Chapter 11 The Labor Market

NON-DISCRIMINATING FIRMS

CAN HIRE FROM A LARGER SUPPLY OF WORKERS AT LOWER WAGES, RESULTING IN LOWER COSTS AND GREATER PROFITS

The following factors can lead to a shift of the labor demand curve?

Changes in product demand Changes in productivity Changes in the prices of other inputs

DISCRIMINATING FIRMS

MUST PAY HIGHER WAGES FOR "PREFERRED" WORKERS, RESULTING IN HIGHER COSTS AND LOWER PROFITS

What is the Marginal revenue product?

marginal physical product of labor times marginal revenue.

Supply of Labor

the amount of time an individual is willing to work at various wage rates.

Unions reduce labor supply to?

push wages higher; this causes an increase in supply in the nonunion sector, reducing wages.

In competitive labor markets, the firm is a

Price Taker, which means MR=P

INDUSTRIAL UNION

REPRESENTS ALL WORKERS EMPLOYED IN A SPECIFIC INDUSTRY (EXAMPLE: AUTO WORKERS—UAW

Backward Bending individual labor supply

- Income effect dominates substitution effect at higher wages. - Substitution effect dominates income effect at lower wages.

Competitive Labor Markets

- Many buyers and sellers - A homogeneous product - Easy entry and exit - All workers are equally productive. - Information in the industry is widely available and accurate.

market labor supply curve

- Unlike individual labor supply curves, the market labor supply curve is positively sloped: Higher wages attract more workers. - Market labor supply can shift (e.g., point a to point c) in response to various factors.

MRPL

= MPPL × MR

MRPL

= MPPL × P = VMPL

MARGINAL REVENUE PRODUCT, MRPL

Amount of additional revenue one worker earns for the firm

The firms demand for labor is derived from what?

Demand for it's product and the productivity of labor

MRPL =

MPPL × P = VMPL

BECKER'S theory

PRESSURES OF MARKET COMPETITION SHOULD DRIVE DISCRIMINATION TO ZERO IN THE LONG RUN

CRAFT UNION

REPRESENTS MEMBERS OF A SPECIFIC CRAFT OR OCCUPATION (EXAMPLE: AIR TRAFFIC CONTROLLERS— PATCO)

For competitive firms, profits are maximized when labor is hired to the point where?

The VALUE OF THE MARGINAL REVENUE PRODUCT= wage rate

4 shifts in labor supply

The following factors can lead to a shift of the labor supply curve: - Demographic changes - Nonwage aspects of jobs - Wages in alternative jobs - Nonwage income

FIRMS HIRE WORKERS BASED ON THEIR?

VALUE RELATIVE TO THEIR COST

Substitution effect

Workers choose more hours as wages rise (opportunity cost of leisure rises)

Income Effect

Workers chose fewer hours when wages rises and more hours when wages fall

Equilibrium in competitive labor markets occurs when?

at the intersection of supply and demand.

Measures responsiveness of quantity of labor demanded to changes in wages. Factors include:

elasticity of demand for the product. ease of input substitutability. labor's share of total production costs.