1. Chapter 4 Labor Market Equilibrium Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 4-2 Equilibrium in a Single Competitive Labor Market Competitive equilibrium occurs when supply equals demand, generating a competitive wage and employment level. It is unlikely that the labor market is ever in an equilibrium, since supply and demand are dynamic. The model suggests that the market is always moving toward equilibrium.

3. 4-3 Equilibrium in a Competitive Labor Market SD0SD0 w*w* P Q E*E* EHEH ELEL Dollars Employment The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*. In equilibrium, all persons who are looking for work at the going wage can find a job. The triangle P gives the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains from trade, or the sum P + Q.

4. 4-4 The “ single wage ” property of a competitive equilibrium The “ single wage ” property of a competitive equilibrium has important implications for economic efficiency. –workers of given skills have the same value of marginal product of labor in all markets. If workers were mobile and entry and exit of workers to the labor market was free, then there would be a single wage paid to all workers. The allocation of workers to firms equating the wage to the value of marginal product is also the allocation that maximizes national income (allocative efficiency).

5. 4-5 Competitive Equilibrium in Two Labor Markets Linked by Migration Suppose the wage in the northern region (w N ) exceeds the wage in the southern region (w S ). Southern workers want to move North, shifting the southern supply curve to the left and the northern supply curve to the right. In the end, wages are equated across regions at w*. S Nominal wage Employment S w*w* wSwS DSDS (b) The Southern Labor Market Nominal wage Employment SNSN wNwN w*w* DNDN (a) The Northern Labor Market s A B C

6. 4-6 Wage Convergence Across States Source: Olivier Jean Blanchard and Lawrence F. Katz, “Regional Evolutions,” Brookings Papers on Economic Activity 1 (1992): 1-61.

7. 4-7 Employment B Nominal wage w 1 + t w0w0 S D0D0 D1D1 w1w1 w 0  t E1E1 E0E0 A The Impact of a Payroll Tax Assessed on Firms A payroll tax of $t assessed on employers shifts down the demand curve (from D 0 to D 1 ). The payroll tax decreases the wage that workers receive from w 0 to w 1, and increases the cost of hiring a worker from w 0 to w 1 + t.

8. 4-8 The Impact of a Payroll Tax Assessed on Workers Nominal wage w1w1 w0w0 S0S0 D0D0 D1D0D1D0 E1E1 E0E0 Employment S1S1 w 0 + t w 1  t A payroll tax assessed on workers shifts the supply curve to the left (from S 0 to S 1 ). The payroll tax has the same impact on the equilibrium wage and employment regardless of who it is assessed on.

9. 4-9 The Impact of a Payroll Tax put on Firms with Inelastic Supply Nominal wage w0w0 D0D0 SD0SD0 D1D1 E0E0 A B Employment w 0 – t A payroll tax assessed on the firm is shifted completely to workers when the labor supply curve is perfectly inelastic. The wage is initially w 0. The $t payroll tax shifts the demand curve to D 1, and the wage falls to w 0 – t.

10. 4-10 The Impact of an Employment Subsidy An employment subsidy of $t per worker hired shifts up the labor demand curve, increasing employment. The wage that workers receive rises from w 0 to w 1. The wage that firms actually pay falls from w 0 to w 1 – t. w1w1 S D1D1 D0D0 w0w0 E0E0 E1E1 B A Employment w 0 + t w 1 – t Nominal wage

11. 4-11 The SR Impact of Immigration when Immigrants and Natives are Complements w1w1 w0w0 Nominal wage Supply Demand N1N1 N0N0 Native worker Employment If immigrants and natives are complements, they do not compete in the same labor market. Immigration makes natives more productive, shifting out labor demand curve.  a higher native wage and an increase in native employment.

12. 4-12 The SR Impact of Immigration When Immigrants and Natives Are Perfect Substitutes Nominal wage Supply w0w0 w1w1 Demand N0N0 Natives + Immigrants Employment E1E1 N1N1 As immigrants and natives are perfect substitutes, the two groups are competing in the same labor market. Immigration shifts out the labor supply curve.  wage falls from w 0 to w 1, and total employment increases from N 0 to E 1. At the lower wage, the number of natives who work declines from N 0 to N 1.

13. 4-13 The LR Impact of Immigration When Immigrants and Natives Are Perfect Substitutes Nominal wage Supply w0w0 w1w1 Demand N0N0 Employment N 0 + Immigrants Immigration initially shifts out the labor supply curve so the wage falls from w 0 to w 1. Over time, capital expands as firms take advantage of the cheaper workforce, shifting out the labor demand curve and restoring the original wage and level of native employment..

