Chapter 13: Labor Markets
Collective bargaining:
Negotiations between representatives of labor unions and management to determine pay and acceptable working conditions.
What does it mean if the marginal product of labor is declining?
The firm is producing in the short run and has a fixed capital input. The marginal revenue product of labor is declining as well. Because the MRP = P x MP, a decline in marginal product will result in a declining marginal revenue product as well.
craft union
an organization of skilled specialists in a particular craft or trade _______ a union organized to represent a single occupation, whose members come from a variety of industries.
As with any economic decision, you decide to go to college if you perceive the
benefits to be greater than the costs.
How is the market demand for labor derived?
by the summing up of the quantity of labor demanded by all firms, at every given wage.
Because the firm will hire workers using the rule MRP = wage, the demand curve for labor is determined by what?
completely by the marginal revenue product of labor.
If the firm can hire fractional units of labor, then the firm will do what? Equation for this?
continue to hire until the Marginal Revenue Product equals the wage. MRP = Wage
If a firm is maximizing profit, the firm will do what? Equation for this?
it will hire the largest number of workers for which the Marginal Revenue Product is greater than the wage. MRP ≥ Wage
Costs
negative things or behaviors that we perceive to be not beneficial to our self-interest College will cause you to forego earning income and pay tuition.
Labor unions can raise wages by _________
restricting labor supply
what will skilled workers not accept
shortage doesnt even apply here labor supply won't accept anything less than the labor market equilibrium (so they are always ABOVE minimum wage
Labor market:
the market in which individuals supply their labor time to firms in exchange for salaries and wages.
Discrimination will lead to __________ profits made by the firm. If the firm hires ________ of the workers it previously discriminated against, its profits will rise.
suboptimal, more
On-the-job training:
the building of skills of a firm's employees while they work for the firm.
nominal wage
wage measured by dollars rather than purchasing power the actual dollar value
Price of leisure:
wage; the opportunity cost of not working. ex.) painting the house for parents instead of working at Walmart
What should you do if your marginal revenue product keeps lowering?
when it gets lower and lower, you should wait to hire more employees until you get more efficient/productive with making chairs
In economics, the decision to supply labor is analyzed as a decision between _______ and _______.
working, leisure
MP of labor equation =
((Change in Quantity of product or service) / (Change in Labor/workers))
MRP of labor equation =
((Change in Total Revenue) / (Change in Labor)) OR: P x MP
Real Wage Equation
((NOMINAL WAGE) / CPI)) nominal wage/price level
Example: You go from making 0 chairs with 0 workers to making 5 chairs with 1 worker. What is the marginal product of labor?
(0 - 5) / (0 - 1) = 5 MPL
You go from making 5 chairs with 1 worker to making 14 chairs with 2 workers. What is the marginal product of labor?
(5-14) / (1-2) = 9 MPL
Examples of Market Power
(Ex. Microsoft, Apple, Amazon)
CPI
(consumer price index) a measure of the overall cost of the goods and services bought by a typical consumer
what will unskilled workers accept
(they are usually AT minimum wage) minimum wage so there is unemployment
U.S. Labor Market Trends
1.) Some regions are more expensive to live in than others. They have higher pay because minimum wage is higher to live there. 2.) Workers with higher skills are paid more than unskilled workers, and the gap is increasing. 3.) College graduates earn more than high school graduates, and the gap is increasing. 4.) Women are paid less than men, although the gap has become narrowed over the years. * $0.80 for women to a man's $1 * If a firm offered $10 per hour to do a job * Most men tried to negotiate about that amount * Women usually just accept the amount without any question
The effects of a wage change can be broken down into two effects:
1.) The income effect 2.) The substitution effect
Imagine you have a company that makes 17 chairs with 1 worker. You hire another worker and make 31 chairs. What is the Marginal product of labor? The chairs each cost $100. What is the Marginal Revenue Product? Solve both ways.
