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Chapter 16: The Markets for Labor and Other Factors of Production
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Chapter 16: The Markets for Labor and Other Factors of Production
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Chapter 16: The Markets for Labor and Other Factors of Production
CHAPTER
16
The Markets for Labor
and Other Factors
of Production
The Yankees were
able to offer Sabathia
a better contract
because of the much
higher revenues the
team generates from
ticket sales, cable
television, and
broadcast television
and radio.
Prepared by:
Fernando Quijano
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CHAPTER
16
Chapter 16: The Markets for Labor and Other Factors of Production
Chapter Outline and
Learning Objectives
The Markets for Labor
and Other Factors
of Production
16.1
The Demand for Labor
Explain how firms choose the profitmaximizing quantity of labor to employ.
16.2
The Supply of Labor
Explain how people choose the quantity of
labor to supply.
16.3
Equilibrium in the Labor Market
Explain how equilibrium wages are
determined in labor markets.
16.4
Explaining Differences in Wages
Use demand and supply analysis to explain
how compensating differentials,
discrimination, and labor unions cause
wages to differ.
16.5
Personnel Economics
Discuss the role personnel economics can
play in helping firms deal with human
resources issues.
16.6
The Markets for Capital and Natural
Resources
Show how equilibrium prices are
determined in the markets for capital and
natural resources.
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Chapter 16: The Markets for Labor and Other Factors of Production
The Markets for Labor and Other Factors of Production
Factors of production Labor,
capital, natural resources, and
other inputs used to produce
goods and services.
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16.1 LEARNING OBJECTIVE
Chapter 16: The Markets for Labor and Other Factors of Production
The Demand for Labor
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
Derived demand The demand for a factor
of production; it depends on the demand for
the good the factor produces.
The Marginal Revenue Product of Labor
Marginal product of labor The additional
output a firm produces as a result of hiring
one more worker.
Marginal revenue product of labor (MRP)
The change in a firm’s revenue as a result
of hiring one more worker.
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16.1 LEARNING OBJECTIVE
The Demand for Labor
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
The Marginal Revenue Product of Labor
FIGURE 16-1
Chapter 16: The Markets for Labor and Other Factors of Production
The Marginal Revenue Product of
Labor and the Demand for Labor
The marginal revenue product of labor
equals the marginal product of labor
multiplied by the price of the good.
The marginal revenue product curve
slopes downward because diminishing
returns cause the marginal product of
labor to decline as more workers are
hired.
A firm maximizes profits by hiring workers
up to the point where the wage equals the
marginal revenue product of labor. The
marginal revenue product of labor curve is
the firm’s demand curve for labor because
it tells the firm the profit-maximizing
quantity of workers to hire at each wage.
For example, using the demand curve
shown in this figure, if the wage is $600,
the firm will hire 4 workers.
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16.1 LEARNING OBJECTIVE
The Demand for Labor
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
The Marginal Revenue Product of Labor
TABLE 16-1
Chapter 16: The Markets for Labor and Other Factors of Production
The Relationship between the Marginal Revenue Product of Labor and the Wage
WHEN …
THE FIRM …
MRP > W,
should hire more workers to increase profits.
MRP < W,
should hire fewer workers to increase profits.
MRP = W,
is hiring the optimal number of workers and is maximizing profits.
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16.1 LEARNING OBJECTIVE
16-1
Solved Problem
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
Chapter 16: The Markets for Labor and Other Factors of Production
Hiring Decisions by a Firm
That Is a Price Maker
(1)
QUANTITY
OF LABOR
(2)
OUTPUT OF
iPODS
PER WEEK
(3)
MARGINAL
PRODUCT OF
LABOR
0
0
—
$200
$0
1
6
6
180
2
11
5
3
15
4
(4)
PRODUCT
PRICE
(5)
TOTAL
REVENUE
(6)
MARGINAL
REVENUE
PRODUCT
OF LABOR
(7)
WAGE
(8)
ADDITIONAL
PROFIT FROM
HIRING ONE
ADDITIONAL
WORKER
—
$500
—
1,080
$1,080
500
$580
160
1,760
680
500
180
4
140
2,100
340
500
–160
18
3
120
2,160
60
500
–440
5
20
2
100
2,000
–160
500
–660
6
21
1
80
1,680
–320
500
–820
YOUR TURN: For more practice, do related problem 1.5 at the end of this
chapter.
