Post on 11-Jan-2016
Introduction: Thinking Like an Economist
1CHAPTER
Work and the Labor Market
Work banishes those three great evils: boredom, vice, and poverty.
— Voltaire
CHAPTER
17
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
1Work and the Labor Market 1
7
17-2
Work and the Labor Market
A labor market is a factor market in which individuals supply labor services for wages to individuals and firms that demand labor services
Incentive effect is how much a person will change hours worked in response to the wage rate
The labor supply choice is between nonmarket activities and legal market activities
• Economists focus on the incentive effect when considering an individual’s choice of whether and how much to work
1Work and the Labor Market 1
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17-3
The Supply of Labor
The higher the wage, the higher the quantity of labor supplied.
The labor supply curve has a positive slope because the opportunity cost of not working increases as wages get higher
Wage Rate
Q of Labor
Supply of Labor
1Work and the Labor Market 1
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17-4
Real Wages and the Opportunity Cost of Work
The upward sloping labor supply curve tells you that, other things equal, as wages go up, the quantity of labor supplied goes up
This is explained by the income effect; higher incomes make people richer, and richer people can afford to choose more leisure causing a decrease in hours worked
Historically real wages have been increasing and people have reduced the number of hours they work, but they still work more hours than predicted
1Work and the Labor Market 1
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Income Tax, Work, and Leisure
Taxes reduce the net wage of individuals, reducing the incentive to work
For welfare recipients, the tax penalties for working create a great incentive to not work or to work “off the books”
An increase in the marginal tax rate is likely to reduce the quantity of labor supplied
EU countries, which have relatively high marginal tax rates, are struggling with the problem of providing incentives for people to work
1Work and the Labor Market 1
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The Elasticity of Labor Supply
Elasticity of labor supply depends on:• Individuals’ opportunity cost of working• The type of labor market being discussed• The elasticities of individuals’ supply curve• Individuals entering and leaving the labor market
Employees prefer an inelastic labor supply, but employers prefer an elastic labor supply
Estimates for labor supply elasticity are about 0.1 (inelastic) for heads of household and 1.1 (elastic) for secondary earners
1Work and the Labor Market 1
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17-7
Immigration and the International Supply of Labor
International limitations on the flow of people play an important role in elasticities of labor supply
Large differentials in wages mean that many people from low wage countries would like to move to high wage countries to earn higher wages
EU countries have open borders among member countries, allowing the flow of labor between low and high wage countries
1Work and the Labor Market 1
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The Derived Demand for Labor
The demand for labor follows the basic law of demand: the higher the wage, the lower the quantity of labor demanded
The demand for labor by firms is a derived demand meaning the demand for factors of production by firms depends on consumers’ demands
Wage Rate
Q of Labor
Demand for Labor
1Work and the Labor Market 1
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Factors Influencing the Elasticity of Demand for Labor
Four factors that influence the elasticity of demand for labor are:
• The elasticity of demand for the firm’s good
• The relative importance of labor in the production process
• The possibility, and cost, of substitution in production
• The degree to which the marginal productivity falls with an increase in labor
1Work and the Labor Market 1
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Labor as a Factor of Production
The traditional factors of production are land, labor, capital, and entrepreneurship
The labor market includes labor and entrepreneurship
Entrepreneurship refers to labor services that require high degrees of organizational skills, concern, oversight responsibility, and creativity
Days of entrepreneurship can be equivalent to weeks and months of non-entrepreneurial labor
1Work and the Labor Market 1
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17-11
•Rule for employing labor:
• MRP = MRC
MarginalRevenueProduct
=Change in Total Revenue
Unit Change in Resource Quantity
MarginalResource
Cost=
Change in Total (Resource) Cost
Unit Change in Resource Quantity
• Marginal Revenue Product (MRP)
• Marginal Resource Cost (MRC)
1Work and the Labor Market 1
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17-12
Re
so
urc
e W
ag
e(W
ag
e R
ate
)
Quantity of Resource Demanded
(1)Units of
Resource
(2)Total Product
(Output)
(3)Marginal
Product (MP)
(4)Product
Price
(5)Total Revenue,
(2) X (4)
(6)Marginal Revenue
Product (MRP)
01234567
07
131822252728
7654321
$22222222
$ 014263644505456
$141210
8642
]]]]]]]
]]]]]]]
1 2 3 4 5 6 7
0
-2
2
4
6
8
10
12
14
16
$18
D=MRP
PurelyCompetitiveFirm’sDemand forA Resource
1Work and the Labor Market 1
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17-13
($10)WC
($10)WC
Wag
e R
ate
(Do
llar
s)
Labor Market
Quantity of Labor
Wag
e R
ate
(Do
llar
s)
Individual Firm
Quantity of Labor
QC
(1000)
0 0
d=mrp
qC(5)
s=MRC
Competitive Labor Market
D=MRP(∑ mrp’s)
S
e b
a
c
1Work and the Labor Market 1
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Equilibrium in the Labor Market
Equilibrium is where the quantity demanded of labor is equal to the
quantity supplied
Wage Rate
Q of Labor
Demand for Labor
Supply of Labor
Qe
We
Equilibrium wage is We
Equilibrium quantity is Qe
1Work and the Labor Market 1
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17-15
Shift Factors of Demand
Technology both increases/decreases the demand for labor
International competitiveness may increase the demand for labor in the U.S. in spite of lower wages in foreign countries because:
• U.S. workers may be more productive• Transportation costs are lower• Potential trade restrictions• Production techniques are not compatible with foreign
social institutions• Focal point phenomenon is a situation where a
company moves to a country because others have already moved there
1Work and the Labor Market 1
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17-16
Determination of Wages
Supply and demand forces strongly influence wages, but they do not fully determine wages
Real-world labor markets are filled with examples of individuals or firms who resist these supply and demand pressures:
• Labor unions
• Professional associations
• Agreements among employers
1Work and the Labor Market 1
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17-17
Labor Market in Action
The effect of an above equilibrium wage is an
excess supply of labor and jobs must be rationed
Wage Rate
Q of Labor
Demand for Labor
Supply of Labor
QD
W1
QS
Excess supply of labor
We
1Work and the Labor Market 1
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17-18
Labor Market in Action
The effect of an increase in the supply
of labor will cause:
Wage Rate
Q of LaborD
S0
Q0
W1
Q1
W0
Equilibrium wage to decrease
Equilibrium quantity to increase
S1
1Work and the Labor Market 1
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17-19
The Labor Market and You
Consider relative pay of jobs requiring a college degree compared to jobs requiring only a high school diploma
Consider the salaries of Ph.D.s compared to the salaries of MBAs
Among jobs you like, choose a job in a field in which the supply of labor is limited, or the demand for labor is significantly increasing
Jobs in which the supply will likely be limited are those in which social or political forces have placed restrictions on entry or those requiring special abilities
1Work and the Labor Market 1
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17-20
Labor Demand
Consider relative pay of jobs requiring a college degree compared to jobs requiring only a high school diploma
Consider the salaries of Ph.D.s compared to the salaries of MBAs
Among jobs you like, choose a job in a field in which the supply of labor is limited, or the demand for labor is significantly increasing
Jobs in which the supply will likely be limited are those in which social or political forces have placed restrictions on entry or those requiring special abilities