Quiz#2 Chapter#2
Fall in the Market Equilibrium Wage Rate
Will be the result from an increased supply or a reduced demand
The labor force is made up of
all members of society who are at least 16 years old and are either employed or unemployed.
Change in Demand of Labor
all other factors (those held constant, ex: demand for the product)
Product demand
amount of labor (their prices=wage rate) and capital (technology)
Desired Employment (DE) is from?
employer's perspective
The firm's labor demand curve in the short run
is the downward sloping segment of the marginal product of labor schedule.
Effects of Unions on the Labor Market
Effects therefore are over the Supply Curve Contracts and Collective bargaining with management (salaries, compensations, working conditions, promotions, layoffs...) all affect supply
Who are the buyers?
Employers. (firms), (demand side)
Supply to a Firm
The firm is in a competitive market Different employers are offering jobs that are more or less the same (ex: secretarial) For a given job, any firm offering wage below others will not attract any employees No firm is foolish to offer above what others are offering either Horizontal supply curve for a firm
What does a 5% and below standard in the US mean?
Tight labor market, plenty of jobs, jobs hard to fill
What type of labor market did we have during WWII?
Tight, plenty of jobs, jobs hard to fill.
Below Equilibrium Wages
Underpaid Workers
FACTS ABOUT UNIONS
Unions raise wages of unionized workers by roughly 20% and benefits, by about 28%. Unions reduce wage inequality more for low- and middle-wage workers than for higher-wage workers The impact of unions on total nonunion wages is almost as large as the impact on total union wages. Unionized workers are more likely than their nonunionized counterparts to receive paid leave, employer-provided health insurance, and employer-provided pension plans. Unions play a pivotal role both in securing legislated labor protections and rights such as safety and health, overtime, and family/medical leave and in enforcing those rights on the job.
What makes up Income?
Wage rate x units of time worked = earnings + employee benefits = total compensation + Unearned income = Income.
Two ways Unions affect the Labor Market
Wages are raised above equilibrium Directly limiting Supply
Unions represent who?
Workers
Supply Side of the Labor Market
Workers' side of the market
Who are the sellers?
Workers. (labor), (supply side)
Which of the following events will cause a surplus of workers?
a wage above the market-clearing wage
What are the four states of the Labor Force?
a) Layoffs (involuntary) -- Quit (voluntary) b) New hires -- Recalls c) Dropouts -- Retirements d) New Entrants - Reentrants
Which of the following events will cause the labor demand curve to shift up and to the right?
an increase in product demand
Positive relationship is:
between wage rate and desired employment,ceteris paribus (other factors such as other wages, satisfaction...)
Labor Market Sub-classification (National)
buyers and sellers search throughout the entire nation
When the price of capital increases, the quantity of ____ demanded will ____ but the effect on ____ is ambiguous.
capital; decrease; labor
Moving from the upper to the lower portion of a straight labor demand curve, the elasticity
changes from elastic to inelastic.
When wages increase, the substitution effect implies that employment will ________ and the scale effect implies that employment will _______
decrease; increase
Opposite Effects of a Fall in Capital Prices
dominant scale effect (Increase in D for Labor). dominant substitution effect (decrease in demand for Labor).
What is purchasing power?
goods and services wages can buy (real Wages).
During the twentieth century, the unemployment rate in the United States
has become more stable
The introduction of new forms of capital generally
increases the own-wage elasticity of labor demand.
What are the Three Markets in which a firm works:
labor Capital (inputs purchased) Product markets (output sold)
When the price of labor falls, the quantity of ____ demanded wil ____ but the effect on ____ is ambiguous.
labor; increase; capital
Low capital price =
low cost of production = increased production= higher level of employment .
An individual's reservation wage
may change over time depending on a number of factors, like changes in the individual's overall wealth, changes in marital status or living arrangements, length of unemployment, and health and disability issues. An individual might also set a higher reservation wage when considering an offer of an unpleasant or undesirable job than when considering a type of job the individual likes (see compensating differential). Just as a worker has an incentive to search for a high wage when looking for a job, a consumer has an incentive to search for a low price when purchasing a good. The highest price the consumer is willing to pay for a particular product is that consumer's reservation price.
What is nominal wage rate?
money paid per working hour in current dollars.
The minimum wage is a relatively blunt instrument with which to reduce poverty because
most workers whose wages are affected by minimum wage increases do not live in poor families.
What is real wages ?
nominal wages divided by some measure of price (CPI for example =a measure of inflation)
Labor Market Sub-classification (Local)
only search locally
Other things equal, the own-wage elasticity of demand for a category of labor is higher when
other factors of production can be easily substituted for the category of labor.
Shift rightward of the D-labor curve for a dominant
scale effect
What are the two effects of Negative relationship?
scale effect substitution effect
Labor Market Sub-classification (External)
search outside the firm (avoid inbreeding)
Firm (Demand): If wages go up which makes labor more expensive; how could we reduce the cost of labor without lowering wages.
switch to other inputs and reduced labor and increase other inputs. W↑→↓↓→↑
Outcome of labor market determined by
terms of employment levels of employment
If the price of a product decrease due to a decrease in demand, then
the labor demand curve shifts to the left
If two inputs are substitutes in production and an increase in the price of one input shifts the demand curve for the other input to the left then
the scale effect is greater than the substitution effect and the two are gross complements.
If employers are paid a subsidy of $.75 per hour for hiring teenage workers, then
the teenagers' wage rate will usually increase by less than $.75 per hour.
