The Labor Market

Labor demand

the act of buying worker's time (the wages paid vs. quantity of workers/hours worked)

Law of Demand (labor)

lower wages will lead to an increase in the quantity of labor markets (wages go down= jobs go up) (wages go up= job quantity goes down)

Labor supply

the act of selling worker's time (time spend working in the market)

Law of Supply (labor)

higher wages lead to an increase in the quantity of labor supplied (wage goes up= quantity goes up vice-versa)

Determinants for Labor Demand

(1) Changes in the demand for your product, (2) changes in the price of capital (k), and (3) better management and productivity gains

Labor is a derived demand meaning..

the if the demand for a good decreases, then the demand for labor also decreases

Rational Rule for Employers

you should hire more workers if the marginal revenue product is greater than or equal to the wage

Marginal revenue product

the extra units of product multiplied by the price of the output (wage x worker productivity)

Scale effect

when the price of capital goods used by labor declines, your business can produce the output more cheaply and therefore afford more workers (capital down = labor up)

Substitution effect (demand)

when firms substitute machinery for labor effectively decreases the need for workers (capital down = labor down)

Improved management and technology....

increases productivity of labor, so each worker can produce more and is worth more to the firm (workers MRP up = labor up)

Labor Supply Determinants

(1) the time you spend working in the market, (2) should I work in the labor market, (3) how should you choose your occupation

To determine how many hours you should work each week...

think about if the marginal benefit of an extra hour of work is greater than or equal to giving up an extra hour of leisure (free time)

Rational Rule for workers

work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure

Substitution effect (supply)

a measure of how people respond to a change in relative prices(wages); the higher the wage, the more attractive working is

Income effect

a measure of how people's choices change when they have more income; the higher the income, the more attractive leisure becomes

At lower wages the.... effect dominates but at higher wages the... effect dominates and this creates the... labor supply curve

substitution; income; backward-bending

To determine if you should work in the labor market...

determine if the alternatives to working are worth it and if the costs are worth the benefits

How should you choose your occupation

to choose what occupation is best for you apply the cost-benefit principle and interdependence principle

Cost when choosing an occupation include...

career risks, physical risks, wage volatility, and hours

Benefits of choosing an occupation include...

non-wage benefits, gaining valuable skills, working conditions, enjoyment and meaning, and wage trajectory

Market Supply Curve

slopes upward; the higher the wage is in a particular occupation the more people will be willing to supply labor in that occupation

The market supply curve is dependent on

(1) hours workers put in, (2) how many workers enter the workforce, and (3) the occupation people choose

Factors that shift labor supply

(1) Wages in other occupations, (2) number of potential workers, (3) income support programs, and (4) non-wage benefits, employment subsidies, and income taxes

What causes wage variance within a specific occupation?

(1) labor demand, (2) labor supply, (3) institutional factors, and (4) discrimination

Labor demand on wage variance

how firms incentivize certain worker characteristics; looks at human capital, signaling, and efficiency eages

Human capital

the knowledge and skills workers have that make workers more productive

Signaling

an action taken by worker to convey information that is hard to verify such as going to college, volunteering, or past accomplishments that show something about your character

Efficiency wages

a higher wage paid to encourage greater work productivity by increasing worker effort and reducing worker turnover; looks at paying worker more than firms which do the same thing

Labor supply on wage variance

looks at what you would rather do as a worker of preferences; how can wage affect what job you choose; reason for compensating differentials

Compensating differential

the differences in wages required to offset the desirable or undesirable aspects of job; these wage differences encourage people to take unpleasant jobs by paying them MORE to work them

Institutional factors on wage variance

the policies and laws that influence wages; includes (1) licensing laws, (2) minimum wage, (3) unions, and (4) monopsony

Licensing laws

laws and licenses that keep people out of a labor market and raises wages in that market; a third of the workforce requires a license to work

Minimum wage

a price floor set in a specific labor market

Union

collective bargaining power to workers in a union which helps them to raise wages; 11% of US workers are unionized

Monopsony

collective bargaining power to employers which lowers wages as the firm is the only labor buyer in the marker so they can get buy labor cheaper than they could otherwise due to a lack of competition

Labor demand is.... but becomes more... over time

relatively inelastic; elastic

To measure discriminations effects on wage you should

isolate the variable by keeping all other factors between the people you're comparing the same other than the discrimination variable