Chapter 6
Labor Market Equilibrium
Introduction
• Labor market equilibrium coordinates the desires
of firms and workers, determining the wage and
employment observed in the labor market.
• Market types:
– Competitive: many buyers of labor
– Monopsony: one buyer of labor
– Monopoly: one seller of output
• These market structures generate unique labor
market equilibria.
2
Equilibrium in a Single Competitive Labor
Market
• Competitive equilibrium occurs when supply
equals demand, generating a competitive wage
and employment level.
• It is unlikely that the labor market is ever in a
stable equilibrium, since supply and demand
are dynamic.
• The model suggests that the market is always
moving toward new equilibrium.
3
Labor Market Equilibrium
Dollars
Supply
whigh
w*
wlow
Demand
ED
E*
ES
In a competitive labor
market, equilibrium is
attained at the point
where supply equals
demand. The marketclearing wage is w* at
which E* workers are
employed.
Employment
4
Benefit that Accrue to the National Economy
• Gains accruing to the firm: producer surplus
• Gains accruing to workers: worker surplus
• Sum of producer surplus and worker surplus:
gains from trade
• (Assume labor is the only input factor in the
production function)
5
Efficiency
• The competitive market maximizes the total
gains from trade accruing to the economy.
• The allocation of persons to firms that
maximizes the total gains from trade in the
labor market is called an efficient allocation.
• A competitive equilibrium generates an
efficient allocation of labor resources.
6
Equilibrium in a Competitive Labor Market
Dollars
S
P
w*
Q
D
EL
E*
EH
Employment
The labor market is in equilibrium
when supply equals demand; E*
workers are employed at a wage
of w*. In equilibrium, all persons
who are looking for work at the
going wage can find a job. The
triangle P gives the producer
surplus; the triangle Q gives the
worker surplus. A competitive
market maximizes the gains from
trade, or the sum P + Q.
7
Competitive Equilibrium Across Labor Markets
• If workers were mobile and entry and exit of workers
to the labor market was free, then there would be a
single wage paid to all workers.
• The allocation of workers to firms equating the wage
to the value of marginal product is also the allocation
that maximizes national income (this is known as
allocative efficiency).
• The “invisible hand” process: self-interested workers
and firms accomplish a social goal that no one had in
mind, i.e., allocative efficiency.
8
Competitive Equilibrium in Two Labor
Markets Linked by Migration
Dollars
Dollars
SN
S’S
S’N
SS
A
wN
B
w*
w*
wS
C
DN
Employment
(a) The Northern Labor Market
DS
Employment
(b) The Southern Labor Market
Suppose the wage in the northern region (wN) exceeds the wage in the southern
region (wS). Southern workers want to move North, shifting the southern supply
curve to the left and the northern supply curve to the right. In the end, wages are
equated across regions at w*. Migration increases the total gains from trade in the
national economy by the triangle ABC.
9
Efficiency Revisited
• The “single wage” property of a competitive
equilibrium has important implications for economic
efficiency.
– Recall that in a competitive equilibrium w = VMPE. As
firms and workers move to the region that provides the best
opportunities, they eliminate regional wage differentials.
Therefore, workers of given skills have the same VMPE in
all markets.
• The allocation of workers to firms that equates the
value of marginal product across markets is also the
sorting that leads to an efficient allocation of labor
resources.
10
Wage Convergence Across Regions
5.7
LA
Percent Annual Wage Growth
GA
5.5
MS
AR
5.3
NH
ME
VT
VA
MD
MA
IA
FL
NC
SC
MI
CT
DE
TN
AL
NE
5.1
NJ
OK
MN
TXMO PA WI
RI
UT
ND
4.9
KS
SD
WV
IN
OH
IL CO
NY
KY
AZ
WA
MT CA
NM
4.7
NV
ID
OR
WY
4.5
.9
1.1
1.3
1.5
Manufacturing Wage in 1950
1.7
1.9
Source: Olivier Jean Blanchard and Lawrence F. Katz, “Regional
Evolutions,” Brookings Papers on Economic Activity 1 (1992): 161.
11
Summary
• Labor market equilibrium
• Some implications
12
Policy Application: Minimum Wage
13
Nobel Prize in Economics 2021
• “Using natural experiments, David Card has
analysed the labour market effects of minimum
wages, immigration and education. His studies
from the early 1990s challenged conventional
wisdom, leading to new analyses and
additional insights. The results showed, among
other things, that increasing the minimum
wage does not necessarily lead to fewer
jobs.”
(https://www.nobelprize.org/uploads/2021/10/
press-economicsciencesprize2021-2.pdf)
14
The Minimum Wage
• Minimum-wage laws dictates the lowest price for
labor that employer may pay: an important example
of a price floor
• First introduced in New Zealand in 1894. US
introduced MW in 1938. Most European nations have
MW laws as well (higher min than US).
