1 © 2010 South-Western, a part of Cengage Learning Chapter 11 Labor Markets Microeconomics for Today Irvin B. Tucker

© 2010 South-Western, a part of Cengage Learning 2 What is the purpose of this chapter? To demonstrate that the wage paid to labor and the quantity of labor hired are influenced by the competitiveness of labor markets To demonstrate that the wage paid to labor and the quantity of labor hired are influenced by the competitiveness of labor markets

© 2010 South-Western, a part of Cengage Learning 3 What is a production function? A graph that shows the relationship between the amount of resources employed and a firm’s total product A graph that shows the relationship between the amount of resources employed and a firm’s total product

© 2010 South-Western, a part of Cengage Learning Production Function Total Output Quantity of Labor Total Output

© 2010 South-Western, a part of Cengage Learning 5 What is marginal product? The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

© 2010 South-Western, a part of Cengage Learning 6 What is marginal revenue product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

© 2010 South-Western, a part of Cengage Learning 7 What is the law of diminishing returns? As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

© 2010 South-Western, a part of Cengage Learning Marginal Product Curve Marginal Product Quantity of Labor Law of Diminishing Returns

© 2010 South-Western, a part of Cengage Learning 9 How do we measure MRP in perfect competition? Marginal revenue product is equal to the marginal product of labor times the price of the product Marginal revenue product is equal to the marginal product of labor times the price of the product MRP = P X MP

© 2010 South-Western, a part of Cengage Learning 10 How many workers will a firm hire to maximize its profits? It will continue hiring workers as long as the last worker’s MRP is greater than the worker’s wage It will continue hiring workers as long as the last worker’s MRP is greater than the worker’s wage

© 2010 South-Western, a part of Cengage Learning 11 Why will a firm hire the last worker if MRP > W? Because the firm’s revenue from hiring the last worker is greater then the amount of money paid to the last worker Because the firm’s revenue from hiring the last worker is greater then the amount of money paid to the last worker

© 2010 South-Western, a part of Cengage Learning 12 Why will a firm not hire the last worker if MRP < W? Because the firm would be paying the last worker more money than it is making on the last worker Because the firm would be paying the last worker more money than it is making on the last worker

© 2010 South-Western, a part of Cengage Learning 13 To what point is the firm tending toward? A firm will continue hiring workers up to the point where MRP = Wage A firm will continue hiring workers up to the point where MRP = Wage

© 2010 South-Western, a part of Cengage Learning 14 What does the demand curve for labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

© 2010 South-Western, a part of Cengage Learning 15 What is the demand curve for labor equal to? It is equal to the marginal revenue product of labor It is equal to the marginal revenue product of labor

© 2010 South-Western, a part of Cengage Learning 16 Decrease in Wage Rate Increase in Quantity of labor demanded Decrease in Quantity of labor demanded Increase in Wage Rate

© 2010 South-Western, a part of Cengage Learning 17 $280 $210 $140 $ Demand Curve for Labor MRP = demand 5 Quantity of Labor Wages

© 2010 South-Western, a part of Cengage Learning 18 What is derived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

© 2010 South-Western, a part of Cengage Learning 19 What does the supply curve for labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

© 2010 South-Western, a part of Cengage Learning 20 Decrease in Wage Rate Decrease in Quantity of labor supplied Increase in Quantity of labor supplied Increase in Wage Rate

© 2010 South-Western, a part of Cengage Learning 21 Market Supply Curve Wages S Quantity of Labor

© 2010 South-Western, a part of Cengage Learning 22 In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor The intersection of the demand for labor and the supply of labor

© 2010 South-Western, a part of Cengage Learning 23 D S Market Supply and Demand Wages Quantity of Labor Equilibrium Wage

© 2010 South-Western, a part of Cengage Learning 24 Why is the firm’s supply curve horizontal at the equilibrium? The firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal The firm can hire all the workers it wants at the equilibrium wage, so its supply curve is horizontal

