Transcript Chapter 29 - The Citadel

Chapter 29
The Labor
Market: Demand,
Supply, and
Outsourcing
Introduction
Technovate and 24/7 sound like U.S. based
firms, but in fact, they are located in India.
The companies offer low-cost labor services to
U.S. firms in need of customer service.
Many U.S. politicians assert these and other
Indian call centers are “stealing” U.S. jobs.
This chapter will help you evaluate this claim.
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29-2
Learning Objectives
• Understand why a firm’s marginal
revenue product curve is its demand
for labor curve
• Explain in what sense the demand for
labor is a “derived” demand
• Identify the key factors influencing the
elasticity of demand for inputs
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29-3
Learning Objectives (cont'd)
• Describe how equilibrium wage rates are
determined for perfectly competitive firms
• Explain what labor outsourcing is and how it
will affect U.S. workers’ earnings and
employment prospects
• Contrast the demand for labor and wage
determination by a product market
monopolist with outcomes that would arise
under perfect competition
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29-4
Chapter Outline
• Labor Demand for a Perfectly
Competitive Firm
• The Market Demand for Labor
• Wage Determination in a Perfectly
Competitive Market
• Labor Outsourcing, Wages, and Employment
• Monopoly in the Product Market
• The Utilization of Other Factors of Production
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29-5
Did You Know That...
• The principles we have used to explain
the market in which goods are sold will
also describe the labor market?
• Profit-maximizing firms will hire labor up
to the point where the marginal benefit
equals the marginal cost?
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29-6
Labor Demand for a Perfectly
Competitive Firm
• We will start our analysis under the
assumption that the market for input factors
is perfectly competitive.
• We will further assume that the output market
is perfectly competitive.
• This provides a benchmark against which to
compare other labor markets or product
markets that are not perfectly competitive.
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29-7
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Assumptions
 Each employer is one of a very large
number of employers.
 Workers do not need special skills.
 Workers are free to move from one
employer to another.
 The firm is a price taker in the
labor market.
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29-8
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Physical Product (MPP) of Labor
 The change in output resulting from the addition
of one more worker
 The change in total output accounted for by
hiring the worker, holding all other factors of
production constant
 Eventually declines because of the law of
diminishing marginal product
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29-9
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Revenue Product (MRP)
 The marginal physical product (MPP)
times the marginal revenue (MR)
 The additional revenue obtained from a
one-unit change in labor input
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29-10
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• The marginal revenue product
represents the incremental
worker’s contribution to the
firm’s total revenues.
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Figure 29-1 Marginal Revenue
Product, Panel (a)
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29-12
Figure 29-1 Marginal Revenue
Product, Panel (b)
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29-13
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Factor Cost (MFC)
 The cost of using an additional unit of
an input
 For example, if a firm can hire all the
workers it wants at the going wage rate,
the MFC of labor is the wage rate.
Marginal factor cost =
Change in total cost
Change in amount of resources used
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29-14
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• In a perfectly competitive labor market
 The market determines the wage
 The individual employer is a wage taker
 All workers are hired for the same wage
 MFC = wage
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29-15
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• The MRP curve demand for labor
 The MRP curve is the demand curve for
labor for the firm.
 This tells us how many workers will be
hired at various possible wage rates.
 The firm will hire any worker who can
contribute to revenues by more than they
contribute to costs.
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29-16
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• General rule for hiring
 The firm hires workers up to the point at
which the additional cost associated with
hiring the last worker is equal to the
additional revenue generated by hiring
that worker.
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29-17
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Derived Demand
 The factors of production are needed to
manufacture a final good or to provide a
final service.
 Thus, the demand for labor is influenced
by demand for the final product.
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29-18
Figure 29-2 Demand for Labor,
a Derived Demand
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29-19
The Market Demand for Labor
• The downward-sloping portion of each
firm’s MRP curve is also its demand
curve for labor.
• When we go to the entire market for
labor, we will also find that the quantity
of labor demanded varies inversely with
wage rate changes.
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29-20
Figure 29-3 Derivation of the
Market Demand Curve for Labor
• Wage rate of $20
• Firms will hire
2,000 workers
• Wage rate of $10
• Firms will hire
3,000 workers
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29-21
The Market Demand
for Labor (cont'd)
• Price elasticity of demand for labor
similar to elasticity for goods
• Percentage change in quantity
demanded divided by percentage
change in price of labor
 Inelastic < I
 Unit-elastic = 1
 Elastic > 1
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29-22
Determinants of Demand Elasticity
for Inputs
• The price elasticity of demand for a variable
input will be greater
1. The greater the price elasticity of demand for the
final product
2. The easier it is to employ substitute inputs
3. The larger the proportion of total costs accounted
for by the particular variable input
4. The longer the time period available
for adjustment
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29-23
Wage Determination in a Perfectly
Competitive Labor Market
• Having developed the demand curve for
labor in a particular industry, let’s turn to the
labor supply curve.
