Microeconomics: The Labor Market

Perfectly Competitive Labor Market

- Many small firms hiring workers

- Many workers with identical skills

- Wage is constant

- Workers are wage takers

Derived Demand

The demand for resources that is determined by the products they help produce.

MRC

Marginal Resource Cost

The additional cost of an additional worker.

change in total cost/change in inputs

Perfectly Competitive Market

MRC

Equals the wage set by the market and is constant.

MRP

Marginal Revenue Product

The additional revenue generated by an additional worker.

change in total revenue/change in inputs

Optimal Number of Workers

(Profit Maximizing Quantity)

MRP=MRC

Demand for Labor

The different quantities of workers that businesses are willing and able to hire at different wages.

Law of Demand for Labor

There is an inverse relationship between wage and quantity of labor demanded.

Supply for Labor

The different quantities of individuals that are willing and able to sell their labor at different wages.

Law of Supply for Labor

There is a direct relationship between wage and quantity of labor supplied.

Perfectly Competitive Market

Labor Supply Graph (Industry)

Upward sloping

Perfectly Competitive Market

Labor Supply Graph (Firm)

Horizontal

Perfectly Competitive Market

Labor Demand Graph (Industry and Firm)

Downward sloping

D=MRP

Shifters of Resource Demand

- Changes in demand for the product

- Changes in productivity

- Changes in price of other resources

Shifters of Resource Supply

- Number of qualified workers

- Government regulation/licensing

- Personal values regarding leisure time and societal roles

Labor Market Imperfections

- Misleading job information

- Geographical immobility

- Unions

- Wage discrimination

Effective Minimum Wage (Graph)

Above the equilibrium

Monopsony

Imperfect competition

- One firm hiring workers

- Workers are relatively immobile

- Firm is wage maker

Monopsony Graph

(no wage discrimination)

MRC is above S

MRP=D

Goal of Labor Unions

Increase wages and benefits of workers

Outsourcing

When firms send jobs overseas