Download - Lecture11(Ch12) (1)
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Questions: (1) Where do the labor
demand and supply curves come from?
(2) How well do they explain the facts?
12_01WAGE(PRICE OFLABOR)
QUANTITY OF LABOR
Labordemand
Marketwage
Amount of labor wherequantity of labor suppliedequals quantity of labordemanded
Laborsupply
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The Slowdown in Wage Growth12_02
INDEX,
1992 = 100
110
100
90
80
70
601960 1965 1970 1975 1980 1985 1990 1995 2000
Real wage
High growth
trend
Low growthtrend
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Two sides of the labor market:
Firms and Workers Labor Demand
The firms decision
Labor Supply
The workers decision
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Derived Demand for Labor
Labor demand is a derived from firms
profit maximization decisions
Firm chooses output to maximize profits(MC = P)
This amount of output implies a level of
labor input (short run)a production function all over again
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Market power? Not yet, lets first
start with competition A firm in a competitive market for its good:
takes priceas given
But now also assume that the labor marketis competitive: firm takes wageas given
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Example: Competitive Firm with
P = $100 (T12.1)Workers Quantity
produced
Marginal
Product
Total
Revenue
Marginal
Revenue
Product0 0 -- 0 --
1 17 17 1700 1700
2 31 14 3100 14003 42 11 4200 1100
4 51 9 5100 900
5 58 7 5800 700
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To derive the labor demand
curve, first plot MRP by hand
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Marginal Revenue Product
Equals Wage Condition for Profit Maximization
In symbols: MRP = W
For firms in competitive markets:
MRP = PxMP
example 1700 = 100x17 or 1400 = 100x14
This implies that MP = W/P
Marginal product of labor equals real wage
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To get market demand for labor,
sum up firms demands for labor12_04
WEEKLY WAGE(DOLLARS)
WEEKLY WAGE(DOLLARS)
WEEKLY WAGE(DOLLARS)
1,500 1,500 1,500
1,000 1,0001,000
500 500 500
50 0 010 5 10 5 10 15 20
QUANTITY OF LABOR
(NUMBER OF WORKERS)
QUANTITY OF LABOR
(NUMBER OF WORKERS)
QUANTITY OF LABOR
(NUMBER OF WORKERS)
LABOR DEMAND IN THE MARKETLABOR DEMAND AT CAREERPROLABOR DEMAND AT GETAJOB
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What if f irm has market power
as in a monopoly? Still must have MRP = W
But in this case MRP does not equal P=MP
because P is not fixed
P must decrease as L and Q go up
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Derivation of Labor Supply
analogywith earlier analysis of consumer
behavior: purposeful choices(work versus
leisure) with limited resources(only 24hrs in a day)
The price of leisure is the opportunity
cost of not working = wage As the wage rises, the price of leisure rises
thus the person will work more
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Leisure includes school!
Investing in human capital
more human capital increase marginal
product of a worker
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Substitutionversus income
effect in labor supply Recall the two effects for a good
the two effects go in the samedirection
in case of labor supply the two effects go in
oppositedirections
hence labor supply can slope down!!!!!!!
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3 different labor supply curves12_05
WAGE WAGE WAGE
Laborsupply
Laborsupply
Labor
supply
QUANTITY OF LABOR QUANTITY OF LABOR QUANTITY OF LABOR
INCOME EFFECT DOMINATESSUBSTITUTION EFFECT EQUALS
INCOME EFFECT
SUBSTITUTION EFFECT DOMINATES
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Backward bending labor supply
curve12_06WAGE
LABOR SUPPLY
Substitution effect
dominates in this
region.
Income and
substitution effects
balance out.
Income effect
dominates in
this region.
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A Test: compare trend in labor
productivity with trend in real
wage12_07
INDEX,
1992 = 100
110
100
90
80
Labor productivity
70
60
50
1960 1965 1970 1975 1980 1985 1990 1995 2000
High growthtrend
Low growthtrend
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But productivity theory does not
explain everything Compensating wage differentials
salaries in the business school versus the
economics department
Efficiency Wages
Long Term Employment Contracts
wage is related to productivity over longperiods, but not short periods
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Effects of M inimum Wage12_09
Quantity oflabor demanded
Quantity oflabor supplied
Minimumwage
Labor marketequilibrium
Labordemand
Labordemand
Laborsupply
Laborsupply
WAGEWAGE
QUANTITY OF LABORQUANTITY OF LABOR
Surplus
Market for Unskilled Workers Market for Skilled Workers
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Discr imination in competitive
markets12_08 WAGE
Labor supply
Actual marginal
revenue product
NUMBER OF WOMEN WORKERS
4. Because actual marginalrevenue product is higherthan the wage, other firmscan hire these women at ahigher wage but still belowthe marginal revenueproduct.
1. Prejudiced firm actsas if marginal revenueproduct is lower thanit actually is.
2. Discriminationcauses wagesto fall by thisamount.
3. Discrimination alsocauses lower
employment for women.
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Effects of Labor Unions
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