Econ 102: Labor Markets

What is the opportunity cost?

The opportunity cost of leisure is wage. -The higher the wage we could earn working, the higher the opportunity cost of leisure.

A point at which the level of profits or benefits gained is less than the amount of money or energy invested. -The marginal product of labor declines as a firm hires more workers.

Law of Diminishing Returns

What is the marginal revenue product of labor and the demand for Labor?

The marginal revenue product of labor equals the marginal product of labor multiplied by the price of the good. -The marginal revenue product curve slopes downward because diminishing returns cause the marginal product of labor to decline as the firm hires more workers. -A firm maximizes profit by hiring workers up to the point where the wage equals the marginal revenue product of labor. -The marginal revenue product of labor curve is the firm's demand curve for labor because it tells the firm the profit-maximizing quantity of workers to hire at each wage. (Look at chart in binder)

What is the marginal productivity theory of income distribution?

The theory that the distribution of income is determined by the marginal productivity of the factors of production that individuals own.

What are three important aspects of labor markets?

-Compensating Differentials -Discrimination -Labor Unions

Why may firms still choose a salary system choose a salary system istead of commission based?

-Difficulty Measuring Output-Often firms have difficulty attributing output to any particular worker. -Concerns About Quality-If workers are paid on the basis of the number of units produced, they may become less concerned about quality. -Worker Dislike of Risk-Piece-rate or commission systems of compensation increase the risk to workers because sometimes output declines for reasons not connected to the worker's effort.

What are compensating deifferentials?

A difference in wages that compensates workers for unpleasant aspects of a job. -If working in a dynamite factory requires the same degree of training and education as working in a semiconductor factory but is much more dangerous, a larger number of workers will want to work making semiconductors rather than dynamite. As a consequence, the wages of dynamite workers will be higher than the wages of semiconductor workers. -One surprising implication of compensating differentials is that laws protecting the health and safety of workers may not make workers better off.

How does income effect affect the market in terms of labor supplied?

An increase in the wage will clearly increase a consumer's purchasing power for any given number of hours worked. -For a normal good, the income effect leads to a larger quantity demanded.

How does leisure affect income effect?

Because leisure is a normal good, the income effect of a wage increase will cause a worker to devote less time to working and more time to leisure. -So, the substitution effect of a wage increase causes a worker to supply a larger quantity of labor, but the income effect causes a worker to supply a smaller quantity of labor. -Whether a worker supplies more or less labor following a wage increase depends on whether the substitution effect is larger than the income effect. -If the worker supplies a larger quantity of labor as the wage rises—and the income effect being larger than the substitution effect at high levels of wages—so the worker supplies a smaller quantity of labor as the wage rises.

What does a change in the price of a product do to demand curve?

A higher price increases the marginal revenue product and shifts the labor demand curve to the right. A lower price shifts the labor demand curve to the left.

What is the labor supply curve?

As the wage increases, the opportunity cost of leisure increases, causing individuals to supply a greater quantity of labor. Therefore, the labor supply curve is upward sloping. -Although we normally expect the labor supply curve for an individual to be upward sloping, it is possible that at very high wage levels, the labor supply curve of an individual might be backward bending, so that higher wages actually result in a smaller quantity of labor supplied, once the income effect becomes greater than the substitution effect.

Demand for a factor of production depends on the demand for the good the factor produces.

Derived Demand

How do we find the market demand curve for labor?

We add up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers.

How does a company maximize its profits when hiring workers?

-If the MRP is greater than the wage, the company should hire more workers. -If the MRP less than the wage, the company should fore workers. -If the MRP is equal to wage, then the company is maximizing its profit. (The marginal revenue product of labor curve is the demand curve for labor).

What are the most important variables that cause the labor demand curve to shift?

-Increase in Human Capital -Changes in Tecnology -Changes in the Price of the Product -Changes in the Quantity of other Inputs -Changes in the Number of Firms in the Market

What variables cause the market supply curve to shift?

-Increasing Population -Changing Demographics (social change, aging popluation, etc.) -Changing Alternatives (Employers firing workers/workers leaving for another market or feild).

What are differing preferences for jobs?

-Women represent 90 percent or more of the people employed in some relatively low-paying jobs, such as preschool teachers, dental assistants, and childcare workers. -Men represent more than 90 percent of the people employed in some relatively high-paying jobs, such as airline pilots, engineering managers, and electricians.

What are the factors that affect the market demand for labor?

An increase or a decrease in the wage causes an increase or a decrease in the quantity of labor demanded, which we show by a movement along the demand curve. -If any variable other than the wage changes, the result is an increase or a decrease in the demand for labor, which we show by a shift of the demand curve.

The price of a factor of production that is in fixed supply.

Economic Rent

What do changes in the number of firms in the market affect the demand curve?

If new firms enter the market, the labor demand curve will shift to the right. If firms exit the market, the demand for labor will shift to the left.

How would a monopsony act like a monopoly?

It would restrict the quantity of the factor demanded to force down the price of the factor and increase profit. -A firm with a monopsony in a labor market will hire fewer workers and pay lower wages than would be the case in a competitive market. Because fewer workers are hired than would be hired in a competitive market, monopsony results in a deadweight loss. -Monopoly and monopsony have similar effects on the economy: In both cases, a firm's market power results in a lower equilibrium quantity, a deadweight loss, and a reduction in economic efficiency compared with a competitive market.

