EC 201: Quiz #7
*TopHat Question:*Who has the higher real wage? A) Person A B) Person B C) Not enough information to determine D) Both have the same real wage
*A) Person A* 33,000 v 25,000
*TopHat Question:* In a competitive labor market, the equilibrium wage and quantity of labor are determined by: A) Finding where MR = MC B) the intersection of supply and demand C) dividing the MRP and the MRC by price D) multiplying the MRP and MRC by price
*B) the intersection of supply and demand*
*TopHat Question:* Suppose there is a decline in the demand for the product labor is producing. Furthermore, the price of capital, which is complementary to labor, increases. Thus, the demand for labor A) may either increase or decrease. B) will increase. C) will decrease. D) will not change.
*C) will decrease.*
Marginal Resource Cost (MRC)
MRC = ∆Total Resource Cost / (∆𝑄 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒)
Price of a Substitute Decreases
Other replacement resources are less expensive. Switch away from this resource!
Price of a Substitute Increases
Other replacement resources are more expensive. Switch to this resource!
Inclusive Union
•A group formed by merging all workers in a specific industry into a single bargaining group, which aims to increase the wages and benefits of its members. •Inclusive unions can be small, local organizations or large, national organizations.
Market Supply of Labor
•Comes from the workers •Upward sloping •What can change the labor supply curve? ○Population Growth or Decline ○Immigration and Migration
Competitive Labor Markets and Wages
•How are wages determined in competitive markets? •*Learning Objective:* Show how the supply and demand for labor interact to generate an equilibrium wage rate.
Resource Payment Name
•Land = Rent •Labor = Wages •Capital = Interest •Enterpreneurial Ability = Profit/Loss
Higher Productivity
•More use of other resources •Better quality •Technological improvements
Inclusive Unions and Wages
•Not all markets for wages are perfectly competitive. Economists must also sometimes consider the impact of unions. •*Learning Objective:* Explain the impact of an inclusive union on wages and employment.
*TopHat Question:* Which of the following statements is true? A) If productivity increases, then MRP, demand, the wage rate, and the quantity of labor hired all increase. B) If productivity increases, then MRP, demand, the wage rate, and the quantity of labor hired all decrease. C) If productivity decreases, then MRP, demand, the wage rate, and the quantity of labor hired all increase. D) If productivity decreases, then MRP decreases and demand, the wage rate, and the quantity of labor hired all increase.
*A) If productivity increases, then MRP, demand, the wage rate, and the quantity of labor hired all increase.*
*TopHat Question:* Which of the following will NOT shift the demand curve for labor? A) The use of a larger stock of capital with the labor force B) A change in the marginal resource cost C) an increase in the price of the product that labor is helping to produce D) the adoption of a more efficient method of combining labor and capital in the production process
*B) A change in the marginal resource cost*
*TopHat Question:* When comparing a union job to a non-union job, we would expect to see: A) higher wages being paid to the the non-union employee B) lower wages being paid to the union employee C) higher wages being paid to the union employee D) no difference in pay between non-union and union employees
*C) higher wages being paid to the union employee*
*TopHat Question:* Which of the following statements does not describe marginal revenue product? A. It equals marginal product multiplied by price B. It equals the change in total revenue from an additional unit of output produced by an additional unit of resource employed C. It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed
*C. It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed*
*TopHat Question:* Which of the following is not an effect of an inclusive union wage rate set higher than the market equilibrium? A. A surplus of labor occurs. B. A decrease in overall employment in the industry occurs. C. Union employees are worse off. D. Employed workers receive higher wages.
*C. Union employees are worse off.*
*TopHat Question:* What happens to productivity and labor demand based on the previous clips from The Office? A) Productivity increases; labor demand increases B) Productivity increases; labor demand decreases C) Productivity decreases; labor demand increases D) Productivity decreases; labor demand decreases
*D) Productivity decreases; labor demand decreases*
*TopHat Question:* A firm will find it profitable to hire workers up to the point at which their A. MP is equal to their MRP B. marginal resource cost equals their wage rate C. wage rate equals product price D. marginal resource cost is equal to their MRP
*D. marginal resource cost is equal to their MRP*
*TopHat Question:* Purchasing power is equal to: A. nominal wages. B. nominal wages divided by income. C. nominal wages divided by the interest rate. D. nominal wages divided by price
*D. nominal wages divided by price*
Big Questions
1. What is Marginal Revenue Product? What is Marginal Resource Cost? 2. Where does the demand for resources come from? 3. How do we find optimal resource utilization? 4. What is a derived demand? 5. What are the determinants of labor demand?
