Transcript Document

Chapters 16.1-16.5, 17.1-17.4, 18.1, 18.2: Input & Labor
Markets, Wages & Rent
1
Input Demand Curve of a
Competitive Firm
• Input demand shows the total quantity of the input that will be
demanded at various prices
• Input demand will depend on the marginal value product (MVP),
which is the extra revenue a competitive firm receives by selling
the additional output generated when employment of an input is
increased by 1 unit
– For a competitive firm, MVP = MPL * P (this is b/c output price is constant
for a competitive firm)
– It makes sense for a firm to hire to the point where MVP = w, w = MPL*P
and therefore w/MPL = P
2
Competitive Firms Demand for Labor:
All Inputs Variable
• When all inputs are variable, an input’s MVP curve shifts with changes in the
employment of other inputs
– A lower wage rate causes the firm to substitute toward labor and away from capital
• Input demand is a “derived demand” reflecting the fact that industry demand for
an input ultimately derives from consumers’ demand for the final product
produced by that input
Dollars
Capital
per
unit
A1
A
12
A’
10
MC
New expansion path
E
E2
E
P3
E2
E1
IQ2
E1
MC’
IQ1
0 20 26 30
Z’
Substitution
Effect
Output Effect
Z1
Labor
0
q1
q2
Output
3
Competitive Industry Demand for Labor
The firm
The market
Wage
Wage
$300 = w
A
$300 = w
B
$200 = w’
C
$200 = w’
d(P = $100)
A’
B’
C’
∑ d(P = $100)
∑ d’(P = $80)
d’(P = $80)
D
0
20
27 30
Labor
0
2,000 2,700 3,000
Labor
4
Elasticity of an Industry’s Demand Curve
for an Input
•
Elasticity of input demand is the sensitivity of input
demand to changes in input cost
= (%input demand)/(%input cost)
•
Four major determinants of the elasticity of an
industry’s demand for an input
1.
2.
3.
4.
Elasticity of the final product
The substitutability of one input for another in production
The supply of other inputs
Time period
5
Supply of Inputs
Wage
S
w2
w1
Wage
S
w2
w1
0
L1
Labor (in all
(100,000,000) industries)
0
L1
(5,000)
L2
Labor (in software
(15,000)
programming
industry)
6
Equilibrium in Input Markets
The Equilibrium Wage and Employment Level
for a Competitive Industry
The firm
Input Price Equalization Across Industries
Aerospace industry
The industry
Wage
Wage SSA SS’A
Wage
Telecommunications industry
Wage SST SS’T
S
$400 = wA
s
$300
=w
$350 = w’A
$300 = w
$250 = w1
l
(500)
Labor
D
0
s
$300 = wT
d
0
$350 = w’T
L0
L
L1
Labor
(6,000) (10,000) (12,000)
DA
0
LA L’A
(500) (700)
Labor
DT
0
LT
L’T
(800) (1,000)
7
Labor
Income Leisure Choice of the Worker
Weekly
Income
A
Y2
$800 = Y1
B
E
U3
U2
G
$20
U1
F
1 hr.
8
Supply of Hours of Work
Weekly
Income
A’
H
$25
1 hr.
$25
1 hr.
A
E’
$20
1 hr.
E1
U2
E
U1
L3 L2 L1
0
I
H’
Z
Leisure
S
TE
9
A Backward Bending Labor Supply
Curve?
Weekly
income
Hourly
wage
A’’
$30
E’’
$30
1 hr.
A’
$25
1 hr. E’
A
$20
E’’
E’
$25
1 hr.
E
0
L2 L3 L1
$20
Z
Leisure
E
ZL3
ZL1 ZL2
Labor
10
Why Do Wages Differ?
•
If wage rates differ across occupations and there is free
entry and exit from/into occupations, shouldn’t we see
individuals leave the low wage occupation (shifting
supply to the left) and enter the high wage occupation
(shifting supply to the right), equalizing wages across
occupations. So why do wages differ across
individuals and occupations?
1. Compensating wage differentials
2. Differences in human capital
3. Differences in ability
11
Minimum Wages
S
Wage
S
Wage
$5.15
$6.00
$4.00
$5.15
D
D
0
L2
L1 L3
Unskilled
Labor
0
L2
L1
L3
Unskilled
Labor
12
Burden of Social Security Tax
• Social security is financed by a payroll tax composed of two
equal-rate levies, one collected from employers and one collected
from employees (about 7.6% on each for the first $80K of
income), so who really pays for this tax?
Wage
Wage
S
S
$10.50 = w’’
$10.00 = w
$10 = w
Total revenue
$8 = w’
$8.50 = w’
$2
$2
D
D
D’ = D - T
0
L1
Labor
D’ = D - T
0
L1
Labor
13