1. Ch. 8 Continued: Women’s Earnings--Overview Labor Market: –Shows supply and demand for labor; –Results in equilibrium wage rate and employment level. –Assume this market is competitive: Large # buyers and sellers of labor; None with market power

2. Labor Demand Curve Buyers of labor are firms Goal of firms is to maximize profits Marginal decision-making: hire additional worker as long as extra worker adds more value than that extra worker costs the firm. Value of extra output is MRP L = P* MP L P = price of output (Q) MP L = marginal product of labor =  Q/  L MP L  as Q  so the firm’s demand curve is downward sloping (declining marginal productivity) Firm’s demand curve same as MRP L Cost to firm of extra worker = wage Hiring rule: hire one more worker as long as MRP L > wage

3. Labor Supply Curve and Labor Market Equilibrium Suppliers of labor are workers. As return to working (wage) goes up, more individuals enter labor market in search of a job. Labor supply curve slopes upward. Labor Market Equilibrium: –See Figure 8.7 –W*, L* –Excess Demand –Excess Supply

4. Labor Market for College Graduates Trend in # of college graduates: much growth in 1970s; slower growth afterward Trend in demand for college graduates: growth throughout the period but particularly after 70s. Wages of college graduates: –See Figure 8.8 for 1970s:  S  W*  –Afterwards: key is  D  W*  Further info on wage rates –Economists assume equilibrium wage allocates labor efficiently. –Since firm’s demand curve is MRP L, when D for output falls, its P falls and so does demand for labor.

5. Exercise Consider the labor market for college graduates. (1)Sketch the market in equilibrium and label everything. (2)Show the impact of the increase in the supply of college graduates that occurred in the 1970s and explain. (3)Show the impact of the increase in the demand for college graduates that occurred in the 1980s and explain. (4)Trace the change in wages over this period.