1. Mr. Bernstein Module 71: The Market for Labor December 18, 2014
AP Economics
Mr. Bernstein
Module 71:
The Market for Labor
December 18, 2014

2. AP Economics Mr. Bernstein
The Market for Labor
You are (or will be) a supplier of labor

3. AP Economics Mr. Bernstein
The Market for Labor: Basics
Labor is a Factor market (not Product market)
Workers have a decision between labor and leisure
Labor Supply Curves can be built and compared to Labor Demand Curves to determine equilibrium
Equilibrium can be found in perfect competition and imperfect competition markets
Price = Wage
Equilibrium is where worker’s MU from add’l hour of labor = MU from one hour of leisure

4. AP Economics Mr. Bernstein
Supply of Labor
Substitution Effect
Higher wage increases
opportunity cost of leisure…
higher price of leisure means
worker substitutes fewer
hours of leisure for work
Hours of work (week)
IE>SE, downward sloping
SE>IE, upward sloping
Labor supply
Hourly wage

5. AP Economics Mr. Bernstein
Supply of Labor
Income Effect
As income rises, people
consume more leisure
(leisure is a normal good)
…for most people, the
supply curve is upward
sloping
Hours of work (week)
IE>SE, downward sloping
SE>IE, upward sloping
Labor supply
Hourly wage

6. AP Economics Mr. Bernstein
Shifts in the Supply of Labor
Changes in preferences or social norms
Post-WWII acceptance of women in workplace
Changes in population
Immigration + birth rate > death rate
Changes in opportunity
Increasing demand for health care, movement of manufacturing jobs overseas
Changes in wealth
Wealth effect (home, investments, etc.) is similar to income effect, increases consumption of leisure

7. AP Economics Mr. Bernstein
Equilibrium in the Labor Market
Combine the demand
from many firms and
individuals
Demand is downward
sloping
Supply is upward sloping
Value of W* = Marginal
Product of last unit of labor hired
Market Labor Demand
Market Labor Supply
Wage W*

8. AP Economics Mr. Bernstein
Imperfect Competition in the Product Market
In Perfect Competition
VMPL = P * MPL = W
Here, MR<P
MRPL = MPL x MR…
and is < VMPL
MRPL is the firm’s
Demand curve
Wage
MRPL
VMPL
Quantity of Labor (workers) Em Ec

9. AP Economics Mr. Bernstein
Imperfect Competition in the Product Market
Fewer units of labor
are used if firm has
pricing power (Em)
than if they are
price takers (Ec)
Wage
MRPL
VMPL
Quantity of Labor (workers) Em Ec

10. AP Economics Mr. Bernstein
Imperfect Competition in the Labor Market
A monopsony is a
single buyer of a
factor
MFCL, or Marginal
Factor Cost of Labor,
rises with the
upward sloping Labor
Supply curve & is > W
MFCL
Labor Supply
$12
$10
Wage
Quantity of Labor (workers) 3

11. AP Economics Mr. Bernstein
Imperfect Competition in the Labor Market
Hire where
MPRL = MFCL
Monopsony pays
W* < MRPL
Remember, whether
Perfect or Imperfect
Markets, firms hire
where MRPL = MFCL
MFCL
Labor Supply W*
MRPL
Wage
Quantity of Labor (workers) E*