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The Labor MarketThe Labor Market
© 2003 South-Western/Thomson © 2003 South-Western/Thomson LearningLearning
Factor Markets in Factor Markets in General General
Product MarketsProduct Markets
Markets in which firms Markets in which firms sell goods and services sell goods and services to households or other to households or other
firmsfirms
Factor Markets in Factor Markets in General General
Factor MarketsFactor Markets
Markets in which Markets in which resources -capital, resources -capital,
land, labor, and land, labor, and natural resources - are natural resources - are
sold to firmssold to firms
Product and Factor Product and Factor MarketsMarkets
Households Firms
S
D
S
D
Demand for Goods
and Services
Supply of Goods
and Services
Demand for
Resources
Supply of Resources
Factor Markets
Product Markets
Labor Markets in Labor Markets in Particular Particular
•Defining a Labor MarketDefining a Labor Market•Competitive Labor Competitive Labor
MarketsMarkets•Firms in Labor MarketsFirms in Labor Markets
Labor Markets in Labor Markets in Particular Particular
Perfectly Competitive Labor Perfectly Competitive Labor MarketMarket
Market with many Market with many indistinguishable sellers of indistinguishable sellers of labor and many buyers, and labor and many buyers, and that involves no barriers to that involves no barriers to
entry or exitentry or exit
Labor Markets in Labor Markets in Particular Particular
Labor markets are perfectly Labor markets are perfectly competitive if:competitive if:
1)1) There are many buyers There are many buyers (firms) and sellers (firms) and sellers (households) of labor(households) of labor
2)2) All workers appear the All workers appear the same to firmssame to firms
3) No barriers to 3) No barriers to entering/exiting the labor entering/exiting the labor marketmarket
Labor Markets in Labor Markets in Particular Particular
Demand side of a labor Demand side of a labor market includes all firms market includes all firms hiring labor in that labor hiring labor in that labor marketmarket–the firms may or may not the firms may or may not compete in the same compete in the same marketmarket
Demand for Labor by a Demand for Labor by a Single FirmSingle Firm
•Goals and ConstraintsGoals and Constraints•The Firm’s Employment The Firm’s Employment
Decision When Only Labor Decision When Only Labor Is VariableIs Variable
•The Firm’s Employment The Firm’s Employment Decision When Several Decision When Several
Inputs Are VariableInputs Are Variable
Demand for Labor by Demand for Labor by Single Firm Single Firm
Derived DemandDerived Demand
The demand for an input The demand for an input that arises from, and that arises from, and
varies with, the demand varies with, the demand for the product it helps for the product it helps
to produceto produce
Goals and ConstraintsGoals and Constraints
Wage TakerWage Taker
In competitive labor markets, each In competitive labor markets, each firm is a wage taker: it takes the firm is a wage taker: it takes the
market wage rate as a given.market wage rate as a given.
Goals and ConstraintsGoals and Constraints
The firm faces three constraints in The firm faces three constraints in deciding how much labor to employ:deciding how much labor to employ:
1.1. Its technologyIts technology
2.2. The market priceThe market price
3.3. The market wage rateThe market wage rate
Goals and ConstraintsGoals and Constraints
Marginal Revenue Marginal Revenue Product (MRP)Product (MRP)
The change in revenue The change in revenue from hiring one more from hiring one more
workerworkerL
TRMRP
The Profit-Maximizing The Profit-Maximizing Employment LevelEmployment Level
•Marginal approach to profit: a firm Marginal approach to profit: a firm should take any action that adds more should take any action that adds more to its revenue than to its costto its revenue than to its cost
•Hire another worker when MRP > WHire another worker when MRP > W
•Do notDo not hire another worker when hire another worker when MRP < WMRP < W
The Profit-Maximizing Employment Level
2
Number of Workers
Dollars
$200
MRP
1 3 4 5 6 7 8
150
6050
100
Wage
The Firm’s Labor The Firm’s Labor Demand CurveDemand Curve
n 1Number
of Workers
Dollars
Firm’sLabor Demand
Curve
n 2
W 2
W 1
W 2
W 1
B
A
The Firm’s Labor The Firm’s Labor Demand CurveDemand Curve
n1Number
of Workers
Dollars
Firm’sLabor
DemandCurve
n2
W2
W1
W2
W1
n3
MRP1
B
MRP2
C
A
The Firm’s Labor The Firm’s Labor Demand CurveDemand Curve
Market Labor Demand Market Labor Demand CurveCurve
Curve indicating the total Curve indicating the total number of workers all firms number of workers all firms in a labor market want to in a labor market want to employ at each wage rateemploy at each wage rate
The Firm’s Labor The Firm’s Labor Demand CurveDemand Curve
100Number
of Workers
HourlyWage
HourlyWage
HourlyWage
HourlyWage
d
80Number
of WorkersNumber
of Workers
Numberof Workers
LD
N2 = 80 + 40+ 30 + ...
N1 = 100 + 50+ 90 + ...
