Lecture11(Ch12) (1)

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Questions: (1) Where do the labor

demand and supply curves come from?

(2) How well do they explain the facts?

12_01WAGE(PRICE OFLABOR)

QUANTITY OF LABOR

Labordemand

Marketwage

Amount of labor wherequantity of labor suppliedequals quantity of labordemanded

Laborsupply

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The Slowdown in Wage Growth12_02

INDEX,

1992 = 100

110

100

90

80

70

601960 1965 1970 1975 1980 1985 1990 1995 2000

Real wage

High growth

trend

Low growthtrend

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Two sides of the labor market:

Firms and Workers Labor Demand

The firms decision

Labor Supply

The workers decision

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Derived Demand for Labor

Labor demand is a derived from firms

profit maximization decisions

Firm chooses output to maximize profits(MC = P)

This amount of output implies a level of

labor input (short run)a production function all over again

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Market power? Not yet, lets first

start with competition A firm in a competitive market for its good:

takes priceas given

But now also assume that the labor marketis competitive: firm takes wageas given

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Example: Competitive Firm with

P = $100 (T12.1)Workers Quantity

produced

Marginal

Product

Total

Revenue

Marginal

Revenue

Product0 0 -- 0 --

1 17 17 1700 1700

2 31 14 3100 14003 42 11 4200 1100

4 51 9 5100 900

5 58 7 5800 700

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To derive the labor demand

curve, first plot MRP by hand

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Marginal Revenue Product

Equals Wage Condition for Profit Maximization

In symbols: MRP = W

For firms in competitive markets:

MRP = PxMP

example 1700 = 100x17 or 1400 = 100x14

This implies that MP = W/P

Marginal product of labor equals real wage

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To get market demand for labor,

sum up firms demands for labor12_04

WEEKLY WAGE(DOLLARS)



1,500 1,500 1,500

1,000 1,0001,000

500 500 500

50 0 010 5 10 5 10 15 20

QUANTITY OF LABOR

(NUMBER OF WORKERS)

QUANTITY OF LABOR

(NUMBER OF WORKERS)

QUANTITY OF LABOR

(NUMBER OF WORKERS)

LABOR DEMAND IN THE MARKETLABOR DEMAND AT CAREERPROLABOR DEMAND AT GETAJOB

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What if f irm has market power

as in a monopoly? Still must have MRP = W

But in this case MRP does not equal P=MP

because P is not fixed

P must decrease as L and Q go up

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Derivation of Labor Supply

analogywith earlier analysis of consumer

behavior: purposeful choices(work versus

leisure) with limited resources(only 24hrs in a day)

The price of leisure is the opportunity

cost of not working = wage As the wage rises, the price of leisure rises

thus the person will work more

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Leisure includes school!

Investing in human capital

more human capital increase marginal

product of a worker

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Substitutionversus income

effect in labor supply Recall the two effects for a good

the two effects go in the samedirection

in case of labor supply the two effects go in

oppositedirections

hence labor supply can slope down!!!!!!!

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3 different labor supply curves12_05

WAGE WAGE WAGE

Laborsupply

Laborsupply

Labor

supply

QUANTITY OF LABOR QUANTITY OF LABOR QUANTITY OF LABOR

INCOME EFFECT DOMINATESSUBSTITUTION EFFECT EQUALS

INCOME EFFECT

SUBSTITUTION EFFECT DOMINATES

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Backward bending labor supply

curve12_06WAGE

LABOR SUPPLY

Substitution effect

dominates in this

region.

Income and

substitution effects

balance out.

Income effect

dominates in

this region.

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A Test: compare trend in labor

productivity with trend in real

wage12_07

INDEX,

1992 = 100

110

100

90

80

Labor productivity

70

60

50

1960 1965 1970 1975 1980 1985 1990 1995 2000

High growthtrend

Low growthtrend

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But productivity theory does not

explain everything Compensating wage differentials

salaries in the business school versus the

economics department

Efficiency Wages

Long Term Employment Contracts

wage is related to productivity over longperiods, but not short periods

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Effects of M inimum Wage12_09

Quantity oflabor demanded

Quantity oflabor supplied

Minimumwage

Labor marketequilibrium

Labordemand

Labordemand

Laborsupply

Laborsupply

WAGEWAGE

QUANTITY OF LABORQUANTITY OF LABOR

Surplus

Market for Unskilled Workers Market for Skilled Workers

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Discr imination in competitive

markets12_08 WAGE

Labor supply

Actual marginal

revenue product

NUMBER OF WOMEN WORKERS

4. Because actual marginalrevenue product is higherthan the wage, other firmscan hire these women at ahigher wage but still belowthe marginal revenueproduct.

1. Prejudiced firm actsas if marginal revenueproduct is lower thanit actually is.

2. Discriminationcauses wagesto fall by thisamount.

3. Discrimination alsocauses lower

employment for women.

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Effects of Labor Unions

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Documents

Lecture11(Ch12) (1)