Chapter 11: Labor Market.

Which of the following most clearly illustrates the concept of derived demand?

An increase in the demand for new houses leads to an increase in the demand for construction workers.

Why does the supply curve slope upward?

Because of the increasing opportunity cost of working more---the increasing value of leisure time which must be foregone when workers decide to work more.

Why does the demand for labor slope downward?

Because of the law of diminishing marginal productivity.

How would one calculate the profit an employer earns from the employment of workers?

By taking the difference between the MRP and the wage for each worker and adding the difference for all workers.

The marginal productivity of workers rises.

Increases demand, increasing the equilibrium wage and quantity of labor employed.

An increase in the price of capital.

Increases demand, increasing the wage and the equilibrium quantity.

If a product's price increases, then its:

MRP will increase.

The following graph shows the labor market for steelworkers. Assume that all firms in the steel industry must hire union workers. The union representing the steelworkers negotiates rules that require steel firms to hire additional workers for each shift, a practice known as featherbedding.

Supply the same, Demand curve shifts right. As a result, the wage rate for steelworkers rises and the level of employment in the steel industry increases. (Featherbedding, a practice whereby unions force firms to hire more workers than are needed or impose work rules that reduce output per worker, causes the demand for labor to shift to the right, leading to an increase in the equilibrium wage and quantity of steelworkers.)

collective bargaining

The process of negotiating labor contracts between the union and management concerning wages and working conditions

Some people have argued that the American workers' movement would have been more successful in achieving its goals if it would have been more organized across labor markets; if it would have adopted a more European style of creating a "Labor" political party; as opposed to just concerning itself with its members and not workers as a group. Discuss.

There is no right or wrong answer here. The idea is to simply generate discussion.

Which of the following statements is true? a. A monopsony is the only employer of a factor of production. b. A monopsony will pay workers a higher wage and employ fewer workers than a competitive labor market. c. A monopsony has a marginal factor cost curve which lies below its supply curve of labor. d. Unions are becoming a greater influence in American labor markets. e. All of the above.

a. A monopsony is the only employer of a factor of production.

The best number of workers for any employer to hire is that quantity in which: a. the marginal revenue product equals the marginal factor cost. b. the marginal revenue product exceeds the marginal factor cost. c. total costs are minimized. d. total revenue is maximized. e. none of the above

a. the marginal revenue product equals the marginal factor cost.

Which of the following statements is true? a. Derived demand for labor depends on the demand for the product labor produces. b. Unions may increase demand or decrease the supply of labor. c. Investment in human capital is expected to increase the demand for those workers. d. All of the above.

d. All of the above.

A worker's accumulated investment in education, training, experience, and health is called:

human capital.

One reason the supply of carpenters is greater than the supply of physicians is because:

of differences in human capital

Which of the following is the best example of an investment in human capital?

on-the-job training received by an apprentice electrician

The marginal cost of labor for a perfectly competitive firm is given by:

the market wage rate.

The optimal hiring rule is to employ labor up to the point where:

wage = MRP

Labor --- Output 0 0 1 20 2 45 3 80 4 100 5 110 In Exhibit 11-2, if product price is fixed at $5, the MRP of the third worker is equal to:

$175

Tucker Corporation sells its product for $5.00. Tucker's industrial engineers have informed management that hiring one additional worker will increase output by five units per hour. Tucker should hire the additional worker only if the wage rate is:

$25.00 or less per hour.

Refer to Exhibit 11-1. What is the marginal revenue product of the fifth unit of labor?

$36

demand curve for labor

A curve showing the different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus; it is equal to the marginal revenue product of labor

supply curve of labor

A curve showing the different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus.

monopsony

A labor market in which a single firm hires labor

Big Cheese Inc. is the only employer in a small town in rural Wyoming and thus acts as a monopsony—that is, a buyer's monopoly. Its main product is cheddar cheese, which it sells in a perfectly competitive market. The following graph shows the marginal revenue product of labor (MRP) curve it faces, its labor supply curve, and its marginal factor cost (MFC) curve. Use the black point (plus symbol) to indicate the quantity of labor Big Cheese Inc. will hire and the wage rate it will pay for its workers.

