Labor Market: Supply, Demand, and Wage Determination

What is the primary goal of the chapter on the labor market?

To explain supply and demand in the labor market, including factors influencing work hours and wage rates.

What determines the wage rate an employer is willing to pay?

The balance of labor supply and demand in the market.

What is labor supply?

The willingness and ability of workers to work specific amounts of time at various wage rates.

How does the opportunity cost of working relate to leisure time?

The opportunity cost of working more hours is the value of leisure time given up.

What happens to the opportunity cost as leisure hours become scarce?

The opportunity cost rises rapidly, requiring a higher wage to compensate for the loss of leisure.

What does the labor supply curve indicate?

It slopes upward, showing that higher wages lead to an increase in the quantity of labor supplied.

What is the marginal utility (MU) of income?

The additional satisfaction gained from earning more money, which may decline as income increases.

What are the two effects of higher wages on labor supply?

The substitution effect (encouraging more work) and the income effect (allowing for fewer hours worked without loss of income).

What characterizes the backward-bending labor supply curve?

the wage rate where the income effect begins to dominate over the substitution effect.

What factors can shift the labor supply curve?

Tastes, income and wealth, expectations, prices, and taxes.

What does the elasticity of labor supply measure?

How responsive the quantity of labor supplied is to changes in wage rates.

How does labor supply elasticity differ between low-skill and high-skill jobs?

Low-skill jobs have high elasticity (small wage increases lead to large increases in supply), while high-skill jobs have low elasticity (large wage increases lead to small increases in supply).

What does an elasticity of labor of 2.1 indicate?

A 10% increase in wages will increase the quantity of labor supplied by 21%.

What institutional constraints affect labor supply?

People often cannot adjust their work hours freely; adjustments are usually limited to overtime, secondary jobs, or retirement.

What is the demand for labor?

The quantities of labor that employers are willing and able to hire at alternative wage rates.

What is the relationship between labor demand and employer hiring practices?

Labor demand is dependent on the needs of firms, which hire based on their operational requirements.

What is the nature of labor demand?

Labor demand is a derived demand, dependent on the demand for goods and services produced.

How does the wage rate affect the quantity of labor demanded?

Firms will hire more workers at lower wage rates and fewer workers as wage rates rise.

What is marginal physical product (MPP)?

MPP is the added output a new hire can produce.

What is marginal revenue (MR)?

MR is the additional sales revenue received when the added output from a worker is sold.

How is marginal revenue product (MRP) calculated?

MRP is calculated as MPP multiplied by the price (p) of the product.

What does MRP represent in labor demand?

MRP sets the upper limit to the wage an employer will pay and is the firm's labor demand curve.

What happens to MPP and MRP as more workers are hired?

MPP begins to diminish due to fixed capital, leading to a decrease in MRP.

What is the ideal situation for hiring workers in relation to MRP and wage?

The ideal number of workers exists where MRP equals the wage, maximizing profit.

How does a decrease in wage rate affect hiring?

Lowering the wage rate leads to an increase in the number of workers hired.

What is the effect of a government-imposed minimum wage?

An effective minimum wage reduces the quantity of labor demanded, increases the quantity supplied, and creates a market surplus.

What is cost efficiency in hiring decisions?

the marginal physical product (MPP) divided by its cost, guiding firms in hiring labor or adding capital.

What should firms do if labor is more cost-efficient than capital?

firms should add workers, making the process more labor-intensive.

What should firms do if capital is more cost-efficient than labor?

If capital is more cost-efficient, firms should add capital, making the process more capital-intensive.

What is the significance of CEO pay ratios?

compare the pay of a CEO to the average employee, highlighting disparities in compensation.

Why is there controversy over CEO pay?

Critics question whether CEO pay should be capped or tied to worker pay, raising concerns about income inequality.

How do market dynamics affect CEO pay?

CEOs seek the highest wage available in the market, similar to other high-income professions.

What is the potential impact of capping CEO pay?

could address income disparity but raises questions about market competitiveness and fairness.