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Chapter 11 Labor Markets

• Key Concepts• Summary• Practice Quiz• Internet Exercises

©2000 South-Western College Publishing

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In this chapter, you will learn to solve these economic puzzles:

What determines the wage rate an employer pays?How do labor unions influence wages and

employment?

Does the NCAA exploit college athletes?

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In a Perfectly Competitive Market, what determines the

level of Wages?The intersection of the

demand for labor and the supply of labor

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D

S

Market Supply and DemandW

ages

Quantity of Labor

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What does the Demand Curve for Labor show?The different quantities of

labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

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40

10

1 2 4

Production Function

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20

5

50

63

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Tot

al O

utp

ut

Quantity of Labor

Total Output

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What is Marginal Revenue Product?

The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

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8

2

1 2 4

Marginal Product Curve

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4

5

10

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Mar

gin

al P

rod

uct

Quantity of Labor

Law of Diminishing

Returns

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What is the Demand Curve for Labor equal to?

It is equal to the marginal revenue product of labor

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$280

$210

$140

$70

1 2 3 4

Demand Curve for Labor

MRP = demand

$350

5Q

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Decrease in Wage Rate

Increase in Quantity of labor an employer

will hire

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How do we measure MRP in Perfect Competition?

A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product

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What isDerived Demand?

The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

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What does the Supply Curve for Labor show?The different quantities of

labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

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$280

$210

$140

$70

10 20 30 40

Supply Curve of Labor$350

50

S

DQuantity of Labor

Wag

e R

ate

per

day

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Increase in Wage Rate

Increase in Quantity of labor willing to work

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What is Human Capital?The accumulation of

education, training, experience, and health that enables a worker to enter an occupation and be productive

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$280

$210

$140

$70

10 20 30 40

Competitive Labor Market$350

50

S

D

E

Quantity of Labor

Wag

e R

ate

per

day

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$280

$210

$140

$70

1 2 3 4

Competitive Labor Market$350

5

S

D

E

Quantity of Labor

Wag

e R

ate

per

day

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Does the Perfectly Competitive model apply

to workers in unions?

No

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What are examples of Unions?

• Teamsters• United Auto Workers• National Education Assoc.• American Federation of

Government Employees

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How do Unions attempt to raise wages?

• Increase demand for labor• Decrease supply for labor• Power

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What is Featherbedding?Unions force firms to hire

more workers than are required or to impose work rules that reduce output per worker

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What else can Unions do to increase the

demand for labor?Decrease competition

from other nations

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$280

$210

$140

$70

10 20 30 40

Unions cause an increase in the demand for labor$350

50

S

D2

E1

D1

E2

Quantity of Labor

Wag

e R

ate

per

day

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Union featherbeds

Increase in the demand for labor

Increase in wages and employment

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$350

$280

$210

$140

10 20 30 40

Unions cause a decrease in the supply for labor$420

50

S2

D1

E1

E2

Quantity of Labor

Wag

e R

ate

per

day

S1

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How else can Unions raise wages?

Collective bargaining

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What isCollective Bargaining?The process of negotiations

between the union and management over wages and working conditions

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$280

$210

$140

$70

10 20 30 40

Collective Bargaining causes a Wage Rate increase$350

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D

UnemploymentW

age

Rat

e p

er d

ayS

Quantity of Labor

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What factors can cause a change in the

Demand for Labor?• Unions• Prices of substitute goods• Demand for final products• Marginal product of labor

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What factors can cause a change in the

Supply for Labor?• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training

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What has happened to Union Membership

since WWII?Union power has declined

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In which sectors has union membership

increased since 1989?Public sector and services

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How does union membership in the

U.S. compare to other countries?

Union membership is far below that of other industrialized countries

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What is a Monopsony?A labor market in which a

single firm hires labor

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15%24%

29%32%

37%40%

U.S. Japan CanadaU.K. Germany Italy Sweden

87%

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What is Marginal Factor Cost (MFC)?

The additional total cost resulting from a one-unit increase in the quantity of labor

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What conclusion can be drawn from a

Monopsonistic Market?Because the monopsonist

can hire additional workers only by raising the wage rate for all workers, the MFC > W

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$4

$3

$2

$1

1 2 3 4 5

D (MRP)Dol

lars

per

hou

r

S

Quantity of Labor

MFC$5A Monopsonist determines its Wage Rate

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How are wages compared between the two markets?

A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market

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Key Concepts

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Key Concepts• In a Perfectly Competitive Market, what det

ermines the level of Wages?

