Lecture 20 : Labor Markets

Who are the buyers and sellers in the labor market?

Firms are buyers of labor;

individuals are sellers.

What determines equilibrium in the labor market?

The intersection of labor supply and labor demand determines the wage (W*) and quantity of labor (L*)

What is the Marginal Product of Labor (MPL)?

The additional output from hiring one more worker

change in labor that results from hiring an additional unit of labor

What is the Value of the Marginal Product of Labor (VMPL)

VMPL = MPL × Price of output.

additional amount of value created by an additional product of labor

what is output in demand for labor

the amount of goods produced by labor

When will a firm hire more labor?

As long as VMPL ≥ wage of laborer

What shifts the demand for labor?

Changes in output price

• Technology

• Human capital

• Complements (e.g., tools)

• Managerial practices

higher productivity/outputs of laborers (managerial practices)

compliments and human capital

What tradeoff do workers face when deciding how much to work

Labor vs. leisure

• most valuable resources is time : tradeoff between labor and leisure

What factors affect labor supply?

• Preferences

• Outside options

• Demographics

• Income level

• Macro shocks (e.g., pandemics, recessions)

What is the backward-bending labor supply curve?

At higher wages, people might choose to work less because they’re richer, not because work got worse.

• as wages increase working becomes more attractive

• for high enough wages people might work less

What is absolute advantage?

Absolute = better at producing overall

comparative advantage?

Comparative = lower opportunity cost.

how is it determined Who should specialize in what?

to decide specialization look @ the comparative advantage of products produced and let each person produce what they are best at comparatively

Why does specialization increase output?

It allows each worker to focus on what they’re relatively better at, maximizing total efficiency.

What are some causes of wage inequality?

1. Human capital differences

2. Compensating wage differentials

3. Discrimination

What is a compensating wage differential?

Higher wages offered to compensate for unpleasant or risky job conditions.

What is human capital?

A mix of intellectual ability and accumulated skills, including education, training, and experience.

How do individuals decide how much education to pursue?

By weighing the costs (tuition, opportunity cost, effort) vs. the benefits (higher wages, employment, quality of life).

What is the “return on education”

The increase in earnings over time that comes from investing in schooling.

What are the two types of job training?

• General training: useful at many firms

• Firm-specific training: only valuable at the current firm

Why are firms hesitant to fund general training?

Trained workers may leave for other jobs, creating a hold-up problem.