Transcript Part and/or Chapter Number and Title

Chapter 10: Wage
Determination
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
Firm’s Demand for Labor
 Labor is the most important of the resources
used by firms.
 Labor demand is a derived demand, thus it
depends on
 the productivity of labor
 the price of the good or service it helps produce
Derived demand is the demand for a resource that results
from the demand for the product it helps produce
LO: 10-1
10-2
Marginal Revenue Product
and Marginal Revenue Cost
 Marginal revenue product (MRP) of labor is the
change in a firm’s total revenue when it employs one
more unit of labor.
 Marginal resource cost (MRC) of labor is the change
in a firm’s total cost when it employs one more unit of
labor.
 In a competitive labor market, MRC is equal to market wage rate.
Change in total revenue
MRP =
Change in total cost
MRC =
Unit change in labor
Unit change in labor
LO: 10-1
10-3
MRP of Labor as Labor
Demand Schedule
 MRP=MRC can be written as MRP=wage rate.
 The MRP schedule therefore constitutes the firm’s
demand for labor
 because each point on this schedule (or curve)
indicates the quantity of labor units the firm would hire
at each possible wage rate.
 The market demand for labor is the horizontal
summation of all the individual firm demand curves for
labor.
LO: 10-1
10-4
Changes in Labor Demand
The labor demand curve can shift if there are:
 Changes in product demand: higher product demand – higher
labor demand.
 Changes in productivity: higher productivity of labor – higher labor
demand. Productivity depends on
 Quantity of other resources
 Technological advance
 Quality of labor
 Changes in the prices of other resources:
 a decline in price of complementary resources increases labor demand
 a change in price of substitute resources has an ambiguous effect on
labor demand
LO: 10-2
10-5
Elasticity of Labor Demand
 Elasticity of Labor Demand (Ew) is a measure of the
responsiveness of employers to a change in the wage
rate.
 Also called wage elasticity of demand.
 Ew < 1: labor demand is inelastic
 Ew > 1: labor demand is elastic
 Ew = 1: labor demand is unit-elastic
Ew =
Percentage change in labor quantity
Percentage change in the wage rate
LO: 10-3
10-6
Changes in Elasticity of
Labor Demand
Wage elasticity of demand depends on:
 Ease of resource substitutability: the greater the
substitutability, the more elastic is the labor demand
 Elasticity of product demand: the greater the elasticity of
product demand, the greater the elasticity of labor
demand
 Ratio of labor cost to total cost: the greater the share of
labor in total cost, the greater the elasticity of labor
demand
LO: 10-3
10-7
Market Supply of Labor
 The supply curve for each type of labor slopes
upward, indicating that firms must pay a higher
wage rate in order to attract workers away from the
alternative job opportunities available to them and
workers not in the labor force.
 The intersection of labor supply and labor demand
determine the equilibrium wage rate and level of
employment in a given labor market.
LO: 10-4
10-8
Competitive Labor Market
 Many employers compete for specific types of
labor.
 Many workers with identical skills supply that
type of labor.
 Individual employers are “wage takers.”
 Individual firm’s labor supply is perfectly elastic at the
market wage rate.
 Firms use MRP=MRC rule to determine
employment at market wage.
LO: 10-4
10-9
Competitive Labor Market
Labor Market
Individual Firm
($10)
WC
s=MRC
($10)
WC
D=MRP
(∑ mrps)
0
Wage Rate (Dollars)
Wage Rate (Dollars)
S
QC
(1000)
Quantity of Labor
d=mrp
0
qC
(5)
Quantity of Labor
LO: 10-4
10-10
Monopsony
 In labor market monopsony, the single employer is a “wage
maker.”
 Monopsonist’s labor supply curve is the same as market labor
supply curve and is upward-sloping.
 The MRC curve lies above the labor supply curve and MRC
exceeds the wage rate.
 Monopsonist will use MRP=MRC rule to determine how much
labor to hire and pay wage corresponding to this quantity
supplied.
Monopsony is a market structure in which there is only a single
buyer of a good, service, or resource.
LO: 10-4
10-11
Monopsony
In
monopsony,
employment
and wage are
lower than in
competitive
labor market
Wage Rate (Dollars)
MRC
S
b
a
Wc
Wm
c
MRP
0
Qm
Qc
Quantity of Labor
LO: 10-4
10-12
Union Models
 In some labor markets, workers sell their labor
services collectively through labor unions.
 Unions work to raise wage rates for members.
Exclusive (craft) unions
 Restrict supply of skilled
labor to increase the
wage rate received by
union members
Inclusive (industrial) unions
 Include as members all
workers in an industry
 Put great pressure on firms to
agree to wage demands
through the threat of a strike
LO: 10-5
10-13
Craft Union Model
Wage Rate (Dollars)
S2
S1
Decrease
In Supply
Wu
Wc
D
Qu
Qc
Quantity of Labor
LO: 10-5
10-14
Industrial Union Model
Wage Rate (Dollars)
S
Wu
a
b
e
Wc
D
Qu
LO: 10-5
Qc
Qe
Quantity of Labor
10-15
Wage Differentials
 Wage differentials are the differences between the
wages of different groups of workers.
 Wage differentials can arise either on the demand or
the supply side of labor markets.
 A weak labor demand will result in a low equilibrium wage, but
a strong labor demand will result in a high equilibrium wage.
 A low labor supply will result in a high equilibrium wage, while a
higher labor supply results in a low equilibrium wage.
 Members of noncompeting groups differ in their mental and
physical abilities and in their levels of education and training,
and therefore, they receive different compensation.
LO: 10-6
10-16