• A frequent topic of debate: advocates view the policy
as one way to raise the income of the working poor
15
Minimum Wages in the US
• Mandatory min. wage was introduced in the labor
market in 1938 ($25/hr, 43% workers covered)
• Nominal wage has been adjusted at irregular intervals
in the past 6 decades; coverage greatly expanded
• Min. wage haven’t been indexed to inflation: real
min. wage declines between the time that the nominal
floor is set and the next time that Congress raised it
16
Minimum Wages in the US, 1938-2007
Nominal Minimum Wage
Ratio Min. Wage to Avg. Mfg. Wage
7
0.6
6
5
Ratio
0.5
4
0.4
3
2
0.3
Nominal
Wage
1
0
1938
0.2
1944
1950
1956
1962
1968
1974
1980
1986
1992
1998
2004
2010
Year
17
The Impact of the Minimum Wage on Employment
Dollars
S
w-
w*
D
E-
E*
ES
Employment
A minimum wage set at w- results in employers cutting employment
from E* to E-. The higher wage also encourages ES – E* workers to
enter the market. Thus, under a minimum wage, ES – E– workers are
unemployed.
18
The Employment Effects of Minimum Wages
• The unemployment rate is higher the higher the
minimum wage and the more elastic are the labor
supply and demand curves.
• The least skilled workers now become particularly
vulnerable to layoffs
– those who can retain their jobs benefit from the law
– the law provides little consolation to those who lose their
jobs
19
An Effective Antipoverty Program?
• The benefits of the minimum wage accrue mostly to
workers who are not at the bottom of the distribution
of permanent income (teenagers from households that
are not poor): may not be a good anti-poverty tool
even if it has few adverse employment effect
20
Minimum Wage Laws
• Minimum wage laws imposed by state, local
and Federal governments
• “Covered” sector includes most jobs
• States/locals can raise but not lower Federal
minimum wage includes most jobs
21
Evidence: Employment Effects of Min. Wages
• Model predicts that an ↑in the min. wage should ↓
employment of the affected group.
• In the empirical literature, there was a long-standing
consensus that the min. wage has adverse
employment impacts on the most susceptible workers
(ε=-0.1~-0.3) (time-series relation)
• In the 1990s, several studies introduce a different
methodology that carries out case studies that trace
out the employment effects of specific min.-wage
increase on specific industries or sectors.
22
Card and Krueger 1994
• The paper analyzes the impact of the min.
wage in New Jersey and Pennsylvania
• On April 1, 1992, New Jersey increased its
min. wage to $5.05 per hour (highest in US),
but Pennsylvania kept the min. wage at $4.25
(federal mandates).
• A difference-in-differences model is used to
assess the impacts of min. wage legislation
23
Difference-in-Differences Models
• Maybe the most popular identification strategy
in applied work today
• Attempts to mimic random assignment with
treatment and “comparison” sample
• Application of two-way fixed effects model
24
Problem Set Up
• Cross-sectional and time series data (panel)
• One group is ‘treated’ with intervention
• Have pre-post data for group receiving
intervention
• Can examine time-series changes but, unsure
how much of the change is due to secular
changes
25
Y
True effect = Yb-Ya
Estimated effect = Yt2-Yt1
Yt1
Ya
Yb
Yt2
t1
ti
t2
time
26
• Intervention occurs at time period ti
• True effect of law
– Yb – Ya
• Only have data at t1 and t2
– If using time series, estimate Yt2 – Yt1
• Solution?
27
Difference-in-Differences Models
• Basic two-way fixed effects model
– Cross section and time fixed effects
• Use time series of untreated group to establish
what would have occurred in the absence of
the intervention
• Key concept: can control for the fact that the
intervention is more likely in some types of
states
28
Three Different Presentations
• Tabular
• Graphical
• Regression equation
29
Difference-in-Differences
Before
Change
After
Change
Group 1
(Treat)
Yt1
Yt2
ΔYt
= Yt2-Yt1
Group 2
(Control)
Yc1
Yc2
ΔYc
=Yc2-Yc1
Difference
Difference
ΔΔY
ΔYt – ΔYc
30
Treatment effect=
(Yt2-Yt1) – (Yc2-Yc1)
Y
Yc1
Yt1
Yc2
Yt2
control
treatment
t1
t2
time
31
Key Assumption
• Control group identifies the time path of
outcomes that would have happened in the
absence of the treatment
• In this example, Y falls by Yc1-Yc2 even
without the intervention
• Note that underlying ‘levels’ of outcomes are
not important (return to this in the regression
equation)
32
Y
Yc1
Treatment effect=
(Yt2-Yt1) – (Yc2-Yc1)
Yc2
Yt1
control
Treatment
Effect
Yt2
treatment
t1
t2
time
33
• In contrast, what is key is that the time trends
in the absence of the intervention are the same
in both groups
• If the intervention occurs in an area with a
different trend, will under/over state the
treatment effect
• In this example, suppose intervention occurs in
area with faster falling Y
34
Y
Estimated treatment
Yc1
Yc2
Yt1
True treatment effect
Yt2
treatment
t1
t2
control
True
Treatment