Big Questions
1.) How are wages determined in the labor market? 2.) How are productivity and prices related to wage rates? 3.) What is the difference between nominal and real wages? How is this related to the cost of living? 4.) How do we find equilibrium in a competitive labor market? 5.) Why are different individuals paid different wages? What are the determinants of wages? 6.) What are compensating differentials? 7.) What is wage discrimination? How is it related to the gender wage gap?
Labor Market-Inclusive Union
A.1 An inclusive union impacts the market very much like a price floor. A.2 At a new Union wage of $15 there is a surplus of labor, since the quantity of labor demanded is less than the quantity of labor supplied. A.3 Those who are employed will make more thanks to the union (union members will be pleased), but fewer people are able to be employed at those wage rates (nonunion members will not be as pleased). A.4 Those who are employed will make more thanks to the union (union members will be pleased), but fewer people are able to be employed at those wage rates (nonunion members will not be as pleased). --At the new price $15 there is a surplus of labor, since the quantity of labor demanded is less than the quantity of labor supplied.
Labor Market Equilibrium
At high wages a surplus of workers exists. This drives the wage rate down until the supply of workers and the demand for workers reach the equilibrium. At low wages a shortage occurs. A shortage forces the wage rate up until the equilibrium wage is reached and the shortage disappears.
Education and Pay
Higher wages represent a compensating differential that rewards additional education! Why go to college? A lot of people get more education in hopes of earning higher pay. Text: Each step up the education ladder produces a significant jump in earnings. Workers who earn advanced degrees have higher marginal products, but they have also invested heavily in education. This works both ways. The higher marginal product of workers who have earned at least a bachelor's degree helps to create high demand for their skills. In addition, the time required to complete advanced degrees limits the supply of workers with high marginal products. Taken together, the firm's demand for workers with high marginal products and the limited supply of such workers causes earnings to escalate.
Changes in Equilibrium
Imagine that demand for medical care increases due to an aging population and that, as a result, the demand for nurses increases and the demand curve shifts from D1 to D2. This creates a shortage of workers. The shortage of workers places upward pressure on wages, which increase from W1 to W2. As wages rise, nursing becomes more attractive; additional people go into nursing and existing nurses decide to work longer hours or postpone retirement. The number of nurses employed rises from Q1 to Q2. Eventually, the wage settles at E2 and the number of workers employed ends up at Q2.
If wages increase, are you willing to work more or less?
Now let's consider the market supply curve for labor. If wages increase, are you willing to work more or less? Obviously, you'd be willing to work more, since you'll now receive more money for your labor. This relationship helps us make sense of the supply curve shape. As wages increase in a market, so to does the quantity of labor supplied.
The price of another resource
Now, let's consider how the price of other resources impacts the demand for a resource. -Substitutes and complements
Price of a Complement Decreases
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Price of a Complement Increases
Other resources used with this resource are more expensive. Switch away from this resource!
Market Demand for Labor
Previously we discussed how MRP = D for an individual. This can be transferred to the entire market by considering the MRP for all individuals in the market. Here we can see an example of the market demand for labor.
Marginal Revenue Product (MRP)
The additional revenue generated as a result of utilizing 1 more unit of a variable resource
The Non-Monetary Determinants of Wages
•*Compensating Differentials* ○Extra income that must be paid to perform a job ○People who do dangerous, stressful, risky, or unpleasant jobs get paid more, ceteris paribus ○"Fun" jobs may get paid less Compensating differentials: If a job's characteristics make it unattractive, the compensating wage differential must be positive. On the other hand, some jobs are highly desirable. Restaurant critics sample a lot of great food, radio DJs spend the day playing their favorite music, and video game testers try beta versions before they are released. In these cases, the compensating differential is negative and the firm will offer lower wages. Video game testing is so desirable that most people who do it are not paid at all.
