Econ 102 004 principles of microeconomics
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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

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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


The marginal product of labor c

The Marginal Product of Labor (c)


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