LABOR%20MARKETS

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LABOR MARKETS
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Questions (1) Where do the labor demand and
supply curves come from? (2) How well do they
explain the facts?
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The Slowdown in Wage Growth
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Two sides of the labor market Firms and Workers

• Labor Demand
• The firms decision
• Labor Supply
• The workers decision

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Derived Demand for Labor

• Labor demand is a derived from firms profit
  maximization decisions
• Firm chooses output to maximize profits (MC P)
• This amount of output implies a level of labor
  input (short run)
• a production function all over again

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Market power? Not yet, lets first start with
competition

• A firm in a competitive market for its good
  takes price as given
• But now also assume that the labor market is
  competitive firm takes wage as given

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Example Competitive Firm with P 100 (T12.1)
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To derive the labor demand curve, first plot MRP
by hand
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Marginal Revenue Product Equals Wage

• Condition for Profit Maximization
• In symbols MRP W
• For firms in competitive markets
• MRP PxMP
• example 1700 100x17 or 1400 100x14
• This implies that MP W/P
• Marginal product of labor equals real wage

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To get market demand for labor, sum up firms
demands for labor
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What if firm has market power as in a monopoly?

• Still must have MRP W
• But in this case MRP does not equal PMP
• because P is not fixed
• P must decrease as L and Q go up

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Derivation of Labor Supply

• analogy with earlier analysis of consumer
  behavior purposeful choices (work versus
  leisure) with limited resources (only 24 hrs in
  a day)
• The price of leisure is the opportunity cost of
  not working wage
• As the wage rises, the price of leisure rises
• thus the person will work more

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Leisure includes school!

• Investing in human capital
• more human capital increase marginal product of a
  worker

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Substitution versus income effect in labor supply

• Recall the two effects for a good
• the two effects go in the same direction
• in case of labor supply the two effects go in
  opposite directions
• hence labor supply can slope down!!!!!!!

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3 different labor supply curves
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Backward bending labor supply curve
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A Test compare trend in labor productivity with
trend in real wage
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But productivity theory does not explain
everything

• Compensating wage differentials
• salaries in the business school versus the
  economics department
• Efficiency Wages
• Long Term Employment Contracts
• wage is related to productivity over long
  periods, but not short periods

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Effects of Minimum Wage
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Discrimination in competitive markets
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Effects of Labor Unions
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