© 2010 South-Western, a part of Cengage Learning 25 D S Firm’s Supply and Demand Wages Quantity of Labor Equilibrium Wage

© 2010 South-Western, a part of Cengage Learning 26 Does the perfectly competitive model apply to workers in unions? No

© 2010 South-Western, a part of Cengage Learning 27 What are examples of unions? Teamsters Teamsters United Auto Workers United Auto Workers National Education Assoc. National Education Assoc. American Federation of Government Employees American Federation of Government Employees

© 2010 South-Western, a part of Cengage Learning 28 How do unions attempt to raise wages? Increase demand for labor Increase demand for labor Decrease supply for labor Decrease supply for labor Power Power

© 2010 South-Western, a part of Cengage Learning 29 What is featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker

© 2010 South-Western, a part of Cengage Learning 30 Union featherbeds Increase in the demand for labor Increase in wages and employment

© 2010 South-Western, a part of Cengage Learning 31 $350 $280 $210 $ Unions cause an increase in the demand for labor 60 S D2D2 E1E1 D1D1 E2E2 Quantity of Labor Wage Rate per day

© 2010 South-Western, a part of Cengage Learning 32 What else can unions do to raise wages? Decrease competition from other nations Decrease competition from other nations

© 2010 South-Western, a part of Cengage Learning 33 $350 $280 $210 $ Unions cause a decrease in the supply for labor 50 S2S2 D E1E1 E2E2 Wage Rate per day S1S1 Quantity of Labor

© 2010 South-Western, a part of Cengage Learning 34 How else can unions raise wages? Collective bargaining Collective bargaining

© 2010 South-Western, a part of Cengage Learning 35 What is collective bargaining? The process of negotiations between the union and management over wages and working conditions The process of negotiations between the union and management over wages and working conditions

© 2010 South-Western, a part of Cengage Learning 36 $280 $210 $140 $ Collective Bargaining causes a Wage Rate increase D Unemployment Wage Rate per day S Quantity of Labor

© 2010 South-Western, a part of Cengage Learning 37 What factors can cause a change in the demand for labor? Unions Unions Prices of substitute goods Prices of substitute goods Demand for final products Demand for final products Marginal product of labor Marginal product of labor

© 2010 South-Western, a part of Cengage Learning 38 What factors can cause a change in the supply for labor? Unions Unions Demographic trends Demographic trends Expectations of future income Expectations of future income Changes in immigration laws Changes in immigration laws Education and training Education and training

© 2010 South-Western, a part of Cengage Learning 39 What has happened to union membership since WWII? Union power has declined Union power has declined

© 2010 South-Western, a part of Cengage Learning 40 How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries Union membership is far below that of other industrialized countries

© 2010 South-Western, a part of Cengage Learning 41 Union membership for selected countries

© 2010 South-Western, a part of Cengage Learning 42 What is a Monopsony? A labor market in which a single firm hires labor A labor market in which a single firm hires labor

© 2010 South-Western, a part of Cengage Learning 43 What is the reason for a monopsony? The absence of other firms in the area competing for a relatively immobile labor force The absence of other firms in the area competing for a relatively immobile labor force

© 2010 South-Western, a part of Cengage Learning 44 What is marginal factor cost? MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor MFC is the additional total cost resulting from a one-unit increase in the quantity of a factor

© 2010 South-Western, a part of Cengage Learning 45 What does the monopsonist have to do to hire additional workers? It has to raise the wage rate for all workers, therefore the MFC exceeds the wage rate It has to raise the wage rate for all workers, therefore the MFC exceeds the wage rate

© 2010 South-Western, a part of Cengage Learning 46 D MRP S Wages Quantity of Labor MFC A Monopsonist Determines its Wage Rate Monopsonist’s Equilibrium Wage Equilibrium Wage with a competitive labor market

© 2010 South-Western, a part of Cengage Learning 47 What conclusion can we make? A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market A monopsonist hires fewer workers and pays a lower wage than a firm in a competitive labor market

© 2010 South-Western, a part of Cengage Learning 48 END