Transcript moving supply

Chapter 4
Labor Market Equilibrium
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Equilibrium
in a Single Competitive Labor Market
• Competitive equilibrium occurs
when supply equals demand,
generating a competitive wage and employment
level.
• It is unlikely that the labor market is ever in an
equilibrium, since supply and demand are
dynamic.
• The model suggests that the market is always
moving toward equilibrium.
4-2
Equilibrium
in a Competitive Labor Market
Dollars
S
P
w*
Q
D0
EL
E*
EH
Employment
The labor market is in equilibrium
when supply equals demand;
E* workers are employed at a wage
of w*.
In equilibrium, all persons who are
looking for work at the going wage
can find a job.
The triangle P gives the producer
surplus;
the triangle Q gives the worker
surplus.
A competitive market maximizes the
gains from trade, or the sum P + Q.
4-3
The “single wage” property
of a competitive equilibrium
• The “single wage” property of a
competitive equilibrium has important
implications for economic efficiency.
– workers of given skills have the same value of
marginal product of labor in all markets.
• If workers were mobile and entry and exit
of workers to the labor market was free,
then there would be a single wage paid to
all workers.
4-4
Competitive Equilibrium
in Two Labor Markets Linked by Migration
Nominal
wage
Nominal
wage
s
SN
SS
SS
A
wN
B
w*
w*
wS
C
DN
Employment
(a) The Northern Labor Market
DS
Employment
(b) The Southern Labor Market
Suppose the wage in the northern region (wN) exceeds the wage in the
southern region (wS).
Southern workers want to move North, shifting the southern supply
curve to the left and the northern supply curve to the right.
In the end, wages are equated across regions at w*.
4-5
Wage Convergence Across States
5.7
LA
Percent Annual Wage Growth
GA
NH
ME
VT
VA
5.5
MS
AR
5.3
MD
MA
IA
FL
NC
SC
KS
MI
CT
DE
TN
AL
NE
5.1
OK
TXMO
RI
MN
PA
WI
NJ
WV
IN
OH
IL CO
UT
WA
NY
KY
AZ
ND
4.9
SD
MT CA
NM
NV
4.7
ID
OR
WY
4.5
.9
1.1
1.3
1.5
Manufacturing Wage in 1950
1.7
1.9
Source: Olivier Jean Blanchard and Lawrence F. Katz, “Regional
Evolutions,” Brookings Papers on Economic Activity 1 (1992): 1-61.
4-6
The Impact of a Payroll Tax
Assessed on Firms
Nominal
wage
S
w1 + t
A
w0
w1
B
w0  t
D0
A payroll tax of $t assessed
on employers shifts down
the demand curve
(from D0 to D1).
The payroll tax decreases
the wage that workers
receive from w0 to w1,
and increases the cost of
hiring a worker from w0 to
w1 + t.
D1
E1
E0
Employment
4-7
The Impact of a Payroll Tax
Assessed on Workers
S1
Nominal
wage
S0
w0 + t
w1
w0
w1  t
D0
D1
E1
E0
D0
A payroll tax assessed on
workers shifts the supply
curve to the left (from S0
to S1).
The payroll tax has the
same impact on the
equilibrium wage and
employment regardless of
who it is assessed on.
Employment
4-8
The Impact of a Payroll Tax put on Firms
with Inelastic Supply
A payroll tax assessed on
the firm is shifted
completely to workers
when the labor supply curve
is perfectly inelastic.
Nominal
wage
S
D0
w0
A
B
w0 – t
D0
The wage is initially w0.
The $t payroll tax shifts the
demand curve to D1, and
the wage falls to w0 – t.
D1
E0
Employment
4-9
The Impact of an Employment Subsidy
Nominal wage
An employment subsidy of
$t per worker hired shifts up
the labor demand curve,
increasing employment.
S
w0 + t
B
w1
w0
A
w1 – t
D1
D0
E0
E1
The wage that workers
receive rises from w0 to w1.
The wage that firms actually
pay falls from w0 to w1 – t.
Employment
4-10
The SR Impact of Immigration
when Immigrants and Natives are Complements
Nominal
wage
Supply
If immigrants and natives are
complements, they do not
compete in the same labor
market.
Immigration makes natives
more productive,
shifting out labor demand curve.
a higher native wage and an
increase in native employment.
w1
w0
Demand
N0
N1
Native worker
Employment
4-11
The SR Impact of Immigration
When Immigrants and Natives Are Perfect
Substitutes
Nominal
wage
Supply
w0
As immigrants and natives are
perfect substitutes, the two
groups are competing in the
same labor market.
Immigration shifts out the
labor supply curve.
wage falls from w0 to w1,
and total employment
increases from N0 to E1.
w1
Demand
N1
N0
E1
Natives +
Immigrants
Employment
At the lower wage, the
number of natives who work
declines from N0 to N1.
4-12
The LR Impact of Immigration
When Immigrants and Natives Are Perfect
Substitutes
Immigration initially shifts
out the labor supply curve so
the wage falls from w0 to w1.