Big Cheese Inc. will hire 3 workers at a wage rate of $15 per hour. ***The optimal quantity of labor for a monopsony is the one at which MRP = MFC. In this case, this occurs at 3 workers, since the marginal revenue product of the third worker and the marginal factor cost of the third worker are each $30 per hour. However, in order to hire three workers, the firm needs to set a wage of only $15 per hour. This is because three workers are willing to supply their labor in exchange for $15 per hour (this can be seen on the labor supply curve).*** Which of the following explains why the MFC curve lies above the labor supply curve? The marginal cost of hiring an additional worker includes not only that worker's wage but also an increase in the wages of all the other workers.

A union is formed which uses collective bargaining to obtain higher wages for its members.

Decreases supply (actually the supply curve becomes horizontal at the wage rate commanded by the union), increasing wages and decreasing the equilibrium quantity.

People desire leisure more than ever before (e.g. it is Christmas Day).

Decreases supply, increasing the wage and decreasing the equilibrium quantity.

The wages offered in other labor markets requiring similar skills are now offering substantially higher wages.

Decreases supply, increasing the wage and decreasing the equilibrium quantity.

Assume that the information technology and consulting industries employ people with similar skills. Suppose an increase in the demand for consultants leads to a rise in their wages, while the demand for computer analysts remains the same. The following graph shows the labor market for computer analysts in the United States.

Demand curve stays the same, supply curve shifts left. As a result, the wage rate for U.S. computer analysts rises, and the level of employment decreases.

Suppose that a large number of U.S. consultants decide to take employment in Europe due to better benefits and work environments at European companies. The following graph shows the labor market for consultants in the United States.

Demand curve the same, Supply curve shifts left. As a result, the wage rate for U.S. consultants rises , and the level of employment decreases. (As consultants leave the U.S. consulting industry for the European consulting industry, the labor supply of consultants in the United States will decrease, shifting the labor supply curve for consultants to the left. As a result, the wage rate for U.S. consultants rises and the level of employment decreases.)

3. Changes in labor supply Assume that the actuarial and accounting industries employ people with similar skills. Suppose a decrease in the demand for accountants leads to a fall in their wages, while the demand for actuaries remains the same. The following graph shows the labor market for actuaries in the United States. Show the effect of the fall in demand for accountants on the U.S. labor market for actuaries by shifting the labor demand curve, the labor supply curve, or both.

Demand curve the same, supply curve shifts right. As a result, the wage rate for U.S. actuaries falls, and the level of employment increases. (Since the actuarial and accounting industries use workers with similar skills, changes in the wage level in the accounting industry will have an impact on the labor supply in the actuarial industry. A decrease in the demand for accountants leads to lower wages for accountants; thus, the option of working as actuaries becomes more attractive. Therefore, the labor supply of actuaries increases, shifting the labor supply curve for actuaries to the right. As a result, the wage rate for U.S. actuaries falls and the level of employment increases.)

The following graph shows the labor market for truck drivers. Assume that all shipping firms must hire union-licensed truck drivers. The union increases membership fees sharply, leading to a reduction in union membership, and a corresponding reduction in the number of union-licensed truck drivers available for work in the shipping industry.

Demand same, supply shifts left. As a result, the wage rate for truck drivers rises and the level of employment in the shipping industry decreases.

5. Labor unions - Employee power The following graph shows the labor market for textile workers. Assume that all firms in the textile industry must hire union workers. The union representing the textile workers enacts a "Buy Union" advertising campaign. The advertising campaign successfully increases the demand for domestically produced textiles (all of which are made by unionized workers). Shift the demand or supply curve on the following graph to illustrate the impact of the union's actions.

Demand shifts right, Supply curve stays the same. As a result, the wage rate for textile workers rises and the level of employment in the textile industry increases.

The following graph shows the labor market for dockworkers. Assume that all shipping firms must hire union-licensed dockworkers. The union successfully lobbies the government to sharply curtail immigration. As part of the immigration legislation, the union also convinces the government to send all visiting foreign dockworkers back to their home countries, reducing the number of union-licensed dockworkers available for work in the shipping industry.

