labor market

demand for labor as

the marginal product of labor times the value of that output to the firm = MPL x P = Value of the Marginal Product of Labor

DEMAND for labor involves

FIRMS (employers)

Value of the Marginal Product of Labor

For firms operating in a competitive output market, the value of additional output sold is the price the firms receive for the output. Since MPL declines with additional labor employed, while that marginal product is worth the market price, the value of the marginal product declines as employment increases.

Equilibrium Level of Employment for Firms with Market Power

For firms with market power in their output market, they choose the number of workers, L2, where the going market wage equals the firm's marginal revenue product. Note that since marginal revenue is less than price, the demand for labor for a firm which has market power in its output market is less than the demand for labor (L1) for a perfectly competitive firm. As a result, employment will be lower in an imperfectly competitive industry than in a perfectly competitive industry.

HIGHER WAGE causes

HIGHER QUANTITY of labor supplied (all over equal)

Monopsony

Market with only one buyer, However, because they face the market supply curve for labor, if they want to hire more workers, they must raise the wage they pay

Supply of labor involves

WORKERS (households)

collective bargaining.

a labor union operates like a monopoly in a labor market. We sometimes call negotiations between unions and firms

What is the labor market?

The labor market is the term that economists use for all the different markets for labor. There is no single labor market. Rather, there is a different market for every different type of labor. Labor differs by type of work (e.g. retail sales vs. scientist), skill level (entry level or more experienced), and location (the market for administrative assistants is probably more local or regional than the market for university presidents). While each labor market is different, they all tend to operate in similar ways. For example, when wages go up in one labor market, they tend to go up in others too. When economists talk about the labor market, they are describing these similarities.

Factor = input =

labor,capital,machines,raw materials, pharmaceutical ingredients

Workers "reservation wage"?

Lowest wage that a worker would be willing to get paid and still work in a particular labor markert. Reservation wages var across the collective group of potential workers.

The Demand for Labor in Imperfectly Competitive Output Markets =

MPL x MR = Marginal Revenue Product

Labor Markets

"price of labor" = wage (or sometimes salary) =payment PER UNIT of labor "quantity of labor" measured either in hours worked or # of workers working

Marginal Product of Labor

Because of fixed capital, the marginal product of labor declines as the employer hires additional workers.

first rule of labor markets.

If a firm wants to maximize profits, it will never pay more (in terms of wages and benefits) for a worker than the value of his or her marginal productivity to the firm.

Equilibrium Employment for Firms in a Competitive Labor Market

In a perfectly competitive labor market, firms can hire all the labor they want at the going market wage. Therefore, they hire workers up to the point L1 where the going market wage equals the value of the marginal product of labor.

What determines the demand for labor for a firm operating in a perfectly competitive output market?

In a perfectly competitive labor market, firms can hire all the labor they want at the going market wage. Therefore, they hire workers up to the point L1 where the going market wage equals the value of the marginal product of labor. An increase in demand for the firm's product drives up the product's price, which increases the firm's demand for labor. This means that the actual equilibrium wage will be set in the market, and the supply of labour to the individual firm is perfectly elastic at the market rate

LOWER WAGE causes

LOWER QUANTITY of labor supplied (all else equal)

What determines the demand for labor for a firm with market power in the output market?

The demand for labor curve is a downward sloping function of the wage rate. The market demand for labor is the horizontal sum of all firms' demands for labor. The supply for labor curve is an upward sloping function of the wage rate. This is because if wages for a particular type of labor increase in a particular labor market, people with appropriate skills may change jobs, and vacancies will attract people from outside the geographic area. The market supply for labor is the horizontal summation of all individuals' supplies of labor.

What is a perfectly competitive labor market?

as one where firms can hire all the labor they wish at the going market wage. Graphically, this means that firms face a horizontal supply curve for labor

Perfectly Competitive Labor Market

as one where firms can hire all the labor they wish at the going market wage. Think about secretaries in a large city. Employers who need secretaries can probably hire as many as they need if they pay the going wage rate. -Graphically, this means that firms face a horizontal supply curve for labor -Given the market wage, profit maximizing firms hire workers up to the point where: Wmkt = VMPL

Marginal Product

as the additional output the firm produces by adding one more worker hour to the production process