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ECON 102.004 – Principles of Microeconomics. S&W, Chapter 8 Labor Markets Instructor: Mehmet S. Tosun, Ph.D. Department of Economics University of Nevada, Reno. Lecture Outline. Labor supply decision Income and substitution effects Labor force participation Demand for Labor.

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econ 102 004 principles of microeconomics

ECON 102.004 – Principles of Microeconomics

S&W, Chapter 8

Labor Markets

Instructor:

Mehmet S. Tosun, Ph.D.

Department of Economics

University of Nevada, Reno

lecture outline
Lecture Outline
  • Labor supply decision
  • Income and substitution effects
  • Labor force participation
  • Demand for Labor
the labor supply decision a
The Labor Supply Decision (a)
  • Do workers decide on how much to work?
    • Many do not
    • However, some workers do:
      • Part‑time workers
      • Workers who work overtime
      • Workers who moonlight
      • Salaried workers
the labor supply decision b
The Labor Supply Decision (b)
  • The method workers use to decide on the goods they buy is the same as the method they use to allocate their scarce time to leisure or labor
  • Buying more of good X means a consumer can afford less of good Y.
  • There is also a trade‑off between work and leisure.
  • More work means less leisure but more consumption.
trade offs for the labor supply decision
Trade‑offs for the Labor Supply Decision
  • More money or more time off
  • A job now but give up college or go to school and be poorer for a while but earn more money later.
the real wage b
The Real Wage (b)
  • When the real wage increases, the budget constraint gets steeper.
    • When the real wage changes, a worker may change the amount she works.
    • There are two effects at work: the substitution effect and the income effect.
substitution and income effects a
Substitution and Income Effects (a)
  • When the real wage rises,
    • Leisure is more expensive (opportunity cost of leisure rises).
    • The worker is richer.
  • The substitution effect of a rise in the real wage
    • Leisure more expensive, so the worker “buys” less leisure and works more.
      • The labor supply increases.
  • The income effect of a rise in the real wage
    • The worker is richer and buys more normal goods: CDs, restaurant meals, and leisure.
      • Workers work less and the labor supply falls.
labor participation b
Labor Participation (b)
  • For most men, the decision is not whether to work but how much.
  • Formerly it was presumed that women would drop out of the labor force to have children and that they would not reenter the labor force after the children were grown.
  • Today women\'s labor force participation rate is over 50%.
women s labor force participation
Women’s Labor Force Participation
  • Women’s labor force participation rate has risen dramatically over the last 40 years.
  • In addition there has been an increase in the demand for women\'s labor as discrimination has been barred by federal law and attitudes have changed.
  • Women\'s employment and wage situation can be explained partly by a shift of the labor supply curve and partly by a movement along the labor supply curve.
labor demand
Labor Demand
  • The demand for labor is a derived demand
    • It depends on the demand for output workers produce
  • Firms hire workers only if they are profitable.
  • The last worker hired makes just enough output so that when it is sold, it equals his or her wage.
the marginal product of labor a
The Marginal Product of Labor (a)
  • Marginal product of labor (MPL)
    • The output one additional worker produces (holding all other inputs, such as capital, constant)
  • The law of diminishing marginal returns
    • The MPL is a decreasing function
      • As more labor is hired, successive units are less productive because they use less capital.
the marginal product of labor b
The Marginal Product of Labor (b)
  • Value of the marginal product (VMP)
    • The revenue the additional worker earns for the firm
  • The VMP is the value of the additional worker\'s marginal product: VMP = p*MPL.
  • The value of the marginal product curve is the firm\'s demand curve for labor.
    • The VMP is downward sloping (like all demand curves) because of diminishing marginal returns to labor.
  • Firms hire labor until
    • VMP = wage, or
    • p*MPL = w
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