$1210
Firm A Firm B Firm C
Labor Market
40 50 30 90
$1210
d
d
Shifts in the Market Labor Shifts in the Market Labor Demand CurveDemand Curve
n1 Number of Workers
Hourly Wage
BA
n2
$10
Number of Workers
Hourly Wage
B
(a) Typical Firm
(b) Labor Market
A
L 1D
d d L 2D
N 1 N 2
1 2
Shifts in the Market Shifts in the Market Labor Demand CurveLabor Demand Curve
Complementary InputComplementary Input
An input whose An input whose utilization utilization increasesincreases the the
marginal product of marginal product of another inputanother input
Shifts in the Market Shifts in the Market Labor Demand CurveLabor Demand Curve
Substitute InputSubstitute Input
An input whose An input whose utilization utilization decreases decreases the the
marginal product of marginal product of another inputanother input
Shifts in the Market Labor Shifts in the Market Labor Demand CurveDemand Curve
Number of Workers
Hourly Wage
M ore of a
Substitu table Input
M ore of a
C om plem entary Input
d
d
d
3
1
2
Change in Change in TechnologyTechnology
•When many firms acquire When many firms acquire a new technology, the a new technology, the market labor demand market labor demand curve will curve will –shift rightward if the shift rightward if the technology is technology is complementary with laborcomplementary with labor–shift leftward if the shift leftward if the technology is substitutable technology is substitutable for laborfor labor
Change in Price of Other Change in Price of Other InputsInputs
•When the price of When the price of some some other inputother input decreases, the decreases, the market labor demand market labor demand curve may shiftcurve may shift–rightward if the input is rightward if the input is complementary with laborcomplementary with labor–leftward if the input is leftward if the input is substitutable for laborsubstitutable for labor
Labor SupplyLabor Supply
•Individual Labor SupplyIndividual Labor Supply•Market Labor SupplyMarket Labor Supply
•Shifts in the Market Labor Shifts in the Market Labor Supply CurveSupply Curve
•Short-Run versus Long-Run Short-Run versus Long-Run Labor SupplyLabor Supply
Labor Supply Labor Supply
Reservation WageReservation Wage
The lowest wage rate at The lowest wage rate at which an individual would which an individual would supply labor to a particular supply labor to a particular
labor marketlabor market
Market Labor Supply Market Labor Supply
Labor Supply CurveLabor Supply Curve•Curve indicating the Curve indicating the number of people who want number of people who want jobs in a labor market at jobs in a labor market at each wage rateeach wage rate–the higher the wage rate, the higher the wage rate, the greater the quantity of the greater the quantity of labor suppliedlabor supplied
Market Labor Supply Market Labor Supply Curve Curve
Shifts in the Market Shifts in the Market Labor Supply Curve Labor Supply Curve
A market labor supply A market labor supply curve will shift when curve will shift when –something other than a something other than a change in the wage rate change in the wage rate causes a change in the causes a change in the number of people who number of people who want to work in a want to work in a particular marketparticular market
Shifts in the Market Shifts in the Market Labor Supply Curve Labor Supply Curve
A market labor supply curve A market labor supply curve will shift when will shift when –there is a change in the market there is a change in the market wage rate in other labor wage rate in other labor marketsmarkets–there are changes in the cost of there are changes in the cost of acquiring human capitalacquiring human capital–there are changes in populationthere are changes in population–there are changes in tastesthere are changes in tastes
Short-Run vs. Long-Short-Run vs. Long-Run Labor Supply Run Labor Supply
Long-Run Labor Supply Long-Run Labor Supply CurveCurve
Curve indicating how many Curve indicating how many (qualified) people will want to (qualified) people will want to work in a labor market after work in a labor market after
full adjustment to a change in full adjustment to a change in the wage ratethe wage rate
Long-Run Labor Long-Run Labor Supply Curve Supply Curve
Fig 9, animatedFig 9, animated
30,000 60,000 90,000 Numberof Workers
HourlyWage
25
$40
L 1S
LLRS L2
S
B
A
C
Labor Market Labor Market EquilibriumEquilibrium
What Happens When What Happens When Things Change? Things Change?
•A Change in Labor A Change in Labor DemandDemand
•A Change in Labor A Change in Labor SupplySupply
•Labor Shortages and Labor Shortages and SurplusesSurpluses
A Change in Labor A Change in Labor DemandDemand
In the short runIn the short run, a shift in , a shift in labor demand moves along labor demand moves along
a short-run labor supply a short-run labor supply curvecurve
In the long runIn the long run, the , the resulting increase in wage resulting increase in wage
rate will cause the short-run rate will cause the short-run labor supply curve to shift labor supply curve to shift
alsoalso
A Change in Labor A Change in Labor DemandDemand
5,000 Numberof Workers
HourlyWage
8,000 12,000
30
$40
L2S
L1D
L2D
Numberof Workers
(a)Labor Market
(b)Typical Firm
W1
W3
W2
50 80 120
Dollars
20
30
$40
20
L1S
C
1d
2d
A
B
c
b
a
A Change In Labor A Change In Labor SupplySupply
Labor ShortageLabor Shortage
The quantity of labor The quantity of labor demanded demanded exceeds the exceeds the
quantity quantity suppliedsupplied at the at the prevailing wage rateprevailing wage rate
A Change in Labor A Change in Labor SupplySupply
Labor SurplusLabor Surplus
The quantity of labor The quantity of labor supplied supplied exceeds the exceeds the
quantity quantity demandeddemanded at the at the prevailing wage rateprevailing wage rate