Module 14: The Labor Market

Value of the marginal product (VMP): the change in revenue from hiring one more worker

  • VMP = P x MP

    • P is the price of the ouptut

    • MP is the marginal product of the worker

    • The VMP is the firm's demand for labor

  • When

    • VMP > wage, hire more workers

    • VMP < wage, hire fewer workers

    • VMP = wage, the optimal number of workers and maximizing profit

There are several factors that may shift the demand for labor

  • Increases in human capital: accumulated knowledge and skills acquired from formal training, education, and/or life experiences

Changes in…

  • Technology

  • Price of the product

  • Quantity of inputs

  • Quantity of firms in the market

Labor supply: the decisions of individuals on how much to work given

Things that may cause the market supply of labor to change

Changes in..

  • Population

  • Demographics

    • birth rates

    • role of women in the labor force

  • Changing alternatives

If the labor supply curve shifts to the left​, then the equilibrium wage will rise and employment will fall