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16.1 LEARNING OBJECTIVE
The Demand for Labor
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
Chapter 16: The Markets for Labor and Other Factors of Production
The Market Demand Curve for Labor
The market demand curve for labor is
determined by adding up the quantity
of labor demanded by each firm at
each wage, holding constant all other
variables that might affect the
willingness of firms to hire workers.
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16.1 LEARNING OBJECTIVE
The Demand for Labor
Explain how firms choose the
profit-maximizing quantity of labor
to employ.
Chapter 16: The Markets for Labor and Other Factors of Production
Factors That Shift the Market Demand Curve for Labor
The five most important variables that cause the
labor demand curve to shift are the following:
•
Increases in human capital.
Human capital The accumulated training
and skills that workers possess.
•
Changes in technology.
•
Changes in the price of the product.
•
Changes in the quantity of other inputs.
•
Changes in the number of firms in the market.
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16.2 LEARNING OBJECTIVE
Chapter 16: The Markets for Labor and Other Factors of Production
The Supply of Labor
Explain how people choose the
quantity of labor to supply.
FIGURE 16-2
FIGURE 16-3
The Labor Supply Curve
A Backward-Bending Labor Supply Curve
As the wage increases, the opportunity cost of
leisure increases, causing individuals to supply a
greater quantity of labor. Therefore, the labor
supply curve is upward sloping.
As the wage rises, a greater quantity of labor is
usually supplied. As the wage climbs above a
certain level, the individual is able to afford more
leisure even though the opportunity cost of
leisure is high. The result may be a smaller
quantity of labor supplied.
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16.2 LEARNING OBJECTIVE
The Supply of Labor
Explain how people choose the
quantity of labor to supply.
Chapter 16: The Markets for Labor and Other Factors of Production
The Market Supply Curve of Labor
The market supply curve of labor is determined
by adding up the quantity of labor supplied by
each worker at each wage, holding constant all
other variables that might affect the willingness
of workers to supply labor.
Factors That Shift the Market Supply Curve of Labor
• Increases in population.
• Changing demographics.
• Changing alternatives.
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16.3 LEARNING OBJECTIVE
Equilibrium in the Labor Market
Explain how equilibrium wages are
determined in labor markets.
FIGURE 16-4
Chapter 16: The Markets for Labor and Other Factors of Production
Equilibrium in the Labor
Market
As in other markets, equilibrium in
the labor market occurs where the
demand curve for labor and the
supply curve of labor intersect.
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16.3 LEARNING OBJECTIVE
Equilibrium in the Labor Market
Explain how equilibrium wages are
determined in labor markets.
The Effect on Equilibrium Wages of a Shift in Labor Demand
FIGURE 16-5
Chapter 16: The Markets for Labor and Other Factors of Production
The Effect of an Increase
in Labor Demand
Increases in labor demand will
cause the equilibrium wage
and the equilibrium level of
employment to rise:
1. If the productivity of workers
rises, the marginal revenue
product increases, causing the
labor demand curve to shift to
the right.
2. The equilibrium wage rises
from W1 to W.2.
3. The equilibrium level of
employment rises from L1 to L2.
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16.3 LEARNING OBJECTIVE
Making
Will Your Future Income Depend on
Connection Which Courses You Take in College?
Chapter 16: The Markets for Labor and Other Factors of Production
the
Explain how equilibrium wages are
determined in labor markets.
YOUR TURN: Test your understanding by doing related problem 3.3 at the end of
this chapter.
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16.3 LEARNING OBJECTIVE
Equilibrium in the Labor Market
Explain how equilibrium wages are
determined in labor markets.
The Effect on Equilibrium Wages of a Shift in Labor Supply
Chapter 16: The Markets for Labor and Other Factors of Production
FIGURE 16-6
The Effect of an Increase
in Labor Supply
Increases in labor supply
will cause the equilibrium
wage to fall but the
equilibrium level of
employment to rise:
1. As population increases,
the labor supply curve shifts
to the right.
