Econ Labor Market and Economic Disparities

Which arrow shows the flow of spending by households?

A

Which arrow shows the flow of goods and services?

B

Which arrow shows the flow of the factors of production?

C

Which arrow shows the flow of income payments?

D

Factors of Production

The inputs used to produce goods and services, this includes land, labor, and capitol

In the circular flow model households become suppliers and firms become demanders

Derived Demand

Demand for a factor of production derived from the output being produced (usually the price of the product)

What does the demand for labor consist of?

Marginal Product of Labor (MPL), Diminishing Marginal Product (DMP), and Value of the Marginal Product of Labor (VMPL)

Marginal Product of Labor (MPL)

The increase in the amount of output from an additional unit of labor (slope of the wage vs output graph)

Diminishing Marginal Product (DMP)

The marginal product of an input declines as the quantity of the input increases

Value of the Marginal Product of Labor (VMPL)

The extra revenue à from gets from hiring an additional unity of a factor of production

VMPL = P * MPL

What causes the Labor Demand Curve to shift?

Output price, technological change, and the supply of other factors

** wage shifts along the curve, not the curve itself

Output Price

• an increase in product P raises VMPL and increases D for labor

• A decrease in product P lowers VMPL and decreases D for labor

Technological change

Raises MPL and VMPL: as tech improves, it raises the value of each worker even though the amount of workers decreases

Supply of other factors

The quantity available of one factor can affect MP of another and will likely affect the D for labor

Why is the supply curve upward sloping?

As wage increases, so does the cost of leisure (everything someone does other than work)

What causes the labor supply curve to shift?

• changes in taste (leisure vs working)

• Changes in alternative opportunities (other occupations)

• Changes in population

Equilibrium in the Labor Market

• the point where the wage = VMPL (supply and demand cross)

• Firms buy as much labor as they find profitable at the equilibrium wage

Monopsony

• a market with one buyer

• That single buyer (which is a firm) hires fewer workers than a competitive labor market and pays a lower wage

• Not efficient

Perfectly Competitive Labor Market

• A market in which firms can hire all the labor they wish at the going market wage

• Think of a big city with many hospitals and many nurses

• Operates at efficiency where MR=MC

Demand for Other Factors (Land and Capital)

• the VMPL or the demand curve still slopes downward

• Influenced by rental rate

Rental Rate

Cost (explicit and implicit) of using a factor of production for a given period of time

How are factors of production used in the real world?

• used together in a way that makes the productivity of each factor dependent on the other factors available to be used in the production process

• A change in the supply of any one factor can change the earnings of all the other factors

As the supply of workers falls…

MPL and VMPL rises which means the remaining workers now have a higher value

In perfectly competitive labor market what is true?

1. Firms are wage takers

2. Workers are assumed to have identical skills

3. The demand curve for labor is downward sloping

All 3 are true

What factors determine wage?

1. Compensating differential

2. Human capital

3. Ability, effort, chance

Compensating Differential

A difference in wages that arises to offset the non monetary (not relating to or consisting of money) characteristics of different jobs

Jobs that are difficult, dull, or dangerous will pay higher wages

Human Capital

The accumulation of investments in people like education and on the job training

Workers with more human capital average higher earnings

Higher educated workers have higher MP

What are the reasons that above-equilibrium wage occurs?

• minimum wage laws (a price floor)

• Unions

• Efficiency wages

• All three of these reasons increase QS of labor and decrease QD, creating a SURPLUS of labor

Unions

• a worker association that bargains with employers over wages and working conditions

• Strike/collective bargaining: the organized withdrawal of labor from a firm by a union

Efficiency Wages

Above equilibrium wages paid by firms to increase worker productivity

Discrimination

• very difficult to prove or verify

• Makes no economic sense

• Shifts the supply curve to the left

Poverty Rate

The percentage of the population whose family income falls below an absolute level (poverty line)

Poverty Line/Threshold

An absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty

In-Kind Transfers

• Transfers to the poor given in the form of goods and services rather than cash

• Not taken into account for standard measurements

• May change poverty rates

• Examples include soup kitchens, churches, and shelters

Life Cycle

• The regular pattern of income variation over a person’s life

• Peaks around age 50

• Borrow young and save later to make this curve smoother

Economic Mobility

The movement of people among income classes

Ways of Income Distribution

• Utilitarianism

• Liberalism

• Libertarianism

Utilitarianism

• The political philosophy according to which the government should choose policies to MAXIMIZE the total utility (usefulness) of everyone in society

• Redistributed based on need

• Progressive tax system (taking from the rich to give to the poor)

Utility

• a measure of happiness or satisfaction

• Based on diminishing marginal utility

• Not all incomes need to be equal

• Government must find balance

Liberalism

• the political philosophy according to which the government should choose policies deemed to be just

• Raise the welfare of the worst-off in society

Libertarianism

The political philosophy according to which the government should punish crimes and enforce voluntary agreements but redistribute income

The Lorenz Curve

• shows the unequal distribution of income

• The straight line represents communism where income is equal

• The farther back the curve lies from the straight line, the more unequal the distribution is

Gini Coefficient

• shows the distribution income inequality within a population

• Ranges from 0 (perfect equality) to 1 (maximum inequality)

Budget Constraint

The limit on the consumption bundles that a consumer can afford

Indifference Curve

Shows the consumption bundles that give equal levels of satisfaction

Marginal Rate of Substitution

The rate at which a consumer is willing to trade for another good

Properties of Indifference curves

• higher curves are preferred to lower ones

• Downward sloping

• Do not cross

• Bowed inward

• Straight lines if they are perfect substitutes

• Right angles if they are perfect complements

Optimization

• occurs when budget constraint matches the highest indifference curve

• Occurs when MRS is the same as the relative price of the two goods

Marginal Rate of Substitution

• abstract measure of consumer satisfaction

• Equation: MUx/Px = MUy/Py

• P = price

• MU = marginal utility

• Different for everyone

What is the goal of a consumer?

To maximize utility and have the highest possible indifference curve