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Chapter 8

Chapter 8. The Labor Market. Labor Supply. The willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus. Labor Supply. Income vs. Leisure.

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Chapter 8

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  1. Chapter 8 The Labor Market

  2. Labor Supply • The willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus.

  3. Labor Supply

  4. Income vs. Leisure • The opportunity cost of working is the amount of leisure time that must be given up in the process: • Opportunity cost is the most desired goods or services that are forgone in order to obtain something else.

  5. Income vs. Leisure • As the opportunity cost of work increases, we require higher rates of pay. • The marginal utility of income declines as more is earned.

  6. Income vs. Leisure • The upward slope of an individual labor supply curve reflects two things: • Increasing opportunity cost of labor. • Decreasing marginal utility of income.

  7. Market Supply • Market supply of labor – the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period, ceteris paribus. • As labor-market entrants increase, the quantity of labor supplied goes up.

  8. Labor Demand • Demand for labor – the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period, ceteris paribus.

  9. The Demand for Labor

  10. Derived Demand • The quantity of resources purchased by a business depends on the firm’s expected sales and output. • The demand for labor depends on the demand for the product that the labor is producing.

  11. Derived Demand • Derived Demand: • The demand for labor and other factors of production results (is derived) from the demand for the final goods and services produced by these factors.

  12. The Wage Rate • The quantity of labor demanded depends on its price - the wage rate.

  13. Marginal Physical Product (MPP) • We measure a worker’s value to the firm by his or her marginal physical product (MPP).

  14. change in total output = Marginal physical product change in quantity of labor Marginal Physical Product (MPP) • Marginal physical product – the change in total output associated with one additional unit of input:

  15. Marginal Physical Product (MPP) • In most situations, the marginal physical product declines as more workers are hired.

  16. Marginal Physical Product (MPP)

  17. Marginal Physical Product (MPP)

  18. change in total revenue = Marginal revenue product change in quantity of labor Marginal Revenue Product (MRP) • Marginal revenue product – the change in total revenue associated with one additional unit of input:

  19. Marginal Revenue Product (MRP) • Marginal revenue product sets an upper limit to the wage rate an employer will pay.

  20. Marginal Revenue Product (MRP)

  21. The Law of Diminishing Returns • The marginal physical product of labor eventually declines (or diminishes) as the quantity of labor employed increases. • Marginal physical product declines as more people must share limited facilities.

  22. The Law of Diminishing Returns • The Law of Diminishing Returns: • The marginal physical product of a variable factor declines as more of it is employed with a given quantity of other (fixed) inputs.

  23. The Law of Diminishing Returns

  24. Diminishing Marginal Revenue Product (MRP) • As MPP diminishes so does MRP. MRP = MPP x p • If p is assumed to be constant, then MRP diminishes along with MPP.

  25. Diminishing Marginal Revenue Product (MRP)

  26. The Hiring Decision • How many workers that will be hired is determined by the demand for and supply of labor.

  27. The Firm’s Demand for Labor • A firm will continue to hire until the MRP has declined to the level of the market wage rate. • The Marginal Revenue Product curve is the labor-demand curve.

  28. The Firm’s Demand for Labor • Each (identical) worker is worth no more than the MRP of the last worker hired, and all workers are paid the same wage rate.

  29. The Labor-Demand Curve

  30. Market Equilibrium • The market demand for labor depends on: • The number of employers. • The Marginal Revenue Product of labor in each firm and the industry.

  31. Market Equilibrium • The market supply of labor depends on: • The number of workers. • Each workers’ willingness to work at alternative wage rates.

  32. Equilibrium Wage • The intersection of the market supply and demand curves establishes the equilibrium wage. • It is the only wage where the quantity of labor supplied equals the quantity of labor demanded.

  33. Equilibrium Wage

  34. Equilibrium Employment • The only sustainable level of employment in a market given the prevailing supply and demand conditions.

  35. Changing Market Outcomes • Changing market conditions alter wages and employment levels: • Changes in labor productivity • Changes in the price of the good produced by labor • Legal minimum wages • Labor unions

  36. Changes in Productivity • If labor productivity (MPP) rises, wages can increase without sacrificing jobs. • Increased productivity implies that workers can get higher wages without sacrificing jobs or more employment without lowering wages.

  37. Changes in Price • Marginal revenue product reflects the interaction of productivity and product prices. • MRP depends on the market price of the product being produced. • MRP shifts to the right if the market price of a product increases.

  38. Shifts in Labor-Demand

  39. Legal Minimum Wages • Minimum wages are mandated by Congress. • Effects of a minimum wage: • Reduces the quantity of labor demanded. • Increases the quantity of labor supplied. • Creates a market surplus. • Some workers end up better off while others end up worse off (a tradeoff).

  40. Minimum-Wage Effects

  41. Labor Unions • Workers may take collective action to get higher wages. • They form a labor union and bargain collectively with employers. • A union must exclude some workers from the market to get and maintain an above-equilibrium wage.

  42. Labor Unions • Unions decrease wages in non-union industries. • Excluded workers increase non-union labor supply.

  43. The Effect of Unions on Relative Wages

  44. Capping CEO Pay • Critics of CEO (Chief Executive Officer) pay levels want to reduce their pay and revise the process used to set their pay levels.

  45. Unmeasured MRP • Measuring the MRP of a CEO is difficult because a CEO’s contributions are not easy to quantify. • CEO salaries are higher because they reflect their opportunity wage: • Opportunity wage is the highest wage an individual would earn in his or her best alternative job.

  46. The Labor Market End of Chapter 8

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