Demand the same, supply curve shifts left. As a result, the wage rate for dockworkers rises and the level of employment in the shipping industry decreases.

Some people have argued: "Any gains made by unions in the form of higher wages will create lower wages for non-unionized workers." Leaving side whether this is actually the case or not, what is the economic logic behind such an argument?

Higher wages won by unions will reduce employment opportunities in those labor markets over time. Those workers who would have otherwise been employed in those labor markets will have to seek employment elsewhere. Many of these workers will seek and obtain employment in non-unionized labor markets. As more workers seek employment in non-unionized labor markets this increases the supply of labor in these markets. This has a depressing effect on wages paid non-unionized workers.

The fringe (nonmonetary) benefits offered in this market have increased substantially.

Increases supply, decreasing the wage and increasing the equilibrium quantity of labor.

The government has just adopted an "open-door' immigration policy?

Increases supply, decreasing the wage and increasing the equilibrium quantity of labor.

The following graph shows the labor market for plumbers. Assume that all plumbing firms must hire union-licensed plumbers. The union imposes new rules that increase the length of an apprenticeship that a worker must complete before becoming a licensed plumber, reducing the number of licensed plumbers available for work in the plumbing industry. Shift the demand or supply curve on the following graph to illustrate the impact of the union's actions.

Supply curve shifts left, demand curve stays the same. As a result, the wage rate for plumbers rises and the level of employment in the plumbing industry decreases.

6. Excess supply with union wages Consider the housing construction industry. Assume that the industry is perfectly competitive in both input and output markets. Suppose that, through collective bargaining, a labor union negotiates an industry-wide wage for various kinds of labor (electricians, plumbers, and so on). In particular, it succeeds in negotiating a wage increase for carpenters from $9 to $12 per hour. The following graph shows the labor demand of an individual firm.

Supply curve shifts up, Demand remains the same. (An individual firm in this market is a wage taker and therefore pays the prevailing industry wage, regardless of how many workers it employs. The supply curve for labor is thus perfectly horizontal at the prevailing industry wage rate. When this wage rate increases from $9 to $12 per hour, the horizontal supply curve shifts up, from $9 up to $12. The number of workers employed falls from 15 workers to 10 workers.)

The following graph shows the labor market for autoworkers. Assume that all firms in the auto industry must hire union workers. The union representing the autoworkers successfully lobbies the government to impose trade restrictions on imports of cars and trucks from foreign competitors, causing the demand for domestically produced cars and trucks to increase.

Supply same, demand shifts right. As a result, the wage rate for autoworkers rises and the level of employment in the auto industry increases.

human capital

The accumulation of education, training, experience, and the level of good health that enables a worker to enter an occupation and be productive

marginal factor cost (MFC)

The additional total cost resulting from a one-unit increase in the quantity of a factor

derived demand

The demand for labor and other factors of production that depends on the consumer demand for the final goods and services the factors produce

marginal revenue product (MRP)

The increase in a firm's total revenue resulting from hiring an additional unit of labor or other variable resource

Assume a competitive labor market has just become a monopsony. What impact will this have on workers wages and employment opportunities?

This will reduce wages and employment opportunities in this labor market.

What is the principle strategy of an inclusive (industrial) union in order to increase wages of its members?

To get everyone in the industry to join the union. Then they can speak with one voice when using the threat of a strike to limit supply to zero below the wage commanded.

What is the principle strategy of an exclusive (trade) union in order to increase wages of its members?

To restrict the number of workers who could practice that trade, to limit the supply and drive wages up.

Which of the following statements is true? a. Marginal revenue product is the extra revenue generated to the firm from the production of one more unit of output. b. Marginal factor cost is the extra cost to a firm of employing one more unit of a factor of production. c. The demand curve for a perfectly competitive employer is horizontal at the market wage rate. d. The supply curve of labor is upward sloping because of the law of diminishing marginal productivity.

b. Marginal factor cost is the extra cost to a firm of employing one more unit of a factor of production.