2. The equilibrium wage
falls from W1 to W2.
3. The equilibrium level of
employment increases from
L1 to L2.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
FIGURE 16-7
Chapter 16: The Markets for Labor and Other Factors of Production
Baseball Players Are Paid
More Than College Professors
The marginal revenue product of
baseball players is very high, and the
supply of people with the ability to
play Major League Baseball is low.
The result is that the 750 Major
League Baseball players receive an
average wage of $3,260,000.
The marginal revenue product of
college professors is much lower, and
the supply of people with the ability to
be college professors is much higher.
The result is that the 663,000 college
professors in the United States
receive an average wage of $81,000,
far below the average wage of
baseball players.
Don’t Let This Happen to YOU!
Remember That Prices and Wages Are Determined at the Margin
YOUR TURN: Test your understanding by doing related problem 4.7 at the end of
this chapter.
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16.4 LEARNING OBJECTIVE
Making
Technology and the Earnings
Connection of “Superstars”
Chapter 16: The Markets for Labor and Other Factors of Production
the
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
The increase in the relative
incomes of superstars is mainly
due to technological advances.
Why does Angelina Jolie earn
more today relative to the
typical actor than stars did in
the 1940s?
YOUR TURN: Test your understanding by doing related problems 4.10 and 4.11
at the end of this chapter.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Chapter 16: The Markets for Labor and Other Factors of Production
Compensating Differentials
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Compensating differentials Higher
wages that compensate workers for
unpleasant aspects of a job.
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16.4 LEARNING OBJECTIVE
Making Are U.S. Firms Handicapped
by Paying for Their Employees’
Connection Health Insurance?
Chapter 16: The Markets for Labor and Other Factors of Production
the
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
The equilibrium level of overall
compensation in the economy is
determined by the supply of and the
demand for labor. Fringe benefits
(such as health insurance) are just
part of that compensation.
Did paying for employees’ health
care contribute to Chrysler’s
bankruptcy in 2009?
YOUR TURN: Test your understanding by doing related problem 4.18 at the end
of this chapter.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Chapter 16: The Markets for Labor and Other Factors of Production
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Economic discrimination Paying a
person a lower wage or excluding a
person from an occupation on the
basis of an irrelevant characteristic
such as race or gender.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Chapter 16: The Markets for Labor and Other Factors of Production
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Most economists believe that only a small amount of the
gap between the wages of white males and the wages
of other groups is due to discrimination. Instead, most
of the gap is explained by three main factors:
1. Differences in education
2. Differences in experience
3. Differing preferences for jobs
Differences in Education
Some of the difference between the incomes
of whites and the incomes of blacks can be
explained by differences in education.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Discrimination
Table 16-2
Chapter 16: The Markets for Labor and Other Factors of Production
Why Do White Males Earn More Than Other Groups?
GROUP
White males
ANNUAL EARNINGS
$50,364
White females
36,891
Black males
36,233
Black females
31,114
Hispanic males
30,151
Hispanic females
26,695
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Chapter 16: The Markets for Labor and Other Factors of Production
Differences in Experience
Women are much more likely than
men to leave their jobs for a period
of time after having a child.
Differing Preferences for Jobs
Significant differences between
the types of jobs held by women
and men is likely a reflection in
job preferences.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Discrimination
Table 16-3
Chapter 16: The Markets for Labor and Other Factors of Production
“Men’s Jobs” Often Pay More Than “Women’s Jobs”
“WOMEN’S JOBS”
OCCUPATION
Preschool and
kindergarten teachers
WEEKLY
EARNINGS
$567
“MEN’S JOBS”
PERCENTAGE
OF WORKERS
WHO ARE
WOMEN
OCCUPATION
97%
Electricians
Dental assistants
508
92
Aircraft mechanics
Child care workers
368
92
Aircraft pilots
Receptionists
482
92
Fire fighters
Teacher assistants
410
92
Hairdressers
425
Health care support
occupations
WEEKLY
EARNINGS
PERCENTAGE
OF WORKERS
WHO ARE
WOMEN
$805
2%
889
2
1,358
4
901
5
Engineering managers
1,713
8
90
Aerospace engineers
1,557
10
454
88
Civil engineers
1,337
11
Maids and
housekeeping cleaners
366
84
Computer software
engineers
1,455
20
Cashiers
356
74
Chief executives
1,882
26
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16.4 LEARNING OBJECTIVE
Solved Problem
16-4
Chapter 16: The Markets for Labor and Other Factors of Production
Is Passing “Comparable Worth” Legislation a Good Way
to Close the Gap between Men’s and Women’s Pay?