14 MPL ((Change in Total Revenue) / (Change in Labor)) (3100 - 1700) / (2 - 1) = $1400!! P x MP So 100 x 14 = $1400!!
Labor Union:
A coalition of workers organized to improve the wages and working conditions of the group's members.
Compensating wage differential:
A difference in the wage rate - negative or positive - that reflects the attractiveness of a job's working conditions _______ a difference in wage for people with similar skills based on some characteristics of the job, such as riskiness, discomfort, or convenience of time schedule. Compensated for the job (paid a little more for jobs not widely accepted) ex.) collecting trash, cleaning high windows, scaffolding, construction painters on sides of bridges
Competitive Labor Market:
A market in which a large number of firms demand a particular type of labor supplied by a large number of nonunion workers
Effects of Minimum Wage Laws
A minimum wage rate set higher than the market equilibrium will create unemployment. A minimum wage set lower than the market equilibrium will have no effect. A minimum wage is more likely to cause unemployment in the market for unskilled workers.
maximizing profit
A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.
If the nominal wage for a truck driver increased from $10 to $20 when the CPI increased from 1 to 1.285, then the real wage increased from...
ANSWERS ($10/1cpi) = $10 to (two diff time periods) ($20/1.285cpi) = $15.56 (increased wage by 50% bc the buying power/inflation rose) FINAL ANSWER: So it increased by $5.56
What kind of demand is labor demand?
Derived Demand
Race Pay Gap
In the 1950s, blacks earned 60 percent of the wages of whites. The gap has narrowed to 70 percent since then. (depends on the region)
examples of deferred wage contract
Doctors start off with an internship, before they specialize in something, they do not make the big money until they are into their profession for several years Same with attorneys. You start by doing as many cases as you can and charge by the hour for advice and counsel. You don't make the big money until you become a partner or a person who helped establish the firm. Lawyers and accountants, who are paid a lot more once they become partners Generous retirement benefits
Examples of piece-rate systems
Examples: Lettuce growers pay harvesters and packers per box of lettuce that they pack. Cotton pickers are paid per 100 pounds of cotton that they pick.
Examples of labor unions
Examples: United Auto Workers (UAW) United Farm Workers (UFW) American Federation of Labor (AFL) Congress of Industrial Organizations (CIO)
The Gender Pay Gap
Fifty years ago, women earned about 50 percent of the wages of men. Today, women earn 80 percent of the wages of men.
so wages and quantity of labor demanded have what kind of relationship?
INVERSE/NEGATIVE the higher the wage, the less quantity of labor is demanded the lower the wage, the more quantity of labor is demanded
Firms follow a simple rule when hiring a worker:
If employing another worker increases the firm's profits, then the firm will employ that worker. If employing another worker decreases the firm's profits, then the firm will not employ that worker.
Example of Bilateral Monopoly
Pharmaceutical companies have their own research and development labs. They employ Ph.D.s and other experienced researchers in those labs. While working at the company, those scientists develop expertise in a particular therapeutic category -- such as cardiovascular or mental health - and the company itself generates patents and other key intellectual property in that area. Often companies achieve a competency in research in a therapeutic category that other companies do not have. As such, a scientist with skills in that category has limited alternative employment opportunities in which to use those skills. Similarly, the company itself cannot easily replace a scientist for their particular skills as they are not available elsewhere. CODEPENDENT (one seller, one buyer)
Example of Monopsony
Tesco (buyer) demands supplier price cuts in discount battle Haribo (employer) stocks run low at Tesco over price cut row Tecso tries to exert monopsy power over Haribo (and buy it all/be the single buyer)
Marginal Revenue Product of Labor:
The change in total revenue due to a one-unit increase in the labor input Measure of what money is being pulled in & if you should hire more
Market for Union Workers when they reduce supply of labor
The union reduces the supply of workers which raises the wage for workers As a result of a rising wage, fewer people are being hired (reduced employment in this market) Author is saying that people in Union workers have less employment offers
The real wage growth between 1993 and 1995 is bad/low In the negative numbers Why did this happen?