The Non-Monetary Determinants of Wages
•*Education and human capital* ○Human capital are the skills acquired through education and training ○Generally, more education and human capital lead to higher wages ○Highly educated or skilled individuals may be more difficult to replace and can command a higher wage *Education and human capital:* Investments in human capital accrue to the employee. Workers who have high human capital can shop those skills among competing firms. Engineering, medicine, and other occupations that require extensive education and training pay high wages in part because the human capital needed to do the job is high. On the other hand, ushers, baggers, sales associates, and other low-skill workers earn less because the human capital required to do those jobs is quite low; it is easy to find replacements. Picture: The job is low-skilled, so the worker might not get paid much. However, climbing a tall ladder may be dangerous, so this job might pay more than other low-skill jobs.
Derived Demand
•A type of demand specific to resources that occurs as a result of the demand for the goods and services produced by those resources
Market Supply for Labor
•Comes from the workers •Upward sloping •What can change the labor supply curve? ○Population Growth or Decline ○Immigration and Migration
Labor Market Equilibrium
•Equilibrium in the labor market ○Qd = Qs ; Eq. Wage ○Quantity supplied of labor = how many workers are willing to work at various wages ○Quantity demanded of labor = how many workers firm is willing to hire at various wages Once again, the equilibrium in this market is a *stable* equilibrium. Without any interference, the wage rate will move toward the equilibrium wage due to the forces of supply and demand.
Nominal Versus Real Wages
•For most people, the wage they earn for their labor is their largest revenue source. In economics, we don't really care what the numerical amount of one's wage is—we care what that amount allows us to do and purchase. •*Learning Objective:* Explain nominal and real wages.
Philly v. Detroit Prices
•Gas ○Purchasing Power (real wage) = Nominal wage / price of good ○50,000 / 2.53 = 19,762 gallons of gas (Philly) ○50,000 / 2.44 = 20,491 gallons of gas (Detroit) ○Detroit has higher real wage, because your income can buy you more gas (higher purchasing power)
Entrepreneurial Decisions
•How do you decide how much of each resource to employ? ○Marginal benefit and marginal cost calculations.
Higher Productivity & Demand
•If TP increases, what happens to TR (ceteris paribus)? ○TR increases •If TR increases, what happens to MRP? ○MRP increases •Finally, if MRP increases, what happens to the demand for the resource? ○The demand increases
Derived Demand Process
•If TR increases, what happens to MRP (ceteris paribus)? ○MRP increases •If MRP increase, what happens to demand for the resource? ○Demand increases
Higher Productivity & Demand
•If a good is more productive, MP has increased •If MP goes up for each unit of input, what happens to the TP at each level of input used? ○TP at each unit has also increased
Derived Demand Process
•If demand for a good increases, what happens to price? ○Price increases •If price of a product increases, what happens to the TR? ○Total revenue increases
Wage Determination
•If selling in competitive market: ○MRP = MP x Price (of good) •If market is NOT competitive: ○MRP = change in TR / change in resource quantity •If MRP > wage hire more workers •If MRP < wage hire fewer workers •Changes to MRP can change wage rate
Philly v. Detroit Prices
•In general ○Nominal / Price = Real Wage ○Purchasing Power (real wage) = Nominal wage / price of good ○Cost of living often looks at a basket of goods to determine what average people buy
Marginal Revenue Product
•In this section, we will consider the different resources used within production. One key concept firms can use to calculate the optimal use of different resources is marginal revenue product. •*Learning Objective:* Calculate marginal revenue product
Philly v. Detroit Prices
•Income = $50,000 •In what city is the real wage higher?
Productivity in "The Office"
•Labor Productivity •Offering incentives to workers •Does it make them more or less productive?
The Non-Monetary Determinants of Wages
•Location ○People may be willing to accept lower wages to work in areas that are more desirable to live in ○Areas with a high cost of living will pay higher wages as a compensating differential •Lifestyle ○Wage is not top priority for some individuals ○Workers of nonprofits, religious organizations, caretakers, musicians, artists, etc. Location: Some places are generally considered more desirable to live in than others. So how does location affect wages? Where the climate is more pleasant, all other things being equal, people are willing to accept lower wages, since the non-monetary benefits of being able to enjoy the weather act as a compensating differential. Cost of living: Jobs in metropolitan areas, where the cost of living is significantly higher than other places, pay higher wages as a compensating differential. This helps employees afford a quality of life similar to what they would enjoy if they worked in less expensive areas. Lifestyle: For some people and jobs, the "cause" or passion is more important than wages. Lower pay functions as a compensating differential.