If more people enter the labor market for architects, then
the wage rate will decrease and the employment level will increase.
If two inputs are complements in production
then the inputs are gross complements
If a union negotiates an industry-wide agreement to set wages above the equilibrium level,
there will be a surplus of labor in the industry.
How may IRW be constructed?
via INW
Empirical estimates of cross-wage elasticities show that
well-educated labor is more likely to be complementary with capital than is unskilled labor.
Directly Limiting Supply
A vertical supply curve (wage increase or decrease will not affect the supply of labor) Drives wages up No surplus of workers in this case and therefore no disappointed people at the Union's office
How is employment distributed?
Agricultural employment has declined. Employment in service industries has expanded. Goods-producing jobs have expanded proportionately. Government employment has quadrupled its share of total employment.
Labor Market characteristics?
Allocates workers to jobs, coordinates employment decisions, and made up of buyers (firms) and sellers (individuals) of labor that meet.
What is the real value of a dollar ?
$1/price level
According to Table 2.2, real earnings in the Widget Industry in 1986 were Table 2.2 YEAR EARNINGS CPI 1966 $8,000 60 1976 $15,000 100 1986 $22,000 178 1996 $30,000 205
$12,640
What is substitution effect?
(high wages = capital substituted for labor).
What is scale effect?
(lower employment levels because, high wages = high cost = higher product price = less buying = lower output = less employment).
Labor Market Sub-classification (Internal)
- strict practices such as filling key positions only from within the firm
If the own-wage elasticity of demand for professors is -0.5, then an increase in the wage of professors from $45,000 to $55,000 will cause the quantity demanded to fall by
10%
Given the data in Table 2.1, the unemployment rate is Table 2.1 Employment: 130 million Unemployment 10 million Retired: 35 million Under Age 16: 60 million
7.1%
How do you determine the Unemployment Rate?
= U/LF
What is wage rate?
= price of labor per working hour
What are the secondary sectors?
Manufacturing
Change in Quantity Demanded of Labor is;
Movement along the D-curve. Wage (W) is the factor.
Shift in the D-curve
New Labor Market Equilibrium After Demand Shifts Right:
Shift in the S-curve
New Labor Market Equilibrium After Supply Shifts Left
Shift in both Demand and Supply
New Labor Market Equilibrium After Supply and Demand Shift Left
Change in Quantity of Labor Supplied
Only a movement along the supply curve. The wage rate (W) is the factor.
Above Equilibrium Wages
Overpaid Workers
It has been said that teaching assistants to professors are underpaid. Which of the following would be evidence (if true) that they are underpaid?
Professors have a hard time finding qualified teaching assistants.
Negative Relationship Wage rate (price) vs. labor hours (Quantity demanded)
Provided capital and technology are held constant (Ceteris paribus)
Economic Rent
Reservation wage:The wage below which the worker will refuse the job (quit) Reservation wage is different from one person to the next There is a difference between the reservation wage and the actual higher wage paid by the employer
Supply Shifting Left results in
Results in an increase in wage rate
What are the tertiary sectors?
Services
Shift leftward of the D-labor curve for a dominant
Substitution effect
If Wages are raised above equilibrium?
Surplus of supply of labor results
What happens to Labor demand and Supply, if Salaries of accountants decrease and the number of accountants employed decrease.
The Demand for labor curve shifts to the left.
What happens to Labor demand and Supply, if Salaries of economists increase and the number of economists employed increase.
The Demand for labor curve shifts to the right.
What happens to Labor demand and Supply: The wage rate of construction workers skrockets but the number of construction workers employed remains constant.
The Supply of labor curve shifts to the left and the Demand for labor curve shifts to the right.
How do you find the INW?
ANW/ ANWbase x 100
What are the primary sectors?
Agriculture
What does the abbreviation ANW stand for?
Average Nominal Wage
What does the abbreviation ANWbase stand for?
Average Nominal Wage base year
Demand and Supply at the "Market" and "Firm" level
The wage rate is determined at the market level The firm is a wage rate (price) taker The "going wage" = firm is a wage taker Shows that the firm is operating in a perfectly competitive labor market structure
What is a Labor Demand Schedule ?
List of Desired Employment (DE) and Wage Rate (WR).
What does a 7% and above standard in the US mean?
Loose labor market, workers are abundant
What type of labor market did we have during the Great depression?
Loose, workers are abundant.
Any change in a sector or in the labor market involves
Change in recruiting and management strategies - Investment in human capital (training)- Revisit of compensation structure
What does the abbreviation CPI stand for?
Consumer Price Index
Market Clearing or Market Equilibrium
Demand = Supply No surplus, no shortage Employers can fill the number of openings Employees who want a job at that wage rate in this market can find one
Shift in Demand for Labor Due to Increase in Product Demand
Demand curve moves forward or to the right.
Labor Supply to the Military
Different Preferences Imply Different "Rents
What is the Labor Force?
Employed (over 16 years old) + actively seeking work unemployed
The Demand side of the Market is?
Employers side (Goods and services are produced).
How do you find the IRW?
INW/CPI x 100
What does the abbreviation INW stand for?
Index of Nominal Wage
What does the abbreviation IRW stand for?
Index of Real Wage
What is a labor market?
It is a market the has buyers and sellers.
How the you determine the Labor Force?
LF=(Labor Force)=E(Employed)+ U(Unemployed)
What is the formula for LF participation?
LFP =LF / P
How do you determine the LF participation?
Labor force divided by Population over 16 years old.