Labor Markets

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Labor Markets

• Demand for Labor Wage Determination Under
  Competition Monopsony

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Demand for Labor

• Assumptions
• Firms and workers are price takers
• Firm chooses quantity of labor given wage rate
  (price of labor) and given price of other inputs
  (capital) and given demand for final good or
  service
• Implication
• Firm will hire labor where WMarginal Revenue
  Product. Marginal Revenue Product is Marginal
  Revenue Times Marginal Product.

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Intuition

• Firm hires where Marginal BenefitMarginal Cost
• Marginal cost of additional unit of labor is the
  wage
• Marginal benefit of additional unit of labor is
  the additional output produced times the value of
  that output

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Downward Sloping Demand?

• Two Effects of Decrease in Wage
• Substitution Effect -- labor is cheaper relative
  to capital. Holding output constant, buy more
  labor and less capital
• Output Effect -- marginal costs are lower,
  produce more output so use more labor.
• Revisit Isoquant Analysis

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Equilibrium Wage
wage
Supply of Labor
W
Demand for Labor
Units of Labor
L
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Factors that Shift Demand

• Price of final good/service
• Prices of other inputs
• Changes in worker productivity

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Factors that Shift Supply

• Value of nonmarket production
• Nonlabor income, including transfers
• Taxes
• Population Growth
• Nonpecuniary job attributes

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How Do We Explain Wage Differences?

• Compensating Wage Differentials
• Differences in Marginal Productivity
• Human Capital and Wages

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Compensating Wage Differences
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Differences in Marginal Productivity
Supply
Wage
Wage,high skill
Wage,low skill
Demand for High Skill Labor
Demand for Low Skill Labor
Units of Labor
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Increase in Relative Wages of College Graduates
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Relative Wages, Women
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Human Capital The Investment Decision

• Investments in Capital
• Immediate costs
• Long-term benefits
• Compare expected benefits and costs over time to
  calculate net present value
• Examples of Investment Decisions
• Firm decision to purchase machinery
• Investors decision to purchase stock in company
• Individuals decision to attend college

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Human Capital Investment
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Investment in College Education

• Lower tuition (more financial aid) would increase
  attendance
• Capital market imperfections/Federal guarantees
• High earnings premium encourages attendance
• Nonpecuniary rewards

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Education and Wages

• Investments in education increase productivity
• Investments in education signal to employer that
  person has desirable traits.
• In 1980s, premium paid to those with a college
  degree increased.

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Look for the Union Grader

• When she entered graduate school at UCLA five
  years ago to pursue a Ph.D. in English, Connie
  Razza, 26, hardly expected to be a campus
  activist. But she also didnt expect a workload
  like this for one undergraduate literature
  course this semester., Razza gives lectures, runs
  a discussion section , grades papers and exams,
  and holds office hours in a basement room where
  40 other teaching assistants share 29 desks and
  one computer. For 30 hours a week of such labor,
  she earns about 1400 a month
• Time, 4/12/99 Article Found by Matthew Bullock

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Monopsony

• Firm employs workers until Marginal Revenue
  Product Marginal Factor Cost
• Marginal Factor Cost is the change in input costs
  associated with hiring another unit of labor.
  MFCgtw because of the upward sloping supply of
  labor
• Workers are paid less than their Marginal Revenue
  Products. This is one notion of exploitation
• Unions frequently emerge in response to monopsony.

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Union

• In competitive markets, unions face trade off
  between higher wages and higher unemployment
• In monopsony, unions can bargain for higher wages
  and not reduce employment
• Union and monopsony is bilateral monopoly