Microeconomics-Chapter 11-The Labor Market

Product Markets

Supply and demand determine price and quantity

Labor Markets

supply and demand determine wage(w) and Q(employment or hours), S curve is workers supplying there labor

D curve

is firms demanding the labor, Labor d-curve is downward sloping. Labor S-curve is typically upwards sloping(also can bend backwards)

Ex-Elementary teachers-Equilibrium

3- possible conditions: 

1QD= QS=Q* at current wage 

Ex-Elementary teachers-Surplus

QD<QS at current wage: Excess Supply/surplus/unemployment

QD-surplus=Qs-Qd= (51,000)-(35,000)=16,000

Pressure for wage to fall to W*

Ex-Elementary teachers-Shortage

Qd>Qs at current wage: Excess Demand/shortage

Shortage: Qd-Qs=55,000-39,000=16,000

Pressure for wage to rise at w*

Labor Demand

we assume a perfectly competitive labor market:

-many buyers/seller

-workers have to have the same skills/pay the market wage

-employed pay market wages

When will firm hire another worker?

When MB>= MC

or when MRPL >= W

The MC of an extra work is the wage MC- wage (w)

MB in labor demand

MB is the marginal revenue product of labor(PRPl), which is the extra revenue you get by hiring this worker 

Example of MB in Labor Demand

Consider hair salon that sells haircuts(its output/product) and hires hair stylists(labor). This marginal revenue of product of labor is 800$/week

Marginal product of labor(MPL)

This is the amount of additional output, the additional worker produces, the stylist MPLs is 40 haircuts/week

MRPl(of an extra worker) is

MRPl=MPL X P, where the P-price of firms output, the thing it is selling

The stylist MRPL= 40 X 120 =800

The rational rule for emplyers: hire an extra worker if MRPL >= W.

Keep hiring until MRPL=W

-The MRPL is also the labor D curve

Why is D curve downward sloping?

Due to diminishing MPL. As firm hires more workers, each additonal worker adds less to output. A change in the wage results in a movement along the D curve, not a shift of the D curve

Shifts in Labor Demand

Increasing Labor Demand, hire more workers at every wage and then the demand curve shifts to the right

Decrease in Labor D

Demand curve shifts left.

1st thing that actuallly shifts the labor D curve

1. Change in D for firms output/profit. Note that labor demand is a dervived demand, firms hire workers as inputs into the production of the firm’s output

The demand for workers depends on the demand for the firm’s output

Increase in Demand for fimr’s product=>

Higher labor D(D curve shifts right)

the longer chain of events

increase in D for firm’s input => higher P of output=> higher MRPl=> higher demand for labor

2nd thing that actually shifts the labor D curve

(ship) (change in P of capita), an increase in price r capital can either increase or decrease D for labor

3rd thing that actually shifts the labor D curve

Changes in Labor Productivity, Higher Labor Productivity=> higher labor demand 

Why? Higher Productivity=> Higher Labor Demand 

MPL=> higher MRPl 

MRPl is the D curve 

-Better management makes workers more productive 

-Technology like computers makes workers more productive 

4th thing that actually shifts the labor D curve

Nonwage Cost of workers

Inadditon to wage and additional costs such as health insurance and retirement 

-hire nonwage costs lead to lower labor 

Will robots take your jobs?

higher wages create an incentive for firm to invest in capital/robot/tech and substitute away from the labor, new tech helps the work of the tech, usually at expense of other workers, tech leads to end of source jobs and creation of others (goes with 4th shifting of labor D)

Lesiure and Work

there is 24 hours in a day, there is labor and there is leisure, leisure is all time not working(labor).

Labor Hours +Leisure Hours=24

The opp cost of working:

is value of leisure(doing what you would be doing if it is not working)

Rational Rule of Workers

You should work another hour if:

Wage >= MB of another hour of leisure

There are two competing effects from a wage increase

these are the ones that dominate in determine if labor S will slope upward or downward: Substitution Effect and Income Effect

Substitution Effect 

Higher wages make work, relatively more attractive than leisure, higher wages make leisure more “expensive”(there is higher opportunity cost of leisure), the effect alone causes the labor S curve to be upward sloping 

Income Effect

Higher wage makes leisure relatively more attractive than work.

-For most people, leisure is a normal good, as income/wage rises you demand more leisure(and less work)

The income effect alone causes the labor supply curve to be downward sloping

Combining substitution and income effect

-When substitution effect dominates the income effect, labor supplu curve is upward sloping. When income effect dominates the S curve it is downward sloping

For most people(in typical income taxes) 

the substitution effect dominates, so typically the market Labor S curve, slopes up.’

Evidence: Higher wages lead people to enter the workforce Ex-Existing workers may increase hours as wage increases and some may switch into jobs   

Extensive margin vs. Intensive Margin

choosing whether or not to work(as opposed to intensive margin, how many hour you are working) only 2/3rd of adult work

Rational rule with work

Work if benefits of work>= Costs of b=working

Benefits of working

-wage -nonwage benefits like insurance -likelihood that experience will boost future wages

Costs of Working 

Consider the OPP cost Ex- Parents of younger kids(not as much time to raise them), older people not being in retirement, students not as many courses, less time to study, higher wages lead more people to enter the workforce 

What actually shifts labor S curve

1.CHangeing wages in other occupations

-higher wages in other occupation leads to a higher labor S

3.Change in benefits of working

-Better benefits of not working=>lower labor S

4.Change in benefits of cost of work

Better nonwage benefits=>higher supply

Choosing your occupation

When deciding on careers consider:

-hours

Consider the benefits:

-wage

-what you low

-Ask about benefits-health insurance

-think about the future

Follow you comparative advantage

-presige

Consider the cost:

-risks

-do not overestimate the odds of success-consider volatility 

Voltality

a change in wage results in the movement along the S curve. Increase in Labor S=> S curve shifts right

Decrease=>Shifts left