The additional output a firm produces as a result of hiring one more worker.

Marginal Product of Labor

The situation in which a firm is sole buyer of a factor of production.

Monopsony

How is economic discrimination still practiced if excluding groups from certain jobs or paying one group more than another has been illegal in the United States since the passage of the Equal Pay Act of 1963 and the Civil Rights Act of 1964?

Most economists believe that only part of the gap between the wages of white males and the wages of other groups is due to discrimination. Instead, some of the gap is explained by three main factors such as differences in education, differences in experience, differing preferences for jobs. -It is difficult to precisely measure differences in productivity or in worker preferences. As a result, we can't know exactly the extent of economic discrimination in the United States today.

In a loophole effect, how will safety legislation make wokers better off?

Nobel Laureate George Akerlof of Georgetown University and William Dickens of the Brookings Institution have argued that the psychological principle known as cognitive dissonance might cause workers to underestimate the true risk of their jobs. -According to this principle, people prefer to think of themselves as intelligent and rational and tend to reject evidence that seems to contradict this image. Because working in a very hazardous job may seem irrational, workers in such jobs may refuse to believe that the jobs really are hazardous. -If Akerlof and Dickens are correct, the wages of these workers will not be high enough to compensate them fully for the risk they have assumed.

What is capital?

Physical capital includes machines, equipment, and buildings. Firms sometimes buy capital, but we will focus on situations in which firms rent capital.

An entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes.

Price Maker

A company that must accept the prevailing prices in the market of its products, its own transactions being unable to affect the market price.

Price Taker

Why are there wage disperities?

Some professions produce a high margin revenue product than others, especially when the labor demanded is high and the labor supplied is low.

What are personal economics?

The application of economic analysis to human resources issues. -Personnel economics analyzes the link between differences among jobs and differences in the way workers are paid. -One issue personnel economics addresses is when workers should receive straight-time pay—a certain wage per hour or salary per week or month—and when they should receive commission or piece-rate pay—a wage based on how much output they produce.

What is the marginal revenue product of natural resources?

The change in a firm's revenue as a result of employing one more unit of natural resources. -The marginal revenue product of natural resources curve is also the demand curve for natural resources. -The quantity of a natural resource that will be supplied is fixed and will not change as the price changes. -Although the total quantity of oil deposits in the world is fixed, an increase in the price of oil will result in an increase in the quantity of oil supplied during a particular period.

What is the marginal revenue product of capital?

The change in the firm's revenue as a result of employing one more unit of capital. -When a firm is considering increasing its capital by, for example, employing another machine, the value it receives equals the increase in the firm's revenue from selling the additional output it can produce by employing the machine. -The marginal revenue product of capital curve is the demand curve for capital. -Firms producing capital goods face increasing marginal costs, so the supply curve of capital goods is upward sloping. -The rental price of capital is determined by demand and supply in the market for capital. In equilibrium, the rental price of capital is equal to the marginal revenue product of capital.

Can we conclude from this analysis that competition in markets will eliminate all economic discrimination?

Unfortunately, this optimistic conclusion is not completely accurate. -We know that until the Civil Rights Act of 1964 was passed, some firms in the United States refused to hire black workers. -Even though this practice had persisted for decades, nondiscriminating competitors did not drive these firms out of business due to worker discrimination, customer discrimination, and negative feedback loops (if discrimination makes it difficult for a member of a group to find employment in a particular occupation, his or her incentive to be trained to enter that occupation is reduced). -It may take the market a very long time to eliminate discrimination entirely.

Why isn't value considered in the determination of wages?

Wages—like prices—do not depend on total value but on marginal value. -Skill/talent also plays a big part in the determination of wage. -Differences in marginal revenue products are the most important factor in explaining differences in wages

How can we determine the market supply curve of labor?

We can determine the market supply curve of labor in the same way we determine a market supply curve of a good. -We find the market supply curve of labor by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor.

What are differences in experience?

Women are much more likely than men to leave their jobs for a period of time after having a child. -Women with several children will sometimes have multiple interruptions in their careers, therefore giving them less experiences than men.

What does a in the quantity of other inputs do to the demand curve?

Workers are able to produce more if they have more machinery and other inputs available to them, which increases their productivity and causes the labor demand curve to shift to the right. -Changes in tecnology will shift the curve to the right.

Is there more to the airlines story?

Yes -First, male pilots employed by "B" airlines will also receive the lower wage. This lower wage gives them an incentive to quit their jobs at "B" airlines and apply at "A" airlines, which will shift the labor supply curve for "B" airlines to the left and the labor supply curve for "A" airlines to the right. -Second, "A" airlines are paying $1,300 per week to hire pilots who are no more productive than the pilots being paid $900 per week by "B" airlines. As a result, "B" airlines will have lower costs and will be able to charge lower prices. -Eventually, high-price "A" airlines will lose their customers to low-price "B" airlines and will be driven out of business. -The market will have imposed an economic penalty on the discriminating airlines. So, discrimination will not persist, and the wages of men and women pilots will become equal.

Why would commission pay be better than straight-time pay?

You would be getting more productive workers and weening out the least productive ones, getting more output sales.