• By adding supply to our analysis, we can
determine the equilibrium wage rate that
workers earn in an industry.
• We can think in terms of a supply
curve for labor that slopes upward in
a particular industry.
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29-24
Figure 29-4 The Equilibrium Wage Rate
and the Electronic Organizer Industry
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29-25
International Example: A Global Shortage
Hits the Market for Mining Workers
• Manufacturing industries in nations
such as India and China have grown
rapidly during the 2000s.
• Demand for mined commodities
(aluminum, copper, zinc, nickel) used
as manufacturing inputs has soared.
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29-26
International Example:
A Global Shortage Hits the Market
for Mining Workers (cont'd)
• Commodity prices have increased, which
has raised the MRP of a key production
input—mine workers.
• The quantity of qualified mining labor
demanded has been pushed above the
quantity of qualified labor supplied.
• Managers of mining companies commonly
try to hire away other firms’ workers
promising higher wages.
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29-27
Shifts in Market Demand for and the
Supply of Labor
• Reasons for labor demand curve shifts
1. Change in demand for the final product
2. Change in labor productivity
3. Change in the price of related inputs
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29-28
Reasons for Labor
Demand Curve Shifts
• A change in the demand for the final
product that labor is producing will shift
the market demand curve for labor in
the same direction.
• A change in labor productivity will shift
the market labor demand curve in the
same direction.
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29-29
Reasons for Labor
Demand Curve Shifts (cont'd)
• A change in the price of a substitute
input will cause demand for labor to
change in the same direction.
• A change in the price of a
complimentary input will cause the
demand for labor to change in the
opposite direction.
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29-30
Reasons for Labor
Supply Curve Shifts
• Labor supply curves may shift in
a particular industry for a number
of reasons.
1. Change in wages in other industries
2. Changes in working conditions
3. Job flexibility
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29-31
Labor Outsourcing, Wages,
and Employment
• Outsourcing
 A firm’s employment of labor outside the
country in which the firm is located
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29-32
Labor Outsourcing, Wages,
and Employment (cont'd)
• Outsourcing
 Some U.S.-based companies outsource
labor to other countries.
 Some firms based around the globe
outsource labor to the United States.
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29-33
Figure 29-5 Outsourcing of U.S.
Computer Technical-Support Services
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29-34
Labor Outsourcing, Wages,
and Employment (cont'd)
• Question
 How are U.S. workers affected?
• Answers
 If cheaper labor is available in other countries, this
will dampen the demand for U.S. labor.
 But as the volume of global commerce rises, there
may be more of a demand by foreign firms to hire
U.S. workers as well.
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29-35
Labor Outsourcing, Wages,
and Employment (cont'd)
• Labor outsourcing by U.S. firms tends
to reduce U.S. wages and employment.
• Whenever foreign firms engage
in labor outsourcing to the United
States, however, U.S. wages and
employment increase.
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29-36
Figure 29-6 Outsourcing of Accounting
Services by Canadian Firms
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29-37
Labor Outsourcing, Wages,
and Employment (cont'd)
• Short-run effects
 Even in the best of times, workers
experience short-run ups and downs in
wages and jobs.
 In the United States, after all, about 4
million jobs come and go every month.
 To be sure, in the near term, workers
earn lower pay and experience
reduced employment.
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29-38
Labor Outsourcing, Wages,
and Employment (cont'd)
• Long-term benefits
 Labor allows for more specialization, which
enhances trade.
 If
goods are produced and services are
performed in those countries where the
opportunity costs are lowest, then global
economic growth is enhanced.
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29-39
Labor Outsourcing, Wages,
and Employment (cont'd)
• Expanded production and consumption
possibilities made possible by
outsourcing and other forms of
international trade generate higher total
revenues across U.S. firms.
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29-40
Labor Outsourcing, Wages,
and Employment (cont'd)
• Benefits for U.S. workers
 Firms can outsource their labor needs and
will operate more efficiently.
 This means that the products they sell
have lower prices.
 In turn, each dollar in a worker’s paycheck
has a greater purchasing power.
