the labor market chapter 29. the labor market supply of labor – number of people willing to work...
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The Labor Market
Chapter 29
The Labor Market
Supply of labor – number of people willing to work at different wage-levels
Demand for labor – number of workers needed by companies at different wage levels
Chapter 29 2
Employment Measures
Unemployment Rate
Average Work Week
Chapter 29 3
The Labor Market
Labor market determines real wages
Chapter 29 4
The Labor Market
Chapter 29 5
Determinants of Labor Demand
Product demand Productivity A change in price of substitutes of labor
(machines)
Chapter 29 6
Labor Demand
Regardless of how many people are willing to work, it is up to employers to decide the demand for labor.
Chapter 29 7
Derived Demand
The demand for labor and other factors of production depend on the demand for final goods and services.
Chapter 29 8
The Labor-Demand Curve
The number of workers hired is not completely dependent upon the demand for the product.
The quantity of labor demanded also depends on its price (the wage rate).
Chapter 29 9
The Labor-Demand Curve
Marginal Physical Product (MPP) is the change in total output associated with one additional unit of input.
Marginal Revenue Product (MRP) - the change in total revenue associated with one additional unit of input.
Chapter 29 10
MRC – Marginal Resource Cost
If a firm hires a new employee at a higher wage, they must increase wages of existing workers to preserve morale.
Thus, it costs more than just the 1 person’s wages to hire a person
Chapter 29 11
The Hiring Decision
Marginal revenue product determines how much labor will be hired.
This is a MC < MB situation.
Chapter 29 12
Forecasting Work Requirements1. Determine expected production for department
for specific time period 10,000 T-shirts per month
2. Determine how many labor hours it will take to meet production goal
Each worker makes 10/hr 10,000/10 = 1000 hours3. Convert work hours to work days
With 8 hr shifts 1000/8 = 125 days4. Divide needed workdays by workdays-per-period
With 20 workdays/month 125/20 = 6.25 people
Chapter 29 13
Forecasting Work Requirements5. Make allowances for absences, training, and
leaves Round up to 7 people
6. Search for other ways to meet your schedule i.e. overtime, transfers, borrow employees, temps instead of 7 line workers to do 6.25 work, hire 6 & work a
little overtime
Chapter 29 14
Staffing Goal
Your goal: make sure employees on hand matches workload
Chapter 29 15
Overstaffing
Costs increase Flexibility increase Efficiency drops Coaching & training opportunities may be
taken
Chapter 29 16
Understaffing
Can get you behind schedule Costs may end up higher as you try to make
up the difference Can bring out creativity
Chapter 29 17
Incentives to Hire
Changes in Productivity More work from each worker
Changes in Product Price More money from each item sold
Chapter 29 18
Labor Supply
The willingness and ability to work specific amounts of time at alternative wage rates in a given time period.
Chapter 29 19
Determinants of Labor Supply
Work conditions Benefits A change in price of goods & services
Chapter 29 20
Income vs. Leisure
The opportunity cost of working is the amount of leisure time that must be given up in the process.
Higher wage rates are needed to compensate for the increasing opportunity cost of labor.
The marginal utility of income may decline as you earn more.
Chapter 29 21
Wages
Nominal Wages – amount of money received per hour, day, week, month or year
Real Wages – purchasing power of nominal wage – the goods & services you can buy Depends on nominal wages and prices of goods &
services
Chapter 29 22
Real Wages
If nominal wage increases 8% in a year and prices increase 5% in the same year, real income increased 3%.
An increase in Productivity increases real wages.
Real wage increases leads to inflation.
Chapter 29 23
Substitution Effect of Wages
An increased wage rate encourages people to work more hours
A worker might also respond to higher wage rates by working less, not more.
Chapter 29 24
Income Effect of Wages
An increased wage rate allows a person to reduce hours worked without losing income.
Chapter 29 25
An Individual’s Labor Supply
Chapter 29 26
Market Labor Supply
The market labor supply is the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period.
The labor supply curve shifts when the determinates of labor supply change.
Chapter 29 27
Shifts in Market Supply
Over time, the labor supply curve has shifted leftward: A rise in living standards. Income transfer programs that provide economic
security when not working. Increased diversity and attractiveness of leisure
activities.
Chapter 29 28
Institutional Constraints
A worker’s responsiveness to wage changes is often constrained by institutional constraints such as specified work hours such as 8 – 5 shifts.
Chapter 29 29
Monopsony
The firm has monopolistic hiring power Company employs large portion of labor for the
area Labor force is relatively immobile The firm becomes a wage-setter:▪ work here or starve
Chapter 29 30
Ologopsony
3 or 4 firms in the area They could compete using high wages to attract the
best labor They could cooperate & secretly set low wages.
(incentive to cheat)
Chapter 29 31
Unions
Unions were formed to counter monopsony power.
Collective bargaining to force employers to improve wages & work conditions
Higher wages unions bring may lead to higher unemployment
Chapter 29 32
Minimum Wage
The lowest hourly wage an employer is allowed to pay a worker.
Currently for the U.S. = $7.25/hr.
Individual States
Chapter 29 33Source: www.dol.gov
Minimum Wage
$7.25 x 40 hours = $290/week
$290 x 4.3 weeks = $1,250/month
$290 x 50 weeks = $14,500/year
Chapter 29 34
Case Against Raising Minimum Wage Wages must be raised for many workers. Causes unemployment Helps teenagers rather than low-skilled
workers
Chapter 29 35
Case For Raising Minimum Wage Removes monopsony power – all companies
are paying better Higher wages leads to increased labor supply Higher wages leads to increased sales & more
jobs Increase in productivity will offset the extra
wages paid – happy workers!
Chapter 29 36
Satisfaction
According to Maslow: job satisfaction and job dissatisfaction are not opposites.
Job Dissatisfaction comes from pay & benefits meeting basic needs of survival & safety
Job Satisfaction is determined by the work itself meeting upper-level psychological needs: Affiliation,
Power & achievement.Chapter 29 37
Efficiency Wage
A company’s wages are above the equilibrium wage.
The theory: Increase in productivity will offset the extra wages
paid Increased loyalty Reduced absenteeism & tardiness More choice in workers
Chapter 29 38
Efficiency Wage
Chapter 29 39
Efficiency Wage
In Practice Temporary effect only Lowers employment
Chapter 29 40
Efficiency Wage Result
Chapter 29 41
New S S
Wage Differentials
Different jobs pay different wages Determined by supply & demand of skills
Almost everyone can cook French Fries Few people can hit baseballs like Albert Pujols Since there are fewer homerun hitters, the supply is
low, thus wages are high. The “Superstar” effect
Chapter 29 42
Income Profiles
Chapter 29 43Source: Economics by Boyes & Melvin
College Income Premium (ratio)
Chapter 29 44Source: Economics by Boyes & Melvin
Human Capital
Why go though 8 years of Medical school (& buy malpractice insurance) to become a doctor if you will make the same money as a used car salesman?
You want the smartest people to become doctors (job is important) so you give incentives.
Chapter 29 45
Employment Discrimination
Employer Limits pool of workers to choose from – must pay
higher wages Worker
May not want to work with people of other race/sex. Leads to lower wage.
Consumer May have preference for who serves them – this
leads to higher pricesChapter 29 46
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