1. 1 ECON 102.004 – Principles of Microeconomics S&W, Chapter 8 Labor Markets Instructor: Mehmet S. Tosun, Ph.D. Department of Economics University of Nevada, Reno

2. 2 Lecture Outline Labor supply decision Income and substitution effects Labor force participation Demand for Labor

3. 3 The Labor Supply Decision (a) Do workers decide on how much to work? –Many do not –However, some workers do: Part ‑ time workers Workers who work overtime Workers who moonlight Salaried workers

4. 4 The Labor Supply Decision (b) The method workers use to decide on the goods they buy is the same as the method they use to allocate their scarce time to leisure or labor Buying more of good X means a consumer can afford less of good Y. There is also a trade ‑ off between work and leisure. More work means less leisure but more consumption.

5. 5 More money or more time off A job now but give up college or go to school and be poorer for a while but earn more money later. Trade ‑ offs for the Labor Supply Decision

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10. 10 The Real Wage (b) When the real wage increases, the budget constraint gets steeper. –When the real wage changes, a worker may change the amount she works. –There are two effects at work: the substitution effect and the income effect.

11. 11 Substitution and Income Effects (a) When the real wage rises, –Leisure is more expensive (opportunity cost of leisure rises). –The worker is richer. The substitution effect of a rise in the real wage –Leisure more expensive, so the worker “buys” less leisure and works more. The labor supply increases. The income effect of a rise in the real wage –The worker is richer and buys more normal goods: CDs, restaurant meals, and leisure. Workers work less and the labor supply falls.

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14. 14 Labor Participation (b) For most men, the decision is not whether to work but how much. Formerly it was presumed that women would drop out of the labor force to have children and that they would not reenter the labor force after the children were grown. Today women's labor force participation rate is over 50%.

15. 15 Women ’ s Labor Force Participation Women’s labor force participation rate has risen dramatically over the last 40 years. In addition there has been an increase in the demand for women's labor as discrimination has been barred by federal law and attitudes have changed. Women's employment and wage situation can be explained partly by a shift of the labor supply curve and partly by a movement along the labor supply curve.

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17. 17 Labor Demand The demand for labor is a derived demand –It depends on the demand for output workers produce Firms hire workers only if they are profitable. The last worker hired makes just enough output so that when it is sold, it equals his or her wage.

18. 18 The Marginal Product of Labor (a) Marginal product of labor (MPL) –The output one additional worker produces (holding all other inputs, such as capital, constant) The law of diminishing marginal returns –The MPL is a decreasing function As more labor is hired, successive units are less productive because they use less capital.

19. 19 The Marginal Product of Labor (b) Value of the marginal product (VMP) –The revenue the additional worker earns for the firm The VMP is the value of the additional worker's marginal product: VMP = p*MPL. The value of the marginal product curve is the firm's demand curve for labor. –The VMP is downward sloping (like all demand curves) because of diminishing marginal returns to labor. Firms hire labor until –VMP = wage, or –p*MPL = w

20. 20 The Marginal Product of Labor (c)

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