Labor Economics: Chapter 2

How do you calculate the effect of a payroll tax on surplus?

1. Use the new labor demand curve with whatever the tax is to calculate the new Equilibrium employment E*' and wage w*'. 2. Calculate w*' + t to get what firms pay for labor. 3. Use these new measurements to graphically calculate the new surpluses and deadweight loss.

How do you calculate the effect of minimum wage on surplus?

1. Using E*', calculate wage on the supply curve to get w*''. 2. Use this wage to calculate triangle and rectangle that make up new worker surplus. 3. Use this to calculate deadweight loss.

What is a monopsony?

A firm that faces an upward sloping labor supply curve and must pay higher wages to attract more workers.

What is the stereotypical example of a monopsony?

A one company town, where everyone in the town works for the same company.

What causes a change in equilibrium?

A shock or shift in the labor demand or the labor supply curve.

What is a payroll tax?

A tax levied on employers based on their total payroll, i.e. labor costs.

What is tax incidence?

Assessing which party (consumers or producers) bear the true burden of a tax.

What is the difference between a labor market and individual firm S/D curves, and why?

Assuming firms have entry, exit, and create identical goods... Labor market: diagonal supply and demand curves. Firm: because firm is a price taker, supply is perfectly elastic at equilibrium wage for the market and firm has a diagonal labor demand curve.

How do you calculate marginal cost and revenue in a perfectly competitive market.

Because firms in this market are price takers, the wage rate equals the marginal cost of an additional employee hour. Marginal revenue is equal to labor demand curve.

What is the best way to conceptualize the marginal cost curve for a monopsony?

Because the supply curve of labor slopes upward, every worker costs more to hire than the last and because of the nature of the market every worker needs to be paid at the price of the most recent worker. Slope is generally twice as steep.

How do you calculate the total change in surplus as a result of the labor migration?

Calculate current and previous labor surplus in each market (the one that lost workers will be negative, the one that gained workers will be positive) and add the differences to find a net gain in total surplus.

How do you solve for an equilibrium?

Demand = supply gives you the wage, which can be plugged in to find employment.

Why does deadweight loss happen?

E*' is different than E*, indicating that some trades that should be happening are not happening and the surplus from these trades is wiped out.

How does a firm maximize profit?

Hires up until the point at which cost of additional unit of labor = revenue that the next unit brings in. Marginal Revenue = Marginal Cost.

How do you calculate the effect of the minimum wage on employment?

If minimum wage (price floor) is binding... 1. Put new wage into demand function to get E*'.

What is competitive equilibrium?

Labor supply = labor demand. Wage = w*, Employment = E*.

How do you model the effect of a minimum wage in a monpsonistic market?

MC curve follows minimum wage until the supply curve, and then goes straight up until it hits the original MC curve. New employment is set where minimum wage intersects with the supply curve.

How do shifts in market supply curve affect firms?

New equilibrium wage becomes perfectly elastic, horizontal supply curve faced by the firm.

How do you find surplus and deadweight loss in a monopsony?

Producer surplus is bound by demand curve, E*, and w*. Worker surplus is bound by S and E*. DWL is bound by E*, Supply curve, and Demand curve.

How do you model surplus with a minimum wage in a monopsony?

Producer surplus is bound by minimum wage, employment under minimum wage, and demand curve. Worker surplus is bound by minimum wage and Supply curve. Deadweight loss is bound by employment, supply and demand curves.

What shifts labor demand?

Something that affects the firm, other than the wage within that labor market: - Price of other production inputs. - Production technology. - Demand for the output good. - Government rules and regulations.

What shifts labor supply?

Something that affects workers changes, other than the wage within that labor market. - Wage in a different labor market the workers can enter. - Income. - Number of workers in the labor market. - Government rules and regulations.

How do you calculate point of profit maximization for a monopsony?

Still marginal revenue = marginal costs.

How do you solve equilibrium in multiple labor markets with vertical supply curves.

Take number of workers in both markets (say 300 N and 400 S). Wages are higher in 300 N. REMEMBER, SUPPLY IS INELASTIC. 300 + x = demand function N, 400 - x = demand function S. Solve for w in both functions. Set them equal to find x, number of workers who moved.

What is statutory incidence?

The burden of a tax borne by the party that sends the check to the government.

What is economic incidence?

The burden of taxation measured by the change in the resources available to any economic agent as a result of taxation.

What happens if firms are mobile?

The same thing; firms move across labor markets until a new wage equilibrium is reached.

What does the labor supply curve show?

Total number of employee-hours that firms want to hire at a given wage.

What is social efficiency?

Total surplus.

How do you find wage and employment for a monopsonist?

Use MC curve and demand curve intersection to find E*. Use E* and supply curve to find w* (wage is set off of the supply curve because that is what workers will accept).

How do you model the affect of a subsidy on the labor market?

Use w+subsidy to calculate new labor supply curve and E*' and w*'. Calculate w*' + subsidy to determine new wage on original supply curve. Use these two new wages to create a rectangle intersected by old equilibrium. Left section of rectangle is now all worker surplus, top is worker surplus, bottom is producer surplus, right is deadweight loss, and rectangle is total cost of subsidy. SC (subsidy cost) > added surplus.

How do you model the effect of payroll taxes on labor demand curves?

W becomes (w+t).

Do wage changes WITHIN LABOR MARKETS shift demand/supply curves?

Wage changes WITHIN LABOR MARKETS do not shift demand and supply curves.

Where is a perfectly competitive firm's point of profit maximization?

Where supply equals demand.

What is assumed when calculating equilibrium in multiple markets?

Workers are mobile, free entry and exit. Workers are perfect substitutes.

What is a labor market?

Workers supply their labor, firms demand it.