Transcript (a) Labor Market

The Labor Market
© 2003 South-Western/Thomson Learning
Factor Markets in General
Product Markets
Markets in which firms sell
goods and services to
households or other firms
Factor Markets in General
Factor Markets
Markets in which resources capital, land, labor, and
natural resources - are sold
to firms
Product and Factor Markets
Demand for
Goods
and
Services
Product
Markets
S
Supply of
Goods
and
Services
D
Households
Supply
of Resources
Firms
S
D
Factor
Markets
Demand
for
Resources
Labor Markets in Particular
•Defining a Labor Market
•Competitive Labor Markets
•Firms in Labor Markets
Labor Markets in Particular
Perfectly Competitive Labor Market
Market with many indistinguishable
sellers of labor and many buyers, and
that involves no barriers to entry or
exit
Labor Markets in Particular
Labor markets are perfectly
competitive if:
1) There are many buyers (firms) and
sellers (households) of labor
2)All workers appear the same to firms
3) No barriers to entering/exiting the
labor market
Labor Markets in Particular
Demand side of a labor market
includes all firms hiring labor in
that labor market
–the firms may or may not compete
in the same market
Demand for Labor by a Single
Firm
•Goals and Constraints
•The Firm’s Employment Decision
When Only Labor Is Variable
•The Firm’s Employment Decision
When Several Inputs Are Variable
Demand for Labor by Single
Firm
Derived Demand
The demand for an input that
arises from, and varies with, the
demand for the product it helps
to produce
Goals and Constraints
Wage Taker
In competitive labor markets, each
firm is a wage taker: it takes the
market wage rate as a given.
Goals and Constraints
The firm faces three constraints in
deciding how much labor to employ:
1.Its technology
2.The market price
3.The market wage rate
Goals and Constraints
Marginal Revenue Product (MRP)
The change in revenue from
hiring one more worker
TR
MRP 
L
The Profit-Maximizing
Employment Level
•Marginal approach to profit: a firm
should take any action that adds more
to its revenue than to its cost
•Hire another worker when MRP > W
•Do not hire another worker when
MRP < W
Dollars
$200
The ProfitMaximizing
Employment
Level
150
100
Wage
60
50
MRP
1
2
3
4
5
6
7
8
Number
of Workers
The Firm’s Labor Demand Curve
Dollars
Firm’s
Labor Demand
Curve
W1
A
W1
B
W2
n1
n2
W2
Number
of Workers
The Firm’s Labor Demand Curve
Dollars
W1
A
W1
B
W2
C
MRP1
n1
n2
n3
W2
Firm’s
MRP2 Labor
Demand
Curve
Number
of Workers
The Firm’s Labor Demand Curve
Market Labor Demand Curve
Curve indicating the total number of
workers all firms in a labor market
want to employ at each wage rate
The Firm’s Labor Demand Curve
Firm A
Firm B
Hourly
Wage
Firm C
Hourly
Wage
Hourly
Wage
$12
10
ld
80 100
Number
of Workers
ld
ld
40 50
Number
of Workers
30
Hourly
Wage
$12
10
LD
N2 = 80 + 40 N1 = 100 + 50
+ 30 + ...
+ 90 + ...
Labor Market
Number
of Workers
90
Number
of Workers
Shifts in the Market Labor
Demand Curve
(a)
Typical Firm
Hourly
Wage
$10
(b)
Labor Market
Hourly
Wage
A
B
n2
Number
of Workers
B
D
L2
D
L1
l 2d
l 1d
n1
A
N1
N2
Number
of Workers
Shifts in the Market Labor
Demand Curve
Complementary Input
An input whose utilization
increases the marginal product of
another input
Shifts in the Market Labor
Demand Curve
Substitute Input
An input whose utilization
decreases the marginal product of
another input
Shifts in the Market Labor
Demand Curve
Hourly
Wage
More
of a
More
of a Complementary
Input
Substitutable
Input
l d2
l d1
l d3
Number
of Workers
Change in Technology
•When many firms acquire a new
technology, the market labor
demand curve will
–shift rightward if the technology is
complementary with labor
–shift leftward if the technology is
substitutable for labor
Change in Price of Other Inputs
•When the price of some other
input decreases, the market labor
demand curve may shift
–rightward if the input is
complementary with labor
–leftward if the input is substitutable
for labor
Labor Supply
•Individual Labor Supply
•Market Labor Supply
•Shifts in the Market Labor Supply Curve
•Short-Run versus Long-Run Labor
Supply
Labor Supply
Reservation Wage
The lowest wage rate at which an
individual would supply labor to a
particular labor market
Market Labor Supply
Labor Supply Curve
•Curve indicating the number of
people who want jobs in a labor
market at each wage rate
–the higher the wage rate, the greater
the quantity of labor supplied
Market Labor Supply Curve
Shifts in the Market Labor
Supply Curve
A market labor supply curve will
shift when
–something other than a change in
the wage rate causes a change in
the number of people who want to
work in a particular market
Shifts in the Market Labor
Supply Curve
A market labor supply curve will shift
when
–there is a change in the market wage rate
in other labor markets
–there are changes in the cost of acquiring
human capital
–there are changes in population
–there are changes in tastes
Short-Run vs. Long-Run
Labor Supply
Long-Run Labor Supply Curve
Curve indicating how many (qualified)
people will want to work in a labor
market after full adjustment to a change
in the wage rate
Long-Run Labor Supply
Curve
Fig 9, animated
Hourly
Wage
S
S
L1
S
LLR
B
$40
25
L2
C
A
30,000
60,000
90,000
Number
of Workers
Labor Market Equilibrium
What Happens When Things
Change?
•A Change in Labor Demand
•A Change in Labor Supply
•Labor Shortages and Surpluses
A Change in Labor Demand
In the short run, a shift in labor
demand moves along a short-run
labor supply curve
In the long run, the resulting increase
in wage rate will cause the short-run
labor supply curve to shift also
A Change in Labor Demand
(a)
Labor Market
Hourly
Wage
(b)
Typical Firm
Dollars
S
L1
S
L2
B
$40
C
30
20
b
$40
c
30
D
A
L2
20
W2
a
W3
W1
l2d
l1d
D
L1
5,000 8,000 12,000
Number
of Workers
50
80
120
Number
of Workers
A Change In Labor Supply
Labor Shortage
The quantity of labor demanded
exceeds the quantity supplied at
the prevailing wage rate
A Change in Labor Supply
Labor Surplus
The quantity of labor supplied
exceeds the quantity demanded at
the prevailing wage rate