Ch. 10 (Part I) Labor Markets: Demand, Supply, and Policy Effects

Labor Demand

Employers hire workers to increase production and profits.

Law of Diminishing Returns

As more labor is added to a fixed amount of resources, each additional worker contributes less additional output.

Marginal Value Product (VMP)

Value of extra output created by an additional worker = Marginal Product × Price of Output.

Hiring rule

Firms hire workers as long as VMP ≥ labor cost.

VMP curve

the demand curve for labor and slopes downward because of diminishing returns.

Labor Supply

Determined by employees' willingness to work at different wage levels.

Shape of Supply Curve

Upward sloping: As people work more, they must give up increasingly valuable leisure time.

Market Equilibrium

Labor demand (VMP) and labor supply intersect.

Equilibrium wage

The wage at which labor supply equals labor demand.

Welfare programs

Reduce labor supply, resulting in higher wages but less employment.

Regulations or taxes on employers

Increase labor costs, reducing labor demand, leading to lower employment and wages.

Unintended consequences

Laws meant to help workers often reduce hiring and flexibility.

Human Capital Theory

Education and training increase skills, productivity, and wages.

Screening Theory

Education signals desirable traits rather than directly improving productivity.

Access to Capital

Workers with better tools are more productive and earn higher wages.

Optimal Arrangement Principle

As people work more, they must give up increasingly valuable leisure time.

Total Output

The overall production resulting from the labor employed.

Marginal Product

The additional output produced by one more worker.

Labor Cost

The total expense incurred by a firm for employing labor.

Example of Hiring Rule

Wage = $280/day → Hire up to 3 workers; if labor cost fell to $100/day → would hire 5 workers.

Example of Market Equilibrium

Equilibrium wage = $15/hour; Equilibrium labor = 5 units.

Spontaneous Order

Markets self-adjust efficiently to new technologies.

Make-Work Fallacy

Mistaken belief that jobs themselves are valuable, even if they don't create value.

Minimum Wage

An imposed wage floor that can lead to unemployment if set above equilibrium wage.

Labor Force (LF)

The sum of employed (E) and unemployed (U) individuals.

Unemployment Rate (Ur)

The percentage of the labor force that is unemployed, calculated as Ur = U / LF.

Labor Force Participation Rate (LFPR)

The percentage of the civilian non-institutional population that is in the labor force, calculated as LFPR = LF / CNIP.

Civilian Non-Institutional Population (CNIP)

Individuals aged 16 and older who are not in the military or institutionalized.

Employed (E)

Individuals who have worked at least 1 hour for pay or 15 hours unpaid in a family business.

Unemployed (U)

Individuals who are not employed but are actively seeking work or are on layoff.

Labor Demand Curve

A graph showing the relationship between the wage rate and the quantity of labor demanded.

Labor Supply Curve

A graph showing the relationship between the wage rate and the quantity of labor supplied.

Marginal Product (MP)

The additional output produced by employing one more unit of labor.

Value Marginal Product (VMP)

The additional revenue generated from the output produced by one more unit of labor.

Trends by Gender

Observations regarding labor force participation rates and income differences between men and women.

Key Definitions (June 2024 Example Data)

A collection of relevant labor market statistics and definitions as of June 2024.

Bureau of Labor Statistics (BLS)

The principal source for labor market data in the United States.

Establishment Survey

A survey that asks businesses about their payroll employees, excluding self-employed individuals.

Household Survey

A phone survey asking individuals about their employment status, used to calculate unemployment rates.