Economics 103
Lecture # 14
The Labor Market
We’ve already discussed how the demand for labor comes from
the marginal product of labor.
This is often called
a “derived demand”
because it follows
from the demand for
the output.
The supply of labor comes from the “demand for leisure.”
Leisure is a good, and the price of leisure is the forgone wage.
If you want 16 hours of
leisure when the wage is $30,
then you are working 8 hours.
If the wage goes up to $40,
the demand for leisure falls
to 12, and the quantity
supplied to the labor market
increases to 12 hours.
So the labor market has a supply and demand graph, just like
other markets.
Unemployment and
shortages in the labor
market are simply the
result of wages out of
equilibrium.
The only thing different
in this application is
what is on the horizontal
axis.
Simple Applications:
1. What is the effect of a union?
A union restricts the number of workers in an effort
to raise wages.
A union also tries to restrict the number of substitutes to
create an inelastic demand for labor.
Unions:
Examples.
1.
2.
Why do prostitutes want to remove
teenage prostitutes from the street?
Who opposed the Gutenberg Press?
2. What explains income differences?
A. Common skills are going to have low wages (large supply of
labor).
B. Some jobs have non-pecuniary aspects.
(i) Good things increase the supply of labor and lower the
wage.
(ii) Jobs that suck have to
offer higher wages to get
people to do them (low supply).
C. Geographic differences.
This is another
shift in supply.
None of these are very controversial.
D. Differences in productivity.
-this is the most objectionable.
- for a given supply of labor, more productive people will
earn higher wages. This is a shift in demand … outwards.
Most work in labor economics has been done around the issue
of differences in wages between the sexes.
Why do
Earn less than
Our model only allows a few choices.
Explanation 1: Women generally have a larger labor supply.
Explanation 2: The Demand for female labor is lower.
There are three possibilities here.
a) Consumers value
the output of women
less. That is, pm > pw
This also makes little
sense, unless we’re
talking about …
Or
But this doesn’t seem to explain the general difference in
wages across sexes.
b) Firms might just discriminate against women.
But this would
imply collusion
among all firms.
A firm that decided to break ranks and hire equally productive
women at higher wages, would drive every other firm out of business
The only other option left is
c) Women have lower marginal products than men.
Why would women be less productive than men?
This might make sense in jobs that require
But if a job requires
Most studies have found that a major factor in the wage difference
stems from
When this starts to happen,
male wages will fall relative to
female wages.