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Labor Markets

Labor Markets. Key Concepts Summary. ©2005 South-Western College Publishing. What is the purpose of this chapter?. This chapter explains different types of labor markets that determine workers’ compensation and the quantity of workers firms hire.

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Labor Markets

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  1. Labor Markets • Key Concepts • Summary ©2005 South-Western College Publishing

  2. What is the purpose of this chapter? This chapter explains different types of labor markets that determine workers’ compensation and the quantity of workers firms hire

  3. In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor

  4. Market Supply and Demand S Wages D Quantity of Labor

  5. What does the demand curve for labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

  6. 60 Production Function 50 40 Total Output 30 Total Output 20 10 Quantity of Labor 1 2 3 4 5 6

  7. What is marginal revenue product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

  8. Marginal Product Curve 12 10 8 Marginal Product 6 Law of Diminishing Returns 4 2 Quantity of Labor 1 2 3 4 5 6

  9. What is the demand curve for labor equal to? It is equal to the marginal revenue product of labor

  10. Demand Curve for Labor $350 $280 $210 MRP = demand $140 $70 Q 1 2 3 4 5

  11. Increase in Quantity of labor an employer will hire Decrease in Wage Rate

  12. How do we measure MRP in perfect competition? A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product

  13. What isderived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

  14. What does the supply curve for labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

  15. $350 Supply Curve of Labor $280 S $210 Wage Rate per day $140 $70 Quantity of Labor 10 20 30 40 50

  16. Increase in Quantity of labor willing to work Increase in Wage Rate

  17. What is human capital? The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive

  18. $350 Competitive Labor Market $280 S E $210 Wage Rate per day $140 D $70 Quantity of Labor 10 20 30 40 50

  19. Competitive Labor Market $350 $280 E S $210 Wage Rate per day $140 D $70 Quantity of Labor 1 2 3 4 5

  20. Does the perfectly competitive model apply to workers in unions? No

  21. What are examples of unions? • Teamsters • United Auto Workers • National Education Assoc. • American Federation of Government Employees

  22. How do unions attempt to raise wages? • Increase demand for labor • Decrease supply for labor • Power

  23. What is featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker

  24. What else can unions do to increase the demand for labor? Decrease competition from other nations

  25. Unions cause an increase in the demand for labor $350 $280 S E2 $210 Wage Rate per day E1 $140 D2 $70 D1 Quantity of Labor 10 20 30 40 50

  26. Increase in wages and employment Increase in the demand for labor Union featherbeds

  27. Unions cause a decrease in the supply for labor $420 $350 S2 E2 S1 $280 Wage Rate per day E1 $210 D1 $140 Quantity of Labor 10 20 30 40 50

  28. How else can unions raise wages? Collective bargaining

  29. What iscollective bargaining? The process of negotiations between the union and management over wages and working conditions

  30. Collective Bargaining causes a Wage Rate increase $350 $280 S Unemployment $210 Wage Rate per day $140 D $70 Quantity of Labor 10 20 30 40 50

  31. What factors can cause a change in the demand for labor? • Unions • Prices of substitute goods • Demand for final products • Marginal product of labor

  32. What factors can cause a change in the supply for labor? • Unions • Demographic trends • Expectations of future income • Changes in immigrations laws • Education and training

  33. What has happened to union membership since WWII? Union power has declined

  34. How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries

  35. What is a monopsony? A labor market in which a single firm hires labor

  36. 87% 75% Union Membership for Different Countries 40% 32% 32% 29% 24% 15% U.S. Japan Canada U.K. Germany Italy Denmark Sweden

  37. What is marginal factor cost (MFC)? The additional total cost resulting from a one-unit increase in the quantity of labor

  38. What conclusion can be drawn from a monopsonistic market? Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W

  39. A Monopsonist determines its Wage Rate $18 MFC $15 E S $12 Dollars per hour F $9 D (MRP) $6 Quantity of Labor 1 2 3 4 5

  40. How are wages compared between the two markets? A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market

  41. Key Concepts

  42. In a perfectly competitive market, what determines the level of wages? • What is marginal revenue product? • What is the demand curve for labor equal to? • How do we measure mrp in perfect competition? • What does the supply curve for labor show? • How do unions attempt to raise wages? • What is featherbedding? • What is collective bargaining?

  43. What factors can cause a change in the demand for labor? • What factors can cause a change in the supply for labor? • What has happened to union membership since WWII? • How does union membership in the u.S. Compare to other countries? • What is a monopsony? • What is marginal factor cost (mfc)? • How are wages compared between the two markets?

  44. Summary

  45. Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).

  46. The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.

  47. Demand Curve for Labor $350 $280 $210 MRP = demand $140 $70 Q 1 2 3 4 5

  48. Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.

  49. The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.

  50. $350 Supply Curve of Labor $280 S $210 Wage Rate per day $140 $70 Quantity of Labor 10 20 30 40 50

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