Over time, capital expands
as firms take advantage of
the cheaper workforce,
shifting out the labor
demand curve and restoring
the original wage and level
of native employment..
Nominal
wage
Supply
w0
w1
Demand
N0
N0 +
Immigrants
Employment
4-13
The LR Impact：
The Native Labor Market’s Response to
Immigration
Nominal
wage
Nominal
wage
S0
S2
S0
S1
PLA
S3
PPT
w0
w0
w*
w*
wLA
Demand
Demand
Employment
Employment
(a) Los Angeles
(b) Pittsburgh
Originally, both markets pay equilibrium wages of w0.
After immigration into Los Angeles, both markets eventually converge
to a new equilibrium wage at w*, which is less than w0.
4-14
Decadal change in log weekly wage
Scatter Diagram Relating Wages and Immigration
for Native Skill Groups
0.2
0.1
0
-0.1
-0.2
-0.1
-0.05
0
0.05
0.1
0.15
0.2
Decadal change in immigrant share
4-15
The Immigration Surplus
Nominal wage
S
S
A
B
w0
C
w1
F
D
0
N
M
Employment
Prior to immigration, there are N
native workers in the economy
and national income is given by
the trapezoid ABN0.
Immigration increases the labor
supply to M workers and
national income is given by the
trapezoid ACM0. Immigrants
are paid a total of FCMN dollars
as salary. The immigration
surplus gives the increase in
national income that accrues to
natives and is given by the area
in the triangle BCF.
4-16
The Cobweb Model 蛛網模型
• Two assumptions of the cobweb model:
– Time is needed to produce skilled workers.
– Persons decide to become skilled workers
by looking at conditions in the labor market
at the time they enter school.
(people may be misinformed)
• A “cobweb” pattern forms around the equilibrium.
4-17
The Cobweb Model
in the Market for New Engineers
Nominal
wage
S
w1
w3
w*
w2
w0
D
D
E0
E2
E*
E1
The initial equilibrium wage in
the engineering market is w0.
The demand for engineers
shifts to D, and the wage will
eventually increase to w*.
Because new engineers are not
produced instantaneously and
because students might misjudge future opportunities in
the market, a cobweb is
created as the market adjusts
to the increase in demand.
Employment
4-18
Noncompetitive Labor Markets:
Monopsony 專買
• Monopsony market exists
when a firm is the only buyer of labor.
• Monopsonists must increase wages to attract
more workers.
• Two types of monopsonist firms:
– Perfectly discriminating
– Nondiscriminating
4-19
Perfectly Discriminating Monopsonist
• Discriminating monopsonists
are able to hire different workers at different
wages.
• To maximize firm surplus (profits),
a perfectly discriminating monopsonist
“perfectly discriminates”
by paying each worker his or her reservation
wage.
4-20
The Hiring Decision of
a Perfectly Discriminating Monopsonist
Nominal
wage
A perfectly discriminating
monopsonist faces an upwardsloping labor supply curve and
can hire different workers at
different wages.
S
A
w*
w30
VMPE
w10
10
30
E*
Employment
Therefore the labor supply curve
gives the marginal cost of hiring.
Profit maximization occurs at
point A.
The monopsonist hires the same
number of workers as a
competitive market, but each
worker is paid his or her
reservation wage.
4-21
The Hiring Decision of
a Nondiscriminating Monopsonist
Nominal wage
MCE
VMPM
S
A
A nondiscriminating
monopsonist pays the
same wage to all
workers.
The marginal cost of
hiring exceeds the wage,
and the marginal cost
curve lies above the
supply curve.
w*
wM
VMPE
E M E*
Profit maximization
occurs at point A;
the monopsonist hires
EM workers and pays
them all a wage of wM.
Employment
4-22
The Impact of the Minimum Wage
on a Nondiscriminating Monopsonist
Nominal
wage
MCE
S
A
w*
w
The minimum wage may
increase both wages and
employment
when imposed on a
nondiscriminating
monopsonist.
A minimum wage set at w
increases employment to E.
wM
VMPE
EM
E
Employment
4-23
Monopoly in the Product Market:
A Review
• Firms that have monopoly power
can influence the price of the product that they
sell.
• Monopolist faces a downward sloped market
demand curve for its output
and an even lower downward sloped marginal
revenue curve.
4-24
The Output Decision of a Monopolist
Price
MC
pM
p*
A
MR
q M q*
A monopolist faces a downwardsloping demand curve for her
output.
The marginal revenue from
selling an additional unit of
output is less than the price of the
product.
Profit maximization occurs at
point A where the monopolist
produces qM units of output and
D
sells each unit of output at a price
Output of pM dollars.
4-25
The Labor Demand Curve of a Monopolist
The marginal revenue product
gives the worker’s contribution
to a monopolist’s revenues (or
the worker’s marginal product
times marginal revenue),
and is less than the worker’s
value of marginal product.
Nominal
wage
w
A
MRPE
EM
E*
VMPE
Profit maximization occurs at
point A where the monopolist
hires fewer workers (EM) than
would be hired in a competitive
market.
Employment
4-26