Transcript Document

Lecture 11
Markets for Labor
How can we explain wage
differences?
• Oprah Winfrey has made $260 million per year
• An aerospace engineer in the U.S. receives $89,000
on average per year
• A preschool teacher receives $26,000 on average
per year
• What causes these differences? Can we explain
them with differences in productivity?
Labor productivity
• Demand for labor is related to the productivity of the
labor
• Main contributors to variations in labor productivity:
– The skills of the workers
– The efficiency with which workers apply their skills
– The level of effort with which workers work
– The quantity and the characteristics of the resources
available to each worker
Labor supply
• What is the opportunity cost of paid employment?
The opportunity cost of engaging in paid work is the
highest value of the time that might otherwise have been
spent in alternative uses such as:
– Household production
– Education
– Self-employment
– Leisure
Labor supply
• What is the benefit of paid employment?
– Wages and salaries (extrinsic motivations)
– Work experience itself (intrinsic motivation)
• Labor force participation:
The percentage of the adult population who are either
working at a paid job or seeking paid work
Individual labor supply
Wage (price of labor $ )
• Assumptions:
– The worker can find a job that meets his/her
desires
– There is only one kind of paid job
– The job has no intrinsic motivation
Supply of Labor
Quantity of Labor
Supply of Labor
Wage (price of labor $ )
Wage (price of labor $ )
Individual labor supply
Income effect
is stronger
Supply of Labor
Substitution effect
is stronger
Quantity of Labor
Quantity of Labor
An upward-sloping individual
supply curve for labor
A backward-bending individual supply
curve for labor
Wage (price of labor $ )
Market labor supply
Supply of Labor
Quantity of Labor
Market labor demand
• Demand curve for labor is downward-sloping:
– When wages are high, employers have incentives to
economize on the use of labor
– When wages are low, employers may be able to expand
their productive activities or substitute relatively cheap
labor for other inputs
Labor market adjustment
Labor in traditional neoclassical model
Labor in traditional neoclassical model
• Example: A firm producing disposable razors
Disposable Razor Production
Quantity of
Labor
1
2
3
4
5
6
7
8
Quantity of
Razors
5
12
18
23
27
30
32
33
MPPL
5
7
6
5
4
3
2
1
MRPL
15
21
18
15
12
9
6
3
MFCL
12
12
12
12
12
12
12
12
Labor in traditional neoclassical model
Quantity of Razors
35
30
Total Product Curve
25
20
15
10
5
0
1
2
3
4
5
6
7
Quantity of Labor (number of workers)
8
9
Labor in traditional neoclassical model
Explaining variations in wages
• Market forces and observable productivity differences are
only part of the explanation of variation in wages.
• Other potential sources for variation:
– Human capital
– Market power (See the case for monopsony!)
– Compensating wage differentials
– Worker motivation
• Efficiency wages
• Employee morale
• Dual labor markets
– Discrimination