14. 4-14 The LR Impact ： The Native Labor Market ’ s Response to Immigration Nominal wage P PT w0w0 Demand (b) Pittsburgh Employment S0S0 S3S3 w*w* Nominal wage w0w0 P LA w LA (a) Los Angeles Employment S0S0 S1S1 S2S2 Demand w*w* Originally, both markets pay equilibrium wages of w 0. After immigration into Los Angeles, both markets eventually converge to a new equilibrium wage at w*, which is less than w 0.

15. 4-15 Scatter Diagram Relating Wages and Immigration for Native Skill Groups

16. 4-16 The Immigration Surplus Prior to immigration, there are N native workers in the economy and national income is given by the trapezoid ABN0. Immigration increases the labor supply to M workers and national income is given by the trapezoid ACM0. Immigrants are paid a total of FCMN dollars as salary. The immigration surplus gives the increase in national income that accrues to natives and is given by the area in the triangle BCF. Nominal wage S S 0 C B N M A w 0 w 1 D Employment S S 0 C B N M A w 0 w 1 D F

17. 4-17 The Cobweb Model 蛛網模型 Two assumptions of the cobweb model: –Time is needed to produce skilled workers. –Persons decide to become skilled workers by looking at conditions in the labor market at the time they enter school. (people may be misinformed) A “ cobweb ” pattern forms around the equilibrium.

18. 4-18 The Cobweb Model in the Market for New Engineers S Nominal wage w1w1 E*E* E2E2 E1E1 w3w3 w*w* w2w2 w0w0 D D E0E0 Employment The initial equilibrium wage in the engineering market is w 0. The demand for engineers shifts to D, and the wage will eventually increase to w*. Because new engineers are not produced instantaneously and because students might mis- judge future opportunities in the market, a cobweb is created as the market adjusts to the increase in demand.

19. 4-19 Noncompetitive Labor Markets: Monopsony 專買 Monopsony market exists when a firm is the only buyer of labor. Monopsonists must increase wages to attract more workers. Two types of monopsonist firms: –Perfectly discriminating –Nondiscriminating

20. 4-20 Perfectly Discriminating Monopsonist Discriminating monopsonists are able to hire different workers at different wages. To maximize firm surplus (profits), a perfectly discriminating monopsonist “ perfectly discriminates ” by paying each worker his or her reservation wage.

21. 4-21 The Hiring Decision of a Perfectly Discriminating Monopsonist A perfectly discriminating monopsonist faces an upward- sloping labor supply curve and can hire different workers at different wages. Therefore the labor supply curve gives the marginal cost of hiring. Profit maximization occurs at point A. The monopsonist hires the same number of workers as a competitive market, but each worker is paid his or her reservation wage. Nominal wage S VMP E Employment w*w* w 30 w 10 30 10 E*E* A

22. 4-22 The Hiring Decision of a Nondiscriminating Monopsonist A nondiscriminating monopsonist pays the same wage to all workers. The marginal cost of hiring exceeds the wage, and the marginal cost curve lies above the supply curve. Profit maximization occurs at point A; the monopsonist hires E M workers and pays them all a wage of w M.

23. 4-23 The Impact of the Minimum Wage on a Nondiscriminating Monopsonist MC E Nominal wage S A ww w*w* wMwM VMP E EE EMEM Employment The minimum wage may increase both wages and employment when imposed on a nondiscriminating monopsonist. A minimum wage set at w  increases employment to E .

24. 4-24 Monopoly in the Product Market: A Review Firms that have monopoly power can influence the price of the product that they sell. Monopolist faces a downward sloped market demand curve for its output and an even lower downward sloped marginal revenue curve.

25. 4-25 The Output Decision of a Monopolist A monopolist faces a downward- sloping demand curve for her output. The marginal revenue from selling an additional unit of output is less than the price of the product. Profit maximization occurs at point A where the monopolist produces q M units of output and sells each unit of output at a price of p M dollars.

26. 4-26 The Labor Demand Curve of a Monopolist The marginal revenue product gives the worker’s contribution to a monopolist’s revenues (or the worker’s marginal product times marginal revenue), and is less than the worker’s value of marginal product. Profit maximization occurs at point A where the monopolist hires fewer workers (E M ) than would be hired in a competitive market.