1. Economics 103 Lecture # 14 The Labor Market

2. We’ve already discussed how the demand for labor comes from the marginal product of labor. This is often called a “derived demand” because it follows from the demand for the output.

3. The supply of labor comes from the “demand for leisure.” Leisure is a good, and the price of leisure is the forgone wage. If you want 16 hours of leisure when the wage is $30, then you are working 8 hours. If the wage goes up to $40, the demand for leisure falls to 12, and the quantity supplied to the labor market increases to 12 hours.

4. So the labor market has a supply and demand graph, just like other markets. Unemployment and shortages in the labor market are simply the result of wages out of equilibrium. The only thing different in this application is what is on the horizontal axis.

5. Simple Applications: 1. What is the effect of a union? A union restricts the number of workers in an effort to raise wages. A union also tries to restrict the number of substitutes to create an inelastic demand for labor. Unions:

6. Examples. 1. Why do prostitutes want to remove teenage prostitutes from the street? 2. Who opposed the Gutenberg Press?

7. 2. What explains income differences? A.Common skills are going to have low wages (large supply of labor).

8. B. Some jobs have non-pecuniary aspects. (i)Good things increase the supply of labor and lower the wage. (ii) Jobs that suck have to offer higher wages to get people to do them (low supply).

9. C. Geographic differences. This is another shift in supply. None of these are very controversial.

10. D. Differences in productivity. -this is the most objectionable. - for a given supply of labor, more productive people will earn higher wages. This is a shift in demand … outwards.

11. Most work in labor economics has been done around the issue of differences in wages between the sexes. Why do Earn less than Our model only allows a few choices.

12. Explanation 1: Women generally have a larger labor supply.

13. Explanation 2: The Demand for female labor is lower. There are three possibilities here. a)Consumers value the output of women less. That is, p m > p w This also makes little sense, unless we’re talking about …

14. Or But this doesn’t seem to explain the general difference in wages across sexes.

15. b) Firms might just discriminate against women. But this would imply collusion among all firms. A firm that decided to break ranks and hire equally productive women at higher wages, would drive every other firm out of business

16. The only other option left is c) Women have lower marginal products than men. Why would women be less productive than men?

17. This might make sense in jobs that require But if a job requires

18. Most studies have found that a major factor in the wage difference stems from When this starts to happen, male wages will fall relative to female wages.