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Marginal product of labor (MP): additional output a firm gets by employing one additional unit of labor.
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Value of marginal product of labor (VMP): dollar value of the additional output a firm gets by employing one additional unit of labor.
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The demand for labor in a perfectly competitive labor market is the horizontal sum of each employer's value of marginal product (VMP) curve.
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The supply curve of labor for an individual labor market is upward-sloping, even though the supply curve of labor for the economy as a whole may be vertical or even downward sloping.
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In each labor market, the demand and supply curves intersect to determine the equilibrium wage and level of employment.
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Human capital theory: theory of pay determination that says a worker's wage will be proportional to his/her stock of human capital.
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Human capital: amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, and initiative that affects the value of a worker's marginal product.
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Minimum wage laws reduce total economic surplus by contracting employment. The earned-income tax credit boosts the incomes of the working poor with out that drawback, but neither policy provides benefits for those who are not employed.
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Other instruments in the battle against poverty include in-kind transfers such as food stamps, subsidized school lunches, Medicaid, and public housing as well as cash transfers such as Aid to Families with Dependent Children. Because benefits under most of these programs are means-tested, beneficiaries often experience a net a decline in income when they accept paid employment.
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The negative income tax is an expanded version of the earned-income tax credit that includes those who are not employed. Combining this program with access to public service jobs would enable government to ensure adequate living standards for the poor without significantly undermining work incentives.
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Negative income tax (NIT): system under which the government would grant every citizen a cash payment each year, financed by an additional tax on earned income.
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Poverty threshold: level of income below which the federal government classifies a family as poor.
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