MB of a Resource
•One new Trainer adds five new memberships at a price of $100 each •MB = $500 (MRP) If you hire one new trainer, as a result you will sell five more memberships at a price of $100 per membership. Thus, the marginal revenue product (the additional revenue generated by utilizing one more unit of a variable resource) is $500 in a competitive market. Thus, the marginal benefit of hiring on that additional trainer is $500. You could afford to hire this trainer as long as the MC < $500. How much one can afford to pay for labor is equal to how much value it creates.
Formulas
•Purchasing Power = nominal wage / price •Real Wage = Nominal Wage / Price of output (Purchasing Power) ○Adjusted for inflation •Helps us look at cost of living •Let's take a look at cost of living in two cities: Philadelphia and Detroit •http://www.bankrate.com/calculators/savings/moving-cost-of-living-calculator.aspx
Philly v. Detroit Prices
•Steak ○Purchasing Power (real wage) = Nominal wage / price of good ○50,000 / 12.16= 4,111 steaks (Philly) ○50,000 / 10.81 = 4,625 steaks (Detroit) ○Detroit has higher real wage, because your income can buy you more steaks (higher purchasing power)
Labor Market Equilibrium
•Surplus of labor ○Qs > Qd. This is unemployment! •Shortage of labor ○Qd > Qs. The number of workers firms want to hire is greater than the number willing to work There can be surpluses or shortages of labor, just like there can be surpluses or shortages of goods that consumers purchase. Notice that the same basic definition of shortage and surplus applies here when we compare the Qd and Qs of labor. Labor surpluses put downward pressure on wages. Labor shortages put upward pressure on wages.
Nominal Wage
•The actual number of dollars received in exchange for one's labor
Marginal Resource Cost (MRC)
•The additional cost incurred as a result of using one more unit of a variable resource
3 Determinants for Resource Demand
•The demand for the good or service that resource is used to produce •Productivity •The price of another resource If one of these determinants changes, so too does demand.
MB of a Resource
•The marginal benefit of a resource depends on the marginal product and price ○How many more units can we sell and at what price?
Real Wage
•The quantity of goods and services that can be bought with (the purchasing power of) one's nominal wage
Purchasing Power
•The value of a monetary amount expressed in terms of the goods and services it can buy
Wage Determination
•The wage rate people can garner is a product of two variables: productivity and price. ○If either price or productivity of the worker increases, so too does the MB (MRP). ◘Changes demand, wage, and number of workers hired ○The entrepreneur can afford to pay a MC up to the level of the MB.
The Non-Monetary Determinants of Wages
•Unions ○Group of workers that bargains together for better wages and benefits ○Union workers earn more than non-union workers Location: Some places are generally considered more desirable to live in than others. So how does location affect wages? Where the climate is more pleasant, all other things being equal, people are willing to accept lower wages, since the non-monetary benefits of being able to enjoy the weather act as a compensating differential. Cost of living: Jobs in metropolitan areas, where the cost of living is significantly higher than other places, pay higher wages as a compensating differential. This helps employees afford a quality of life similar to what they would enjoy if they worked in less expensive areas. Lifestyle: For some people and jobs, the "cause" or passion is more important than wages. Lower pay functions as a compensating differential.
Determinants of Demand
•We can also predict how a change in a determinant of resource demand affects the demand for that resource. •*Learning Objective:* Predict how a change in a determinant of resource demand affects the demand for a resource.
Wage Determination - Productivity and Prices
•We can now think more about something most students are probably interested in—wage determination. •*Learning Objective:* Describe how productivity and product prices determine wages.
Marginal Revenue Product (MRP)
𝑀𝑅𝑃 = ∆𝑇𝑅 / (∆𝑄 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒) MRP = the change in total revenue divided by the change in resource quantity Shows demand curve for a resource