Unemployment was high because during this period, we had a recession Everything slows down and people get laid off
Market for Nonunion Workers when unions reduce supply of labor
Union workers come to nonunion jobs which tend to pay lower wages Supply of workers increase which lowers the wage The lower wage causes labor demand to increase Author says then people from the Union go to nonunion work and pay less So the author is basically saying that Union workers always lose ? But Mr. D says standard of living would be worse if Unions did not exist
Other explanations for why union workers have higher wages:
Unions can reduce the exit of workers when a dispute with management occurs. This is beneficial when exit from the firm is costly. The "collective voice" role of unions provides workers with a means through which they can improve productivity. Unions of AFL-CIO
There is a strong correlation between labor productivity and the real wage. What is it? What does this observation suggest?
When the growth rate of labor productivity is low, real wages drop or rise slowly. When the growth rate of labor productivity is high, real wages rise more rapidly. This observation suggests that the growth rate of labor productivity is a major explanation for wage changes over time.
Leisure
a generic term used by economists for nonwork activities; it may include activities such as painting the house, going bowling, or hiking. something ur not getting paid for
National Labor Relations Act (1935):
a law that gives workers the right to organize into unions and bargain with employers.
Market power (sometimes called monopoly power)
a market failure that occurs when one or more of the participants has the ability to influence the price or other outcomes in some general or specialized market.
Bilateral Monopoly
a market in which there is a single seller (monopoly) and a single buyer (monopsony) There is a kind of "professional co-dependency" between the company and the worker
Human capital:
a person's accumulated knowledge and skills. ex.) EDUCATION, SKILLS, TALENTS, EXPERIENCE
Monopsony
a situation in which there is a single buyer of a particular good or service in a given market. Market with only one buyer SO A MONOPSY WHEN A COMPANY WITH MARKET POWER (buyer) BUYS A LOT FROM THE EMPLOYER (employer) TO SELL IT (THEY TRY TO BECOME THE SINGLE-BUYER OF THAT PRODUCT) Buy it all so you don't have to compete
Piece-rate system:
a system in which workers are paid a specific amount per unit of output that they produce.
Deferred wage contract:
an agreement between a worker and an employer under which the worker is paid less than the marginal revenue product when young, and subsequently paid more than the marginal revenue product when old.
Industrial union:
an association of all workers in the same industry, regardless of the job each worker performs. _______ a union organized within an industry, whose members come from a variety of occupations.
If the firm has market power, the marginal revenue __________________. Thus, the marginal revenue product of labor will ________________ than in a competitive firm.
drops faster than the price fall faster in a firm with market power
Discrimination causes wages to
fall
Minimum wage laws:
government legislation requiring that firms pay a worker a wage no lower than the legislated minimum. The minimum wage is effectively a price floor, where paying a wage lower than the floor is not legal.
A lower wage will _________ the quantity of labor demanded.
increase
By restricting the supply of workers in the union, the supply of non-union workers _________, and the equilibrium wages ______ for non-union workers.
increase, drop
Fractional units of labor
like seasonal labor/temporary labor hire more during christmas bc more people are buying stuff
If a firm has market power in the product market, then the price of the good is ____________, so what equation no longer holds.
no longer constant P × MP = wage aka the MRP = wage thing / profit maximizing rule ________ MRP = wage is still the profit-maximizing rule. We just need to calculate the marginal revenue product of labor in a slightly different way. Equilibrium occurs (for firms with market power) where marginal revenue product (now, marginal product multiplied by marginal revenue) equals the wage
Discrimination:
not hiring workers even though their marginal product is as high as or exceeds the marginal product of other workers; alternatively, paying a lower wage to a worker when the worker's marginal product of labor is equal to or greater than other workers' marginal product of labor. Discrimination may be based on race, gender, or other observable differences of workers.