• What is Marginal Revenue Product?

• What is the Demand Curve for Labor equal to?

• How do we measure MRP in Perfect Competition?

• What does the Supply Curve for Labor show?

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Key Concepts cont.• How do Unions attempt to raise wages?

• What is Featherbedding?

• What is Collective Bargaining?

• What factors can cause a change in the Demand for Labor?

• What factors can cause a change in the Supply for Labor?

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Key Concepts cont.• What has happened to Union Membership s

ince WWII?

• How does union membership in the U.S. compare to other countries?

• What is a Monopsony?

• What is Marginal Factor Cost (MFC)?

• How are wages compared between the two markets?

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Summary

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Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).

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The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.

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$280

$210

$140

$70

1 2 3 4

Demand Curve for Labor

MRP = demand

$350

5Q

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Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.

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The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.

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$280

$210

$140

$70

10 20 30 40

Supply Curve of Labor$350

50

S

DQuantity of Labor

Wag

e R

ate

per

day

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Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital.

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Collective bargaining is the process through which a union and management negotiate a labor contract.

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Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor.

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The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers.

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$4

$3

$2

$1

1 2 3 4 5

D (MRP)Dol

lars

per

hou

r

S

Quantity of Labor

MFC$5A Monopsonist determines its Wage Rate

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Chapter 11 Quiz

©2000 South-Western College Publishing

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1. Marginal revenue product measures the increase in a. output resulting from one more unit of

labor.b. TR resulting from one more unit of

output.c. revenue per unit from one more unit of

output.d. total revenue resulting from one more

unit of labor.D. MRP is the increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource.

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2. Troll Corporation sells dolls for $10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is a. $100 or less per day.b. more than $100 per day.c. $5.10 or less per day.d. none of the above.

A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 - 500) = $100.

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3. Derived demand for labor depends on the a. cost of factors of production used in the

product.b. market supply curve of labor.c. consumer demand for the final goods

produced by labor.d. firm’s total revenue less economic profit.

C. If consumers do not purchase goods, there is no MRP and no workers are hired.

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4. If demand for a product falls, the demand curve for labor used to produce the product will shift a. leftward.b. rightward.c. upward.d. downward.

A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases.

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5. The owner of a restaurant will hire waiters if the a. additional labor’s pay is close to the

minimum wage .b. marginal product is at the maximum.c. additional work of the employees adds

more to total revenue than to costs.d. waiters do not belong to a union.

C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters.

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6. In a perfectly competitive market, the demand curve for labor a. slopes upward.b. slopes downward because of

diminishing marginal productivity.c. is perfectly elastic at the equilibrium

wage rate.d. is described by all of the above.

B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases.

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7. A union can influence the equilibrium wage rate by a. featherbedding.b. requiring longer apprenticeships.c. favoring trade restrictions on

foreign products.d. all of the above.e. none of the above.

D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor.

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8. In which of the following market structures is the firm not a price taker in the factor market?a. Oligopoly.b. Monopsony.c. Monopoly.d. Perfect competition.

B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer.

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9. The extra cost of obtaining each additional unit of a factor of production is called the marginal a. physical product.b. revenue product.c. factor cost.d. implicit cost.

C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers.

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10. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must a. increase the price of its product to sell

more.b. lower the price of its product to sell more.c. increase the wage rate to hire more labor.d. lower the wage rate to hire more labor.C. The monopsonist can hire an

additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.

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11. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product.b. marginal revenue product.c. total revenue product.d. any of the above.

B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers.

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$8

$6

$4

$2

1 2 3 4 5

D (MRP)

Dol

lars

per

hou

r

Quantity of Labor

MFC

$10Marginal Factor Cost (MFC) and Marginal Revenue Product (MRP)

Surplus

Shortage

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12. BigBiz, a local monopolist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to $6.25 per hour. What is BigBiz’s marginal factor cost?a. $6.25 per hour.b. $12.50 per hour. c. $18.75 per hour.d. $20.00 per hour.

C. Its total cost would increase by $18.75 to hire that additional worker (25 x 50 + 6.25).

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13. Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to a. $8.00.b. $8.05.c. $13.05.d. $13.00.

C. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05).

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14. A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be a. less than $10.b. equal to $10.c. greater than $10.d. equal to $5.

A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market.

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$4

$3

$2

$1

1 2 3 4 5

D (MRP)Dol

lars

per

hou

r

S

Quantity of Labor

MFC$5

A Monopsonist determines its Wage Rate

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END