W? Because the firm would be paying the last worker more money than it is making on the last worker Because the firm would be paying the last worker more money than it is making on the last worker

13. © 2010 South-Western, a part of Cengage Learning 13 To what point is the firm tending toward? A firm will continue hiring workers up to the point where MRP = Wage A firm will continue hiring workers up to the point where MRP = Wage

14. © 2010 South-Western, a part of Cengage Learning 14 What does the demand curve for labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

15. © 2010 South-Western, a part of Cengage Learning 15 What is the demand curve for labor equal to? It is equal to the marginal revenue product of labor It is equal to the marginal revenue product of labor

16. © 2010 South-Western, a part of Cengage Learning 16 Decrease in Wage Rate Increase in Quantity of labor demanded Decrease in Quantity of labor demanded Increase in Wage Rate

17. © 2010 South-Western, a part of Cengage Learning 17 $280 $210 $140 $70 1234 Demand Curve for Labor MRP = demand 5 Quantity of Labor Wages

18. © 2010 South-Western, a part of Cengage Learning 18 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 The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

19. © 2010 South-Western, a part of Cengage Learning 19 What does the supply curve for labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

20. © 2010 South-Western, a part of Cengage Learning 20 Decrease in Wage Rate Decrease in Quantity of labor supplied Increase in Quantity of labor supplied Increase in Wage Rate

21. © 2010 South-Western, a part of Cengage Learning 21 Market Supply Curve Wages S Quantity of Labor

22. © 2010 South-Western, a part of Cengage Learning 22 In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor The intersection of the demand for labor and the supply of labor

23. © 2010 South-Western, a part of Cengage Learning 23 D S Market Supply and Demand Wages Quantity of Labor Equilibrium Wage

24. © 2010 South-Western, a part of Cengage Learning 24 Why is the firm’s supply curve horizontal at the equilibrium? The firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal The firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal

25. © 2010 South-Western, a part of Cengage Learning 25 D S Firm’s Supply and Demand Wages Quantity of Labor Equilibrium Wage

26. © 2010 South-Western, a part of Cengage Learning 26 Does the perfectly competitive model apply to workers in unions? No

27. © 2010 South-Western, a part of Cengage Learning 27 What are examples of unions? Teamsters Teamsters United Auto Workers United Auto Workers National Education Assoc. National Education Assoc. American Federation of Government Employees American Federation of Government Employees

28. © 2010 South-Western, a part of Cengage Learning 28 How do unions attempt to raise wages? Increase demand for labor Increase demand for labor Decrease supply for labor Decrease supply for labor Power Power

29. © 2010 South-Western, a part of Cengage Learning 29 What is featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker

30. © 2010 South-Western, a part of Cengage Learning 30 Union featherbeds Increase in the demand for labor Increase in wages and employment

31. © 2010 South-Western, a part of Cengage Learning 31 $350 $280 $210 $140 2030 40 50 Unions cause an increase in the demand for labor 60 S D2D2 E1E1 D1D1 E2E2 Quantity of Labor Wage Rate per day

32. © 2010 South-Western, a part of Cengage Learning 32 What else can unions do to raise wages? Decrease competition from other nations Decrease competition from other nations

33. © 2010 South-Western, a part of Cengage Learning 33 $350 $280 $210 $140 1020 30 40 Unions cause a decrease in the supply for labor 50 S2S2 D E1E1 E2E2 Wage Rate per day S1S1 Quantity of Labor

34. © 2010 South-Western, a part of Cengage Learning 34 How else can unions raise wages? Collective bargaining Collective bargaining

35. © 2010 South-Western, a part of Cengage Learning 35 What is collective bargaining? The process of negotiations between the union and management over wages and working conditions The process of negotiations between the union and management over wages and working conditions

36. © 2010 South-Western, a part of Cengage Learning 36 $280 $210 $140 $70 1020 30 4050 Collective Bargaining causes a Wage Rate increase D Unemployment Wage Rate per day S Quantity of Labor

37. © 2010 South-Western, a part of Cengage Learning 37 What factors can cause a change in the demand for labor? Unions Unions Prices of substitute goods Prices of substitute goods Demand for final products Demand for final products Marginal product of labor Marginal product of labor

38. © 2010 South-Western, a part of Cengage Learning 38 What factors can cause a change in the supply for labor? Unions Unions Demographic trends Demographic trends Expectations of future income Expectations of future income Changes in immigration laws Changes in immigration laws Education and training Education and training

39. © 2010 South-Western, a part of Cengage Learning 39 What has happened to union membership since WWII? Union power has declined Union power has declined

40. © 2010 South-Western, a part of Cengage Learning 40 How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries Union membership is far below that of other industrialized countries

41. © 2010 South-Western, a part of Cengage Learning 41 Union membership for selected countries

42. © 2010 South-Western, a part of Cengage Learning 42 What is a Monopsony? A labor market in which a single firm hires labor A labor market in which a single firm hires labor

43. © 2010 South-Western, a part of Cengage Learning 43 What is the reason for a monopsony? The absence of other firms in the area competing for a relatively immobile labor force The absence of other firms in the area competing for a relatively immobile labor force

44. © 2010 South-Western, a part of Cengage Learning 44 What is marginal factor cost? MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor

45. © 2010 South-Western, a part of Cengage Learning 45 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 It has to raise the wage rate for all workers, therefore the MFC exceeds the wage rate

46. © 2010 South-Western, a part of Cengage Learning 46 D MRP S Wages Quantity of Labor MFC A Monopsonist Determines its Wage Rate Monopsonist’s Equilibrium Wage Equilibrium Wage with a competitive labor market

47. © 2010 South-Western, a part of Cengage Learning 47 What conclusion can we make? A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market

48. © 2010 South-Western, a part of Cengage Learning 48 END