1. 1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2. 2 Labor Market Facts: 1. Market forces drive wages to their equilibrium level and cause markets to clear. 2. At the market-clearing wage and employment levels, there can still be some unemployment. But, the number of people looking for jobs should just match the number of vacancies. 3. If workers are mobile, their wages for the same type of work should be the same everywhere. 4. If wage differences persist for the same type of labor when there is adequate mobility, there some non- monetary aspects of the jobs must be different.

3. 3 Imperfection in Labor Markets I. Imperfection on Sellers’ Side - Union Q2 Q2 – Q1 Q1 = unemployment (would be same for minimum wage case) II. Imperfection on Buyers’ Side A single buyer of labor in a market is called a monopsonist. Total Market

4. 4 Monopsonist  -Max Hiring Point gap ECEC EMEM The gap between wc wc and wm wm is called monopsonistic exploitation.  Monopsony causes fewer people to be hired and wages to be lower. MRP

5. 5 Unions 1. American Federation of Labor (AFL)  Craft Unionism 2. Congress of Industrial Organization (CIO)  Industrial Unionism  founded in 1930’s. 3. 1955: Two Labor Federations Merged.  AFL-CIO

6. 6 Labor Legislation 1. Wagner Act of 1935 1935  Pro-Labor – insured rights of workers to organize, bargain collectively, and to strike. – forced company to bargain in good faith. – established the National Labor Relations Board to investigate “unfair labor practice”. 2. Taft-Hartley Act of 1947 1947  Anti-Labor – outlawed “closed shop”,but not “union shop”. – 22 states have “Right-to-Work” laws. – provides for 80-day cooling off period when ntional security is involved.

7. 7 Capital Markets Capital Capital is a human-made resource that is used to produce other commodities. 2. Investment Investment – An act that results in the formation of capital. (a) Physical Capital: Plant and Equipment (b) Human Capital: Skill or Training In deciding to purchase capital, a firm must compare the cost of the capital today to its returns which come from in the future.

8. 8 Present Value Formula ASK: ASK: How much is $100 today worth 1 year from now (assume i=10%) Today 1 Year Hence 100  (1 +.10) = 100 + 10 = 110 100 = 110/(1+.10) So: $100 today is worth $110 one year from now. Or: The Present Value Value of $110 after one year from now is $100 today. Where R= future return i = interest rate

9. 9 Present Value Formula ASK: ASK: What is $100 worth 2 years from now? Today 2 Year Hence 100  (1 +.10)  (1+.10) = 110  (1+.10) 100  (1 +.10) 2 = 121 100 = 121/(1+.10) 2 So: $121 gotten two years hence is worth $100 today. The present value of a sum gotten after “t” years is: * Important fact is compound interest.

10. 10 Two Important Things About P.V. Formula (1) The P.V. of any sum will be smaller the further in the future the sum is gotten (and vice versa). (2) The P.V. of any sum will be smaller the higher the interest rate is (and vice versa). We can generalize our formula to get the P.V. of a stream of future earnings. The “capitalized value” of an asset is the P.V. of the stream of earnings or returns that asset will yield.

11. 11 Capital Purchasing Decision If P.V. of future Returns > Today’s Purchase Price then BUY If P.V. of future Returns < Today’s Purchase Price then DON’T BUY