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29-41
Labor Outsourcing, Wages,
and Employment (cont'd)
• In the long run, outsourcing helps boost the
overall value of MRP in industries throughout
the U.S. economy.
• Consequently, the ultimate long-run effect of
outsourcing is an increase in demand for labor
in most industries.
• Increased labor demand pushes up wages
and boosts employment, and economists
estimate outsourcing has created more jobs
than it has destroyed.
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29-42
Labor Outsourcing, Wages,
and Employment (cont'd)
• International labor outsourcing is also
known as “labor offshoring.”
• One U.S. firm has found a way to
literally engage in “offshore”
outsourcing activities.
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29-43
E-Commerce Example:
Outsourcing Computer Programming
Very Close to the Border
• A company called SeaCode has hundreds of
workers from nations such as India and
Russia on a cruise ship off the U.S. coast.
• Most of the workers are computer
programmers that SeaCode hires to write
software for U.S. businesses.
• In this way, people from abroad who cannot
obtain immigration visas can earn roughly
$1,800 per month.
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29-44
Monopoly in the Product Market
• Now we assume that the firm sells its
product in an imperfectly competitive market
(we assume the firm purchases inputs
under perfect competition still).
• In other words, we are considering output
market structures of monopoly, oligopoly, and
monopolistic competition.
• For the remainder of the chapter, we
simply refer to a monopoly situation for
ease of analysis.
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29-45
Monopoly in the
Product Market (cont'd)
• Constructing the monopolist’s input
demand curve
 In reconstructing the demand schedule for
an input, we must recognize that
 The
marginal physical product falls because
of the law of diminishing marginal product
as more workers are added.
 The
price (and marginal revenue) received for
the product sold also falls as more is produced
and sold.
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29-46
Figure 29-7 A Monopolist’s Marginal
Revenue Product, Panel (a)
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29-47
Figure 29-7 A Monopolist’s Marginal
Revenue Product, Panel (b)
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29-48
Monopoly in the
Product Market (cont'd)
• Question
 Why does the monopolist hire fewer workers?
• Answer
 The marginal benefit to the monopolist of hiring
an additional worker is affected by the fact that
the monopolist faces a reduction in the price
charged on all units in order to be able to sell
more of her product.
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29-49
The Utilization of
Other Factors of Production
• Profit maximization revisited
 MRP of labor = Price of labor (wage)
 MRP of land = Price of land (rent)
 MRP of capital = Price of capital (cost per
unit of service)
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29-50
The Utilization of
Other Factors of Production (cont'd)
• Cost minimization
 To minimize total costs for a particular rate
of production, the firm will hire factors of
production up to the point at which the
marginal physical product per last dollar
spent on each factor is equalized.
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29-51
The Utilization of
Other Factors of Production (cont'd)
• Cost minimization
MPP of labor
Price of labor
=
MPP of capital
Price of capital
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=
MPP of land
Price of land
29-52
Issues and Applications:
Now Indian Outsourcing Specialists
are Also Outsourcing
• An outsourcing specialist chooses
to outsource.
• Indian outsourcing firms increasingly
look abroad for talent.
• For India, outsourcing has become a
two-way street.
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29-53
Summary Discussion
of Learning Objectives
• Why a firm’s marginal revenue product curve
is its labor demand curve
 In competitive markets, firms hire labor to the
point at which the wage equals MRP.
• The demand for labor as a “derived demand”
 The demand for labor by perfectly competitive
firms is derived from the demand for the final
products they produce.
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29-54
Summary Discussion
of Learning Objectives (cont'd)
• Key factors affecting the elasticity of
demand for inputs
 Price elasticity of demand for the
final product
 Ease of substitution of other inputs
 Proportion of total costs
 Time period
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29-55
Summary Discussion
of Learning Objectives (cont'd)
• How equilibrium wage rates at perfectly
competitive firms are determined
 The wage at which the quantity of labor supplied
by all workers equals the quantity of labor
demanded by all firms
• U.S. wage and employment effects of
labor outsourcing
 Decreased demand for U.S. workers when
cheaper labor is available overseas
 Increased demand for some U.S. labor
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29-56
Summary Discussion
of Learning Objectives (cont'd)
• Contrasting the demand for labor and wage
determination under monopoly with outcomes
under perfect competition
 A monopolist’s labor demand curve is to the left of
that of a perfectly competitive industry.
 Marginal revenue for a monopolist is less
than price.
 Fewer workers are employed by the monopolist.
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29-57
End of
Chapter 29
The Labor
Market: Demand,
Supply, and
Outsourcing