1. Lecture 11
Markets for Labor

2. How can we explain wage differences?
Oprah Winfrey has made $260 million per year
An aerospace engineer in the U.S. receives $89,000 on average per year
A preschool teacher receives $26,000 on average per year
What causes these differences? Can we explain them with differences in productivity?

3. Labor productivity
Demand for labor is related to the productivity of the labor
Main contributors to variations in labor productivity:
The skills of the workers
The efficiency with which workers apply their skills
The level of effort with which workers work
The quantity and the characteristics of the resources available to each worker

4. Labor supply What is the opportunity cost of paid employment?
The opportunity cost of engaging in paid work is the highest value of the time that might otherwise have been spent in alternative uses such as:
Household production
Education
Self-employment
Leisure

5. Labor supply What is the benefit of paid employment?
Wages and salaries (extrinsic motivations)
Work experience itself (intrinsic motivation)
Labor force participation:
The percentage of the adult population who are either working at a paid job or seeking paid work

6. Individual labor supply
Assumptions:
The worker can find a job that meets his/her desires
There is only one kind of paid job
The job has no intrinsic motivation

7. Individual labor supply
An upward-sloping individual supply curve for labor
A backward-bending individual supply
curve for labor

8. Market labor supply

9. Market labor demand Demand curve for labor is downward-sloping:
When wages are high, employers have incentives to economize on the use of labor
When wages are low, employers may be able to expand their productive activities or substitute relatively cheap labor for other inputs

10. Labor market adjustment

11. Labor in traditional neoclassical model

12. Labor in traditional neoclassical model
Example: A firm producing disposable razors

13. Labor in traditional neoclassical model

14. Labor in traditional neoclassical model

15. Explaining variations in wages
Market forces and observable productivity differences are only part of the explanation of variation in wages.
Other potential sources for variation:
Human capital
Market power (See the case for monopsony!)
Compensating wage differentials
Worker motivation
Efficiency wages
Employee morale
Dual labor markets
Discrimination