In competitive markets, lowering or raising prices above or below the marginal cost of production would drive customers to
other firms. Thus, market power is characterized by a lack of competition.
Labor productivity:
output per hour of work.
Fringe benefits:
payments to employees other than wages or salary compensation that a worker receives, excluding direct money payments for time worked, but including insurance, retirement benefits, vacation time, and sick leave.
Benefits:
positives out of something College will improve your skills and increase your probability of landing a higher-paying job (higher pay).
MRP = ((change in Total Revenue) / (Change in Labor)) Market power is when a firm has the ability to...
raise or lower prices above or below the marginal cost of production.
A higher wage will _________ the quantity of labor demanded.
reduce
Income effect:
the change in consumption that results when a price increase causes real income to decline _______________ A price change will increase if the price decreases your ability to purchase all goods by changing your real income. A price change will decrease if the price increases your ability to purchase all goods by changing your real income. (inverse/neg relationship) _____ basically, the point where you begin to make more money even thought you are working less and less wage increase, labor decrease
Marginal product of labor:
the change in production due to a one-unit increase in the labor input. Measure of productivity
How is the LABOR MARKET graph different from supply-demand graphs?
the demand curve represents firms that WANT workers ex.) restaurants the supply curve is who is available to work ex.) a chef, waiter, etc. the equilibrium is the MARKET WAGE _____________ it is reversed from the supply-demand thing bc that one is aimed at consumers: - consumers demand a product - firms supply the product labor market graph: - firms demand workers/people - workers/people supply the firms __________ SIMPLIFIED VERSION Consumer Market Demand ← people Supply ← firms Labor Market (swaps from consumer market) Demand ← firms Supply ← people
Derived demand: and explain an example of if ur parents got you a gift to go to the bahamas in terms of derived demand
the demand for an input derived from the demand for the product produced with that input. ex.) parents surprise you in honor of graduating, there are a couple plane tickets and a thing to go on a cruise in the bahamas Take the activity of vacationing (input) Prior to getting the gift, you did not have a demand to go on a plane or cruise ship Now you have to take a taxi or plane to get there These demands would not exist if you did not get that "INPUT" of your parents giving you a gift
National Labor Relations Board:
the government agency that ensures firms do not illegally prevent workers from organizing and that monitors the election of union officials.
Substitution effect:
the higher the hourly wage, the more attractive work will seem relative to the other activities. As a result, the quantity of work supplied will increase when the wage increases. (pos relationship) _____ basically, you work more because you are getting paid more wage increase labor increase
comparable worth
the issue raised when women who hold traditionally female jobs are paid less than men for working at jobs requiring comparable skill
Wage:
the price of labor defined over period of time; expressed as currency per unit of labor worked; also known as the nominal wage. (hourly employee, incentives to work longer)
Salary:
the price of labor over an extended period of time (salary agreement to get paid a certain amount in a certain amount of time) a fixed regular payment, typically paid on a monthly or biweekly basis but often expressed as an annual sum, made by an employer to an employee, especially a professional or white-collar worker.
Labor demand:
the relationship between the quantity of labor demanded by firms and the wage.
Labor supply:
the relationship between the quantity of labor supplied by individuals and the wage. # of people who are willing to work
Backward-Bending Labor Supply Curve
the situation in which the income effect outweighs the substitution effect of an increase in the wage at higher levels of income, causing the labor supply curve to bend back and take on a negative slope only for people who want to balance their work life with leisure (not workaholics) 1.) substitution effect (work more, more wage) 2.) income and substitution effects balance out 3.) income effect (work less, more wage)
Labor market equilibrium:
the situation in which the quantity of labor supplied equals the quantity of labor demanded; the point of intersection of the labor supply and the labor demand curve.
Real wage:
the wage or price of labor adjusted for inflation. In contrast, the nominal wage has not been adjusted for inflation. the wage rate divided by the price level
real wage
the wage rate divided by the price level (FACTORING IN INFLATION!)