1. 1 Labor Markets and Income Distribution ©2006 South-Western College Publishing

2. Factors of Production Factors of production are the inputs used to produce goods and services.

3. The Market for the Factors of Production The demand for a factor of production is a derived demand. uA firm’s demand for a factor of production is derived from its decision to supply a good in another market.

4. 4 In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor

5. The Demand For Labor Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.

6. 6 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

7. 7 Decrease in Wage Rate Increase in Quantity of labor an employer will hire

8. 8 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

9. 9 Increase in Wage Rate Increase in Quantity of labor willing to work

10. 10 What Causes the Labor Demand Curve to Shift? u Output Price of the Good the laborers are Producing u Technological Change u Supply of Other factors u Machines u Workers in other counties

11. 11 What is human capital? The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive

12. 12 What factors can cause a change in the supply for labor? Unions Demographic trends Expectations of future income Changes in immigrations laws Education and training

13. Equilibrium in the Labor Market u The wage adjusts to balance the supply and demand for labor. u The wage equals the value of the value of the marginal product of labor. uThe value of the marginal product is the dollar value of the product produced by the least skilled worker.

14. Equilibrium in the Labor Market u Labor supply and labor demand determine the equilibrium wage. u Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

15. A Shift in Labor Supply u An increase in the supply of labor : u Results in a surplus of labor. u Puts downward pressure on wages. u Makes it profitable for firms to hire more workers. u Lowers the value of the marginal product. u Gives a new equilibrium.

16. Shifts in Labor Demand u An increase in the demand for labor : u Makes it profitable for firms to hire more workers. u Puts upward pressure on wages. u Raises the value of the marginal product. u Gives a new equilibrium.

17. Three Determinants of Productivity u Physical Capital u When workers work with a larger quantity of equipment and structures, they produce more. u Human Capital u When workers are more educated, they produce more. u Technological Knowledge u When workers have access to more sophisticated technologies, they produce more.

18. Productivity and Wage Growth in the United States

19. Productivity and Wage Growth around the World

20. 20 What has happened to the distribution of income recently? Measured by distribution of family money income, the richest families did become a little richer and the rest of the family groups a little poorer in recent decades

21. 21 Exhibit 10-12 Medium Income of Families 2003 Characteristics All Families Families headed by male $52,680 $38,032 $26,550 $46,554 $44,620 $86,921 Families headed by female Families with head aged 25-34 years Families headed by high school graduate Families headed by bachelors degree Medium Income

22. What causes earnings to vary so much? uWages are governed by labor supply and labor demand. uLabor demand reflects the marginal productivity of labor.

23. What causes earnings to vary so much? u In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services.

24. Some Determinants of Equilibrium Wages u Compensating differentials u Human capital u Ability, effort, and chance u Signaling u The superstar phenomenon

25. 25 What is poverty? There are two views of poverty. One defines poverty in absolute terms, and the other defines poverty in relative terms

26. 26 Absolute poverty can be defined as a dollar figure that represents some level of income per year required to purchase some minimum amount of goods and services essential to meeting a person’s or a family’s basic needs

27. 27 Relative poverty might be defined as a level of income that places a person or family in the lowest, say, 20 percent of all persons or families receiving incomes

28. 28 Who are the poor? The poverty rate was 26 percent for families headed by a female with no husband present and 12 percent for families headed by a male with no female present compared to only 5 percent for married couples

29. 29 13% 12% 13% 14% 1995 19701975198019851990 20032000 12% 11%

30. Average Annual earnings by Educational Attainment

31. Why has the gap in earnings between skilled and unskilled workers risen in recent years? u International trade has altered the relative demand for skilled and unskilled labor. u Changes in technology have altered the relative demand for skilled and unskilled labor.

32. 32 Who are eligible for antipoverty programs? The groups eligible for such assistance include disabled persons, elderly persons, and poor families with dependent children

33. 33 What are some examples of cash transfer programs? Social Security Unemployment compensation Temporary assistance to needy families

34. 34 What are in-kind transfers? Government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing

35. 35 What are some examples of in-kind transfers? Food stamps Medicare Medicaid