ECO 202 Chapter 16: Markets for Labor and Other Factors of Production

derived demand

demand for a factor of production, depends on the demand for the good the factor produces

marginal product of labor

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

MPL = change in production output / change in input labor

law of diminishing returns applies so MPL decreases as firms hire more workers

value of the marginal product of labor

the change in a firm’s revenue as a result of hiring one more worker

VMPL = P x MP (price times additional output)

when VMPL> wage, firm should hire more workers to increase profit

when VMPL< wage, firm should hire fewer workers to increase profit

when VMPL = wage, firm is hiring optimal number of workers

graph of VMPL is the firm’s demand curve for labor

MC = MR rule for labor becomes W = VMPL

factors that shift the marker demand curve for labor

1. increases in human capital

2. changes in technology

3. changes in the price of the product

4. changes in the quantity of other inputs

5. changes in the number of firms in the market

increases in human capital

human capital is the accumulated knowledge and skills that workers acquire from formal training and education or life experiences

better workers produce more, increasing VMPL and demand

changes in technology

improvements in technology allow workers to be more productive, shifting the labor demand curve to the right

changes in the price of the product

VMPL depends on price

higher price increases VMPL, shifting labor demand to the right

lower price decreases VMPL, shift labor demand to the left

changes in the quantity of other inputs

workers can produce mroe if they have more machinery and other inputs available to them

increases in the quantity of these inputs tend to increase productivity of workers, increasing the demand for labor

changes in the number of firms in the market

increasing number of firms increases the demand for labor, decreasing hte number of firms decreases the demand for labor

labor supply

decisions of individuals about how much to work

• assume time is divided between labor and leisure

as wage rate increases, leisure becomes more expensive relative to consumption, so individuals consume less leisure time (work more) - substitution effect

as wage increases, we work more, labor supply curve for the most part is upward sloping - income effect

if wage gets very high, increases in wage may cause an individual to work less resulting in a backward-bending curve

factors that shift the market supply curve of labor

1. changes in population: increases or decreases in the number of available workers (due to changes in birth/death rates or immigration/emigration)

2. changing demographics: more people of working age = more supply of labor

3. changing alternatives: chagnes in attractiveness or desire to do things other than work

equilibrium in the labor market

DC and SC intersect

compensating differentials

a higher wage that compensates workers for the unpleasant aspects of a job

economic discrimination

the practice of paying a person a lower wage or excluding a person from an occupation on the basis of irrelevant characteristics such as race or gender

explaining wage differentials

1. differences in education: white workers have higher average education than black or hispanic workers

2. differences in experience: women spend more time out of the labor force due to parenting so they often have less job experience

3. differing preferences for jobs: women and men select different hobs sometimes due to preferences

why is there still discrimination

1. worker discrimination: white workers refuse to work with black workers

2. customer discrimination: customers have discriminatory preferences

3. negative feedback loops: can’t get a job in law so don’t get educated in law, etc

4. statistical discrimination: assigning characteristics of a group to an individuals who belongs to the group

labor unions

organizations of employees that have a legal right to bargain with employers about wages and working conditions

personnel economics

application of economic analysis to human resource issues at firms

why not pay everyone piece rate/commission

1. difficulty measuring ouput

2. concerns about quality

3. worker dislike of risk

monopsony

situation in which a firm is the sole buyer of a factor of production (remote labor markets, coal in WV)

• will use power to decrease the price of labor, employing fewer workers at a lower wage resuling in deadweight loss

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 (including their own labor)