Labor Markets

Labor Demand

the number and types of employees the company needs

Labor Supply

the time you spend working in the market

Labor Market

represents the people available for hire by the organization

Lower wages lead to..

an increase in quantity demanded

Higher wages lead to..

an increase in quantity supplied

marginal product of labor

The additional amount produced by hiring one more worker

Marginal Revenue Product

The additional revenue generated by hiring one more worker (MRP= MPL x Price)

Rational Rule for Employers

Hire more workers if their marginal revenue product is greater than (or equal to) the wage

Why Labor Demand Slopes Down

1. Diminishing Marginal Product

2. Declining output prices

3. Labor Capital Substitution

Labor Demand Shifters

1. Shift in demand for your output

2. Capital stock

3. Management and technologies

Shift in demand for your output (shifter 1)

When price increases, MRP increases

Capital stock (shifter 2)

Machinery is a substitute for low-skilled labor and a complement for high-skilled labor

Management and technologies

New technology and better management-firms do more with less (increases MPL)

Rational Rule for Workers

Work more hours as long as the wage is at least as large as the marginal benefit of another hour of leisure

Two effects of a higher wage on labor supply

1. substitution effect

2. income effect

Substitution Effect (shifter 1)

Higher wages makes work more attractive relative to leisure (work more hours).

Income Effect (shifter 2)

you don't have to work as long to buy the same amount of stuff (work less hours)

Labor Supply Shifters

1. Wages in other jobs

2. Income and payroll taxes

3. Income support programs

4. Value of leisure