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Trend in the Overall Unemployment Rate Feb 2003: 5.8% Graph copyright © 2003 by Pearson Education, Inc. Positive Omitted Variable Bias Don’t realize that have 2 types of workers. Problem is that young workers both earn less and quit more. Estimated slope is too steep. Graph copyright © 2003 by Pearson Education, Inc. Demand Shifts Out Due to Changes in: Technology, Prices of Other Inputs, Demand for Output Graph by Harcourt, Inc. Supply Shifts Out Due to Changes in: Wages in Other Markets, Unearned Income, Job Conditions, Population Graph by Harcourt, Inc. Total, Average and Marginal Product Marginal product is slope of total product. Average product is rising when marginal product is above, falling when marginal product is below. Marginal product intersects average product at its maximum. Graph by Harcourt, Inc. Marginal Revenue Product, Labor Demand Marginal Revenue Product = MR*MP. Labor Demand is the downward sloping portion of Marginal Revenue Product. Graph by Harcourt, Inc. Short-Run Demand Curve for the Market Unlike in product market, don’t just add up individual demands. A lower wage implies a lower output price, decreasing MRP and shifting in each firm’s demand curve so at W2 end up at the star. The resulting market demand is thus steeper either firm demand. Graph by Harcourt, Inc. Perfect Competition – the Market and the Firm Too high of a wage (W2) and excess supply of labor results, putting downward pressure on wages. Too low of a wage (W1) and excess demand of labor results, putting upward pressure on wages. At WE the market is in equilibrium and firms are wage takers. Graph by Harcourt, Inc. Monopsony – i.e. only one employer Marginal is always above average when average is rising (supply is ACL). Intuitively, MCL is above supply because the firm must raise all wages to entice more workers into the market. Graph by Harcourt, Inc. A Minimum Wage with an Uncovered Sector In the covered sector, minimum wage, W2, is above equilibrium so there is an excess supply of labor (L3 – L2). If there is an uncovered sector, these workers will move into it, shifting out demand and lowering the wage to W3. Results inefficient – W1 in both sectors maximized output. Graph by Harcourt, Inc. A Minimum Wage with a Shift in Demand If the extra money earned with minimum wage W2 increases demand for output and labor demand shifts out, then employment could increase. Graph by Harcourt, Inc. A Minimum Wage with a Monopsony With minimum wage W2, MCL becomes flat until C and then jumps up to D and follows the original MCL. Employment thus increases to L2 where MRP=MCL The competitive wage is W2, but the monopsony wage is W1. If a minimum wage is set at W2, the competitive outcome is achieved. Graph by Harcourt, Inc.