1. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 16 The Markets for Labor and Other Factors of Production

2. 2 of 41 © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. Why Are the Chicago Cubs Paying Alfonso Soriano $18 Million per Year? 16.1Explain how firms choose the profit-maximizing quantity of labor to employ. 16.2Explain how people choose the quantity of labor to supply. 16.3Explain how equilibrium wages are determined in labor markets. 16.4Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.5Discuss the role personnel economics can play in helping firms deal with human resources issues. 16.6Show how equilibrium prices are determined in the markets for capital and natural resources. Learning Objectives …wages are determined in the labor market by the demand and supply of labor…

3. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 38 Factors of production Labor, capital, natural resources, and other inputs used to produce goods and services. The Markets for Labor and Other Factors of Production

4. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 38 The Demand for Labor Learning Objective 16.1 Derived demand The demand for a factor of production that is derived from the demand for the good the factor produces. The Marginal Revenue Product of Labor Marginal product of labor The additional output a firm produces as a result of hiring one more worker. Marginal revenue product of labor (MRP) The change in a firm’s revenue as a result of hiring one more worker.

5. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 38 The Demand for Labor Learning Objective 16.1 The Marginal Revenue Product of Labor FIGURE 16-1 The Marginal Revenue Product of Labor and the Demand for Labor

6. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 38 Learning Objective 16.1 Table 16-1 The Relationship between the Marginal Revenue Product of Labor and the Wage WHEN …THEN THE FIRM … MRP > W,should hire more workers to increase profits. MRP < W,should hire fewer workers to increase profits. MRP = W, is hiring the optimal number of workers and is maximizing profits. The Demand for Labor The Marginal Revenue Product of Labor

7. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 38 Solved Problem 16-1 Hiring Decisions by a Firm That Is a Price Maker Learning Objective 16.1 (1) QUANTITY OF LABOR (2) OUTPUT OF iPODS PER WEEK (3) MARGINAL PRODUCT OF LABOR (4) PRODUCT PRICE (5) TOTAL REVENUE (6) MARGINAL REVENUE PRODUCT OF LABOR (7) WAGE (8) ADDITIONAL PROFIT FROM HIRING ONE ADDITIONAL WORKER 00—$200$0—$500— 166180$1,080 500$580 21151601,760680500180 31541402,100340500–160 41831202,16060500–440 52021002,000–160500–660 6 211801,680–320500–820

8. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 38 Learning Objective 16.1 The market demand curve for labor is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers. The Demand for Labor The Market Demand Curve for Labor

9. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 38 Learning Objective 16.1 Increases in human capital. Human capital The accumulated training and skills that workers possess. Changes in technology. Changes in the price of the product. Changes in the quantity of other inputs. Changes in the number of firms in the market. The Demand for Labor Factors That Shift the Market Demand Curve for Labor The five most important variables that cause the labor demand curve to shift are the following:

10. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 38 The Supply of Labor Learning Objective 16.2 FIGURE 16-2 The Labor Supply Curve FIGURE 16-3 A Backward-Bending Labor Supply Curve

11. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 38 Learning Objective 16.2 The market supply curve of labor is determined by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor. Increases in population. Factors That Shift the Market Supply Curve of Labor Changing demographics. Changing alternatives. The Supply of Labor The Market Supply Curve of Labor

12. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 38 Equilibrium in the Labor Market Learning Objective 16.3 FIGURE 16-4 Equilibrium in the Labor Market

13. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 38 Learning Objective 16.3 FIGURE 16-5 The Effect of an Increase in Labor Demand Equilibrium in the Labor Market The Effect on Equilibrium Wages of a Shift in Labor Demand

14. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 14 of 38 Learning Objective 16.3 Will Your Future Income Depend on Which Courses You Take in College? Making the Connection

15. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 38 Learning Objective 16.3 FIGURE 16-6 The Effect of an Increase in Labor Supply Equilibrium in the Labor Market The Effect on Equilibrium Wages of a Shift in Labor Supply

16. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 16 of 38 Learning Objective 16.3 Immigration and Wages, Then and Now Making the Connection The flower industry is one of many industries in the United States that rely on immigrant workers.

17. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 17 of 38 Explaining Differences in Wages Learning Objective 16.4 FIGURE 16-7 Baseball Players Are Paid More Than College Professors Don’t Let This Happen to YOU! Remember That Prices and Wages Are Determined at the Margin

18. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 18 of 38 Learning Objective 16.4 Technology and the Earnings of “Superstars” Making the Connection Why does Julia Roberts earn more today relative to the typical actor than stars did in the 1940s?

19. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 19 of 38 Learning Objective 16.4 Compensating differentials Higher wages that compensate workers for unpleasant aspects of a job. Explaining Differences in Wages Compensating Differentials Discrimination Table 16-2 Why Do White Males Earn More Than Other Groups? GROUPANNUAL EARNINGS White males$46,746 White females34,464 Black males33,248 Black females29,749 Hispanic males26,769 Hispanic females24,402

20. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 20 of 38 Learning Objective 16.4 1 Differences in education 2 Differences in experience 3 Differing preferences for jobs Differences in Education Some of the difference between the incomes of whites and the incomes of blacks can be explained by differences in education. Explaining Differences in Wages Discrimination Most economists believe that only a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Instead, most of the gap is explained by three main factors:

21. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 21 of 38 Learning Objective 16.4 Women are much more likely than men to leave their jobs for a period of time after having a child. Differences in Experience Significant differences between the types of jobs held by women and men is likely a reflection in job preferences. Differing Preferences for Jobs Explaining Differences in Wages Discrimination

22. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 22 of 38 Learning Objective 16.4 Differing Preferences for Jobs “WOMEN’S JOBS”“MEN’S JOBS” OCCUPATION WEEKLY EARNINGS PERCENTAGE OF WORKERS WHO ARE WOMENOCCUPATION WEEKLY EARNINGS PERCENTAGE OF WORKERS WHO ARE WOMEN Preschool and kindergarten teachers$52196%Electricians$7132% Dental assistants47495% Fire fighters9444% Childcare workers33293%Aircraft mechanics9196% Receptionists46692%Aircraft pilots1,3666% Hairdressers41691%Engineering managers1,78810% Teacher assistants39891%Aerospace engineers1,36611% Nursing aides38889%Civil engineers1,13813% Maids and housekeeping cleaners33587% Computer software engineers1,40121% Cashiers33675%Chief executives1,83424% Table 16-2 “Men’s Jobs” Often Pay More Than “Women’s Jobs” Explaining Differences in Wages Discrimination

23. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 23 of 38 Solved Problem 16-4 Is “Comparable Worth” Legislation the Answer to Closing the Gap between Men’s and Women’s Pay? Learning Objective 16.4

24. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 24 of 38 Learning Objective 16.4 When two people are paid different wages, discrimination may be the explanation. But differences in productivity or preferences may also be an explanation. The Difficulty of Measuring Discrimination Explaining Differences in Wages Discrimination

25. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 25 of 38 Learning Objective 16.4 FIGURE 16-8 Discrimination and Wages Does It Pay to Discriminate? Explaining Differences in Wages Discrimination

26. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 26 of 38 Learning Objective 16.4 1 Worker discrimination. 2 Customer discrimination. 3 Negative feedback loops. Employers who discriminate pay an economic penalty. Yet before the Civil Rights Act of 1964 many firms continued to discriminate. The three important factors that allowed these companies to operate were: Does It Pay to Discriminate? Explaining Differences in Wages Discrimination

27. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 27 of 38 Learning Objective 16.4 Labor union An organization of employees that has the legal right to bargain with employers about wages and working conditions. FIGURE 16-9 The United States Is Less Unionized Than Most Industrial Countries Explaining Differences in Wages Labor Unions

28. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 28 of 38 Learning Objective 16.4 Table 16-3 Union Workers Earn More Than Nonunion Workers AVERAGE WEEKLY EARNINGS UNION WORKERS$833 NONUNION WORKERS642 Explaining Differences in Wages Labor Unions

29. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 29 of 38 Personnel Economics Learning Objective 16.5 Personnel economics The application of economic analysis to human resources issues. Should Workers’ Pay Depend on How Much They Work or on How Much They Produce? FIGURE 16-10 Paying Car Salespeople by Salary or by Commission

30. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 30 of 38 Learning Objective 16.5 Raising Pay, Productivity, and Profits at Safelite AutoGlass Making the Connection A piece-rate system at Safelite AutoGlass led to increased worker wages and firm profits.

31. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 31 of 38 Learning Objective 16.5 Difficulty in measuring output. Concerns about quality. Worker dislike of risk. Personnel Economics Other Considerations in Setting Compensation Systems Firms may choose a salary system for several good reasons:

32. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 32 of 38 Learning Objective 16.6 FIGURE 16-11 Equilibrium in the Market for Capital The Markets for Capital and Natural Resources The Market for Capital

33. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 33 of 38 Learning Objective 16.6 FIGURE 16-12 Equilibrium in the Market for Natural Resources The Markets for Capital and Natural Resources The Market for Natural Resources

34. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 34 of 38 Learning Objective 16.6 Economic rent (or pure rent) The price of a factor of production that is in fixed supply. The Markets for Capital and Natural Resources The Market for Natural Resources

35. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 35 of 38 Learning Objective 16.6 Monopsony The sole buyer of a factor of production. With only one lumber mill in town, the wages of these loggers won’t be as high. The Markets for Capital and Natural Resources Monopsony

36. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 36 of 38 Learning Objective 16.6 Marginal productivity theory of income distribution The theory that the distribution of income is determined by the marginal productivity of the factors of production that individuals own. The Markets for Capital and Natural Resources The Marginal Productivity Theory of Income Distribution

37. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 37 of 38 An Inside LOOK Are Race Car Drivers Athletes? We Don’t Know, but the Pit-Crew Members Are Racing Teams Recruit Athletes and Train Them Hard; The $60,000 Tire Carrier

38. Chapter 16: The Markets for Labor and Other Factors of Production © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 38 of 38 Compensating differentials Derived demand Economic discrimination Economic rent (or pure rent) Factors of production Human capital Labor union K e y T e r m s Marginal product of labor Marginal productivity theory of income distribution Marginal revenue product of labor (MRP) Monopsony Personnel economics