1. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eO’Sullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER 18 The Labor Market

2. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Demand for Labor The model of supply and demand can be used to study the determination of wages and employment in the labor market.The model of supply and demand can be used to study the determination of wages and employment in the labor market. Firms use workers to produce products demanded by consumers.Firms use workers to produce products demanded by consumers. Economists say that labor demand is a derived demand, that is, derived from the demand for the products produced by workers.Economists say that labor demand is a derived demand, that is, derived from the demand for the products produced by workers.

3. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Demand by an Individual Firm in the Short-Run Marginal PRINCIPLE Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals its marginal cost. The firm will pick the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.The firm will pick the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.

4. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Demand by an Individual Firm in the Short Run PRINCIPLE of Diminishing Returns Suppose output is produced with two or more inputs and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.

5. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle for Labor Decision Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 26$0.50$8 500.50$8 720.50$8 920.50$8 1080.50$8 1200.50$8 1280.50$8 1300.50$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 126$0.50$8 2500.50$8 3720.50$8 4920.50$8 51080.50$8 61200.50$8 71280.50$8 81300.50$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$8 250240.50$8 372220.50$8 492200.50$8 5108160.50$8 6120120.50$8 712880.50$8 813020.50$8 Because of diminishing returns, the marginal product of labor (the change in output from one additional worker) decreases as the number of workers increases.Because of diminishing returns, the marginal product of labor (the change in output from one additional worker) decreases as the number of workers increases.

6. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle for Labor Decision Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$8 250240.50$8 372220.50$8 492200.50$8 5108160.50$8 6120120.50$8 712880.50$8 813020.50$8 The marginal benefit of labor equals the marginal revenue product of labor (MRP).The marginal benefit of labor equals the marginal revenue product of labor (MRP). Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

7. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Demand by an Individual Firm in the Short Run The marginal revenue product of labor (MRP) is the extra revenue generated from one more unit of labor; equal to price of output times the marginal product of labor.The marginal revenue product of labor (MRP) is the extra revenue generated from one more unit of labor; equal to price of output times the marginal product of labor.

8. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor Using the marginal principle, the firm picks the quantity of workers at which the marginal benefit (the marginal revenue product of labor) equals the marginal cost (the wage).Using the marginal principle, the firm picks the quantity of workers at which the marginal benefit (the marginal revenue product of labor) equals the marginal cost (the wage).

9. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor Because the marginal product drops as the numbers of workers increases, the MRP curve is negatively sloped.Because the marginal product drops as the numbers of workers increases, the MRP curve is negatively sloped. Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

10. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor The MRP curve (or marginal benefit curve) is also the firm’s short-run demand curve for labor.The MRP curve (or marginal benefit curve) is also the firm’s short-run demand curve for labor. Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

11. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor The short-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the short run, the period when the firm cannot change its production facility.The short-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the short run, the period when the firm cannot change its production facility.

12. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor At an hourly wage of $8, marginal revenue product equals marginal cost when the firm hires five workers.At an hourly wage of $8, marginal revenue product equals marginal cost when the firm hires five workers. Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

13. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor If the wage goes up to $11 an hour, the firm hires 3 workers.If the wage goes up to $11 an hour, the firm hires 3 workers. Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

14. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor The additional revenue from the 6 th worker is less than the $8 additional cost of that worker.The additional revenue from the 6 th worker is less than the $8 additional cost of that worker. Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8 Number of Workers Balls per Hour Marginal Product Price per Ball Marginal Benefit = Marginal Revenue Product Marginal Cost when Wage = $8 12626$0.50$13$8 250240.50$12$8 372220.50$11$8 492200.50$10$8 5108160.50$8$8 6120120.50$6$8 712880.50$4$8 813020.50$1$8

15. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Marginal Principle and the Firm’s Demand for Labor If you pick a wage, the MRP curve tells you exactly how much labor the firm will demand.If you pick a wage, the MRP curve tells you exactly how much labor the firm will demand.

16. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin An Increase in the Price of Output Shifts the Labor Demand Curve An increase in the price of the output or in productivity will shift the entire labor demand curve to the right.An increase in the price of the output or in productivity will shift the entire labor demand curve to the right.

17. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin What About Labor Demand in the Long Run? The long-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the long run, when the number of firms in the market can change and firms already in the market can modify their production facilities.The long-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the long run, when the number of firms in the market can change and firms already in the market can modify their production facilities.

18. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin What About Labor Demand in the Long Run? Although there are no diminishing returns in the long run, the market demand curve is still negatively sloped for two reasons:Although there are no diminishing returns in the long run, the market demand curve is still negatively sloped for two reasons: The output effect: The change in the quantity of labor demanded resulting from a change in the quantity of output produced.The output effect: The change in the quantity of labor demanded resulting from a change in the quantity of output produced. The input-substitution effect: The change in the quantity of labor demanded resulting from a change in the relative cost of labor.The input-substitution effect: The change in the quantity of labor demanded resulting from a change in the relative cost of labor.

19. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Short-Run Versus Long-Run Demand The demand for labor is less elastic (steeper) in the short-run than in the long run (flatter), because in the short run the firm has less flexibility to substitute other inputs for labor or modify its production facilities.The demand for labor is less elastic (steeper) in the short-run than in the long run (flatter), because in the short run the firm has less flexibility to substitute other inputs for labor or modify its production facilities.

20. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Individual Decision: How Many Hours? An increase in the wage—the price of labor— has the following effects on the demand for leisure:An increase in the wage—the price of labor— has the following effects on the demand for leisure: Substitution effect: As the wage increases, a worker will substitute income for leisure timeSubstitution effect: As the wage increases, a worker will substitute income for leisure time Income effect: An increase in the wage increases the worker’s real income and the demand for leisure timeIncome effect: An increase in the wage increases the worker’s real income and the demand for leisure time

21. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Supply Curve The market supply curve for labor shows the relationship between the wage and the quantity of labor supplied.The market supply curve for labor shows the relationship between the wage and the quantity of labor supplied.

22. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Supply Curve The market supply curve for labor is positively sloped, consistent with the law of supply: The higher the wage (the price of labor), the larger the quantity of labor supplied.The market supply curve for labor is positively sloped, consistent with the law of supply: The higher the wage (the price of labor), the larger the quantity of labor supplied.

23. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Supply, Demand, and Market Equilibrium At the market equilibrium (point e, with wage = $15 per hour and quantity = 16,000 hours), the quantity supplied equals the quantity demanded.At the market equilibrium (point e, with wage = $15 per hour and quantity = 16,000 hours), the quantity supplied equals the quantity demanded.

24. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Supply, Demand, and Market Equilibrium There is neither excess demand for labor nor excess supply of labor.There is neither excess demand for labor nor excess supply of labor.

25. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Supply, Demand, and Market Equilibrium An increase in the wage affects the quantity of nursing supplied in three ways:An increase in the wage affects the quantity of nursing supplied in three ways: Change in hours per worker.Change in hours per worker. Occupational choice.Occupational choice. Migration.Migration. The second and third effects reinforce one another, so an increase in the wage causes movement upward along the market supply curve.The second and third effects reinforce one another, so an increase in the wage causes movement upward along the market supply curve.

26. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Market Equilibrium A market equilibrium is a situation in which there is no pressure to change the price of a good or service.A market equilibrium is a situation in which there is no pressure to change the price of a good or service. Equilibrium occurs at point e where the supply curve intersects the demand curve.Equilibrium occurs at point e where the supply curve intersects the demand curve.

27. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Market Equilibrium Equilibrium wage is $15 per hour and the equilibrium quantity is 16,000 hours of nursing per day.Equilibrium wage is $15 per hour and the equilibrium quantity is 16,000 hours of nursing per day. At this wage, there is neither excess demand for labor nor excess supply of labor.At this wage, there is neither excess demand for labor nor excess supply of labor.

28. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Market Effects of an Increase in Demand for Labor An increase in the demand for nursing services shifts the demand curve to the right, moving the equilibrium from point e to point f.An increase in the demand for nursing services shifts the demand curve to the right, moving the equilibrium from point e to point f.

29. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Market Effects of an Increase in Demand for Labor The equilibrium wage increases from $15 to $17 per hour.The equilibrium wage increases from $15 to $17 per hour. The equilibrium quantity increases from 16,000 hours to 19,000 hours.The equilibrium quantity increases from 16,000 hours to 19,000 hours.

30. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Why Do Wages Differ Across Occupations? The wage for a particular occupation will be high if the supply of workers in that occupation is small relative to the demand for those workers.The wage for a particular occupation will be high if the supply of workers in that occupation is small relative to the demand for those workers.

31. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Why Do Wages Differ Across Occupations? If supply is low relative to demand– because few people have the skills, training costs are high, or the job is undesirable–the equilibrium wage will be high.If supply is low relative to demand– because few people have the skills, training costs are high, or the job is undesirable–the equilibrium wage will be high.

32. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Why Do Wages Differ Across Occupations? The supply of workers in a particular occupation could be small for four reasons:The supply of workers in a particular occupation could be small for four reasons: Few people with the required skills.Few people with the required skills. High training costs.High training costs. Undesirable job features.Undesirable job features. Artificial barriers to entry.Artificial barriers to entry.

33. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Why Do College Graduates Earn Higher Wages? In 1997, the typical graduate earned 78% more than the typical high-school graduate. There are two reasons for the college premium:In 1997, the typical graduate earned 78% more than the typical high-school graduate. There are two reasons for the college premium: The learning effect: The increase in a person’s wage resulting from the learning of skills required for certain occupations.The learning effect: The increase in a person’s wage resulting from the learning of skills required for certain occupations. The signaling effect: The increase in a person’s wage resulting from the signal of productivity provided by completing college.The signaling effect: The increase in a person’s wage resulting from the signal of productivity provided by completing college.

34. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Effects of the Minimum Wage The minimum wage decreases the quantity of labor employed and yields good news and bad news for workers, employers and consumers:The minimum wage decreases the quantity of labor employed and yields good news and bad news for workers, employers and consumers: Good news: Some workers keep their jobs and earn a higher wage.Good news: Some workers keep their jobs and earn a higher wage. Bad news: Some workers lose their jobs, and production costs rise, increasing the price of goods and services.Bad news: Some workers lose their jobs, and production costs rise, increasing the price of goods and services.

35. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of the Minimum Wage The market equilibrium is shown by point e. The wage is $4.70 per hour, and the quantity of labor is 50,000 labor hours per day.The market equilibrium is shown by point e. The wage is $4.70 per hour, and the quantity of labor is 50,000 labor hours per day.

36. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of the Minimum Wage A minimum wage of $5.15 per hour decreases the quantity of labor demanded to 49,000 hours per day.A minimum wage of $5.15 per hour decreases the quantity of labor demanded to 49,000 hours per day.

37. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of the Minimum Wage Although some workers receive a higher wage, others lose their jobs or work fewer hours.Although some workers receive a higher wage, others lose their jobs or work fewer hours.

38. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Occupational Licensing Occupational licensing has been criticized on three grounds:Occupational licensing has been criticized on three grounds: Weak link between performance and licensing requirements.Weak link between performance and licensing requirements. Alternative means of protection.Alternative means of protection. Entry restrictions.Entry restrictions.

39. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of Occupational Licensing To be a licensed pharmacist, a worker can complete a 5- year baccalaureate or a 6-year doctorate.To be a licensed pharmacist, a worker can complete a 5- year baccalaureate or a 6-year doctorate. The market equilibrium with this educational requirement is shown by point e.The market equilibrium with this educational requirement is shown by point e.

40. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of Occupational Licensing Occupational licensing increases the cost of entering an occupation, shifting the supply curve to the left.Occupational licensing increases the cost of entering an occupation, shifting the supply curve to the left.

41. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of Occupational Licensing An increase in the required education for pharmacists increases the equilibrium wage from $15 to $17.An increase in the required education for pharmacists increases the equilibrium wage from $15 to $17.

42. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of Occupational Licensing The equilibrium quantity decreases from 32,000 to 24,000 hours of labor.The equilibrium quantity decreases from 32,000 to 24,000 hours of labor.

43. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Unions A labor union is an organized group of workers: the objectives of the organization are to increase job security, improve working conditions, and increase wages and fringe benefits.A labor union is an organized group of workers: the objectives of the organization are to increase job security, improve working conditions, and increase wages and fringe benefits.

44. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin A Brief History of Labor Unions in the United States There are two types of labor unions:There are two types of labor unions: A craft union includes workers from a particular occupation, for example, plumbers, bakers, or electricians.A craft union includes workers from a particular occupation, for example, plumbers, bakers, or electricians. An industrial union includes all types of workers from a single industry, for example, steelworkers or autoworkers.An industrial union includes all types of workers from a single industry, for example, steelworkers or autoworkers.

45. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Unionization Rates in the United States, 1999 Overall, 14% of all wage and salary workers are members of unions. Over 37% of public-sector workers are members of unions.Overall, 14% of all wage and salary workers are members of unions. Over 37% of public-sector workers are members of unions.

46. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Legislation 1935 The Wagner Act guaranteed workers the right to join unions and required each firm to bargain with a union formed by a majority of its workers. The National Labor Relations Board (NRLB) was established to enforce the provisions of the Wagner Act. 1935 1947 The Taft-Harley Act gave government the power to stop strikes that “imperiled the national health or safety” and gave the states the right to pass “right-to-work” laws. Right-to-work laws outlaw union membership as a precondition of employment. 1935 The Wagner Act guaranteed workers the right to join unions and required each firm to bargain with a union formed by a majority of its workers. The National Labor Relations Board (NRLB) was established to enforce the provisions of the Wagner Act. 1947 The Taft-Harley Act gave government the power to stop strikes that “imperiled the national health or safety” and gave the states the right to pass “right-to-work” laws. Right-to-work laws outlaw union membership as a precondition of employment. 1959 The Landrum-Griffin Act was a response to allegations of corruption and misconduct by union officials. This act guaranteed union members the right to fair elections, made it easier to monitor union finances, and made the theft of union funds a federal offense.

47. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Labor Unions and Wages Three approaches to increase the wages of union workers:Three approaches to increase the wages of union workers: Organize workers and negotiate a higher wage—restricting membership.Organize workers and negotiate a higher wage—restricting membership. Promote the products produced by union workers; labor demand is derived demand.Promote the products produced by union workers; labor demand is derived demand. Increase the amount of labor required to produce a given quantity of output—a practice known as “featherbedding.”Increase the amount of labor required to produce a given quantity of output—a practice known as “featherbedding.”

48. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Imperfect Information and Efficiency Wages There is asymmetric information in the labor market because employers cannot distinguish between skillful and unskillful workers, or between hard workers and lazy workers.There is asymmetric information in the labor market because employers cannot distinguish between skillful and unskillful workers, or between hard workers and lazy workers. If the employer cannot distinguish between different types of workers, it will pay a single wage, realizing that it will probably hire workers of each type.If the employer cannot distinguish between different types of workers, it will pay a single wage, realizing that it will probably hire workers of each type.

49. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Imperfect Information and Efficiency Wages To attract some high-skill workers, the employer must pay a wage that exceeds the opportunity cost of high-skill workers.To attract some high-skill workers, the employer must pay a wage that exceeds the opportunity cost of high-skill workers. Paying efficiency wages is the practice of a firm paying a higher wage to increase the average productivity of its workforce.Paying efficiency wages is the practice of a firm paying a higher wage to increase the average productivity of its workforce. As the firm attracts more skilled workers, the average productivity of the workforce rises.As the firm attracts more skilled workers, the average productivity of the workforce rises. By paying efficiency wages to increase the average productivity of its workforce, a firm could increase its profit.By paying efficiency wages to increase the average productivity of its workforce, a firm could increase its profit.

50. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Monopsony Power A monopsony is a single buyer of a particular input.A monopsony is a single buyer of a particular input. A monopsonist faces a positively sloped market supply curve of labor.A monopsonist faces a positively sloped market supply curve of labor. If the monopsonist hires more workers, it must pay a higher wage to attract them away from other activities.If the monopsonist hires more workers, it must pay a higher wage to attract them away from other activities.

51. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Supply of Labor and Marginal Labor Cost for a Monopsonist To hire more workers, the monopsonist must pay a higher wage, so the marginal labor cost exceeds the wage.To hire more workers, the monopsonist must pay a higher wage, so the marginal labor cost exceeds the wage.

52. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Supply of Labor and Marginal Labor Cost for a Monopsonist The marginal labor cost is the increase in total labor cost resulting from hiring one more worker. (Also known as marignal factor cost).The marginal labor cost is the increase in total labor cost resulting from hiring one more worker. (Also known as marignal factor cost).

53. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Supply of Labor and Marginal Labor Cost for a Monopsonist To hire the 8 th worker, the firm increases the wage from $10 to $12.To hire the 8 th worker, the firm increases the wage from $10 to $12.

54. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Supply of Labor and Marginal Labor Cost for a Monopsonist The marginal labor cost for the 8 th worker is $26, equal to $12 paid to the 8 th worker plus $14 extra money paid to the 7 original workers, each of whom receives $2 more per hour.The marginal labor cost for the 8 th worker is $26, equal to $12 paid to the 8 th worker plus $14 extra money paid to the 7 original workers, each of whom receives $2 more per hour.

55. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Hiring Decision of a Monopsonist Using the marginal principle, the firm chooses the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.Using the marginal principle, the firm chooses the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.

56. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Hiring Decision of a Monopsonist The monopsonist chooses point m, where the marginal benefit of labor (the marginal revenue product) equals the marginal labor cost.The monopsonist chooses point m, where the marginal benefit of labor (the marginal revenue product) equals the marginal labor cost.

57. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Hiring Decision of a Monopsonist The supply curve indicates that to hire 36 workers, the monopsonist must pay a wage of $10 (point w ).The supply curve indicates that to hire 36 workers, the monopsonist must pay a wage of $10 (point w ).

58. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Monopoly versus Monopsony MonopolyMonopsony Single seller of output Single buyer of input High price of output Low price of input Small quantity of output Small quantity of input A monopolist (a single seller) uses its market power to increase the price of output.A monopolist (a single seller) uses its market power to increase the price of output. A monopsonist (a single buyer) uses its market power to decrease the wage or other input prices.A monopsonist (a single buyer) uses its market power to decrease the wage or other input prices.