In panel (a), without comparable-worth legislation, the
equilibrium wage for electricians is $800, and the
equilibrium quantity of electricians hired is L1. Setting the
wage for electricians below equilibrium at $650 reduces
the quantity of labor supplied in this occupation from L1 to
L2 but increases the quantity of labor demanded by
employers from L1 to L3. The result is a shortage of
electricians equal to L3 – L2, as shown by the bracket in
the graph.
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
In panel (b), without comparable-worth legislation, the
equilibrium wage for dental assistants is $500, and the
equilibrium quantity of dental assistants hired is L1. Setting
the wage for dental assistants above equilibrium at $650
increases the quantity of labor supplied in this occupation
from L1 to L3 but reduces the quantity of labor demanded
by employers from L1 to L2. The result is a surplus of
dental assistants equal to L3 – L2, as shown by the bracket
in the graph.
YOUR TURN: For more practice, do related problems 4.15 and 4.16 at the end of
this chapter.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Chapter 16: The Markets for Labor and Other Factors of Production
The Difficulty of Measuring Discrimination
When two people are paid different
wages, discrimination may be the
explanation. But differences in
productivity or preferences may
also be an explanation.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
FIGURE 16-8
Chapter 16: The Markets for Labor and Other Factors of Production
Discrimination and Wages
Initially, neither “A” airlines nor “B” airlines
discriminates, and as a result, men and women pilots
receive the same wage of $1,100 per week at both
groups of airlines. “A” airlines then discriminates by
firing all their women pilots. Panel (a) shows that this
reduces the supply of pilots to “A” airlines and raises
the wage paid by these airlines from $1,100 to $1,300.
Panel (b) shows that this increases the supply of pilots
to “B” airlines and lowers the wage paid by these
airlines from $1,100 to $900. All the women pilots will
end up being employed at the nondiscriminating airlines
and will be paid a lower wage than the men who are
employed by the discriminating airlines.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Discrimination
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Chapter 16: The Markets for Labor and Other Factors of Production
Does It Pay to Discriminate?
Employers who discriminate pay an economic penalty.
Yet before the Civil Rights Act of 1964 many firms
continued to discriminate. The three important factors
that allowed these companies to operate were:
1. Worker discrimination.
2. Customer discrimination.
3. Negative feedback loops.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Chapter 16: The Markets for Labor and Other Factors of Production
Labor Unions
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Labor union An organization of employees that
has the legal right to bargain with employers about
wages and working conditions.
FIGURE 16-9
The United States is Less
Unionized Than Most Other
High-Income Countries
The percentage of the labor force
belonging to unions is lower in the
United States than in most other
high-income countries.
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16.4 LEARNING OBJECTIVE
Explaining Differences in Wages
Use demand and supply analysis
to explain how compensating
differentials, discrimination, and
labor unions cause wages to differ.
Labor Unions
TABLE 16-4
Chapter 16: The Markets for Labor and Other Factors of Production
Union Workers Earn More
Than Nonunion Workers
AVERAGE WEEKLY EARNINGS
UNION WORKERS
NONUNION WORKERS
$886
691
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16.5 LEARNING OBJECTIVE
Personnel Economics
Discuss the role personnel
economics can play in helping firms
deal with human resources issues.
Chapter 16: The Markets for Labor and Other Factors of Production
Personnel economics The application of economic
analysis to human resources issues.
Should Workers’ Pay Depend on How Much
They Work or on How Much They Produce?
FIGURE 16-10
Paying Car Salespeople
by Salary or by Commission
This figure compares the compensation a
car salesperson receives if she is on a
straight salary of $800 per week or if she
receives a commission of $200 for each
car she sells. With a straight salary, she
receives $800 per week, no matter how
many cars she sells. This outcome is
shown by the horizontal line in the figure.
If she receives a commission of $200 per
car, her compensation will increase with
every car she sells. This outcome is
shown by the upward-sloping line.
If she sells fewer than 4 cars per week,
she would be better off with the $800
salary. If she sells more than 4 cars per
week, she would be better off with the
$200-per-car commission.
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16.5 LEARNING OBJECTIVE
Making Raising Pay, Productivity, and
the
Chapter 16: The Markets for Labor and Other Factors of Production
Connection
Profits at Safelite AutoGlass
Discuss the role personnel
economics can play in helping firms
deal with human resources issues.
The experience of Safelite AutoGlass
provides a clear example of workers
reacting favorably to the opportunity to
increase output in exchange for higher
compensation.
A piece-rate system at Safelite AutoGlass led
to increased worker wages and firm profits.
YOUR TURN: Test your understanding by doing related problem 5.7 at the end of
this chapter.
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16.5 LEARNING OBJECTIVE
Personnel Economics
Discuss the role personnel
economics can play in helping firms
deal with human resources issues.
Chapter 16: The Markets for Labor and Other Factors of Production
Other Considerations in Setting Compensation Systems
Firms may choose a salary system for several good
reasons:
• Difficulty in measuring output.
• Concerns about quality.
• Worker dislike of risk.
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The Markets for Capital and
Natural Resources
16.6 LEARNING OBJECTIVE
Show how equilibrium prices are
determined in the markets for
capital and natural resources.
The Market for Capital
FIGURE 16-11
Chapter 16: The Markets for Labor and Other Factors of Production
Equilibrium in the Market
for Capital
The rental price of capital is
determined by equilibrium in the
market for capital.
In equilibrium, the rental price of
capital is equal to the marginal
revenue product of capital.
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The Markets for Capital and
Natural Resources
16.6 LEARNING OBJECTIVE
Show how equilibrium prices are
determined in the markets for
capital and natural resources.
Chapter 16: The Markets for Labor and Other Factors of Production
The Market for Natural Resources
Economic rent (or pure rent) The
price of a factor of production that is
in fixed supply.
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The Markets for Capital and
Natural Resources
16.6 LEARNING OBJECTIVE
Show how equilibrium prices are
determined in the markets for
capital and natural resources.
The Market for Natural Resources
FIGURE 16-12
Chapter 16: The Markets for Labor and Other Factors of Production
Equilibrium in the Market for Natural Resources
In panel (a), the supply curve of a natural resource is upward sloping. The price of the natural resource is determined
by the interaction of demand and supply.
In panel (b), the supply curve of the natural resource is a vertical line, indicating that the quantity supplied does not
respond to changes in price. In this case, the price of the natural resource is determined only by demand. The price of
a factor of production with a vertical supply curve is called an economic rent, or a pure rent.
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The Markets for Capital and
Natural Resources
16.6 LEARNING OBJECTIVE
Show how equilibrium prices are
determined in the markets for
capital and natural resources.
Chapter 16: The Markets for Labor and Other Factors of Production
Monopsony
Monopsony The sole buyer
of a factor of production.
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The Markets for Capital and
Natural Resources
16.6 LEARNING OBJECTIVE
Show how equilibrium prices are
determined in the markets for
capital and natural resources.
Chapter 16: The Markets for Labor and Other Factors of Production
The Marginal Productivity Theory of Income Distribution
Marginal productivity theory of
income distribution The theory
that the distribution of income is
determined by the marginal
productivity of the factors of
production that individuals own.
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Chapter 16: The Markets for Labor and Other Factors of Production
AN INSIDE
LOOK
>> Basketball Coaches’ Salaries:
A March to Madness?
The market for NCAA Division 1-A college basketball coaches.
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Chapter 16: The Markets for Labor and Other Factors of Production
KEY TERMS
Compensating differentials
Derived demand
Economic discrimination
Economic rent (or pure rent)
Factors of production
Human capital
Labor union
Marginal product of labor
Marginal productivity theory of
income distribution
Marginal revenue product
of labor (MRP)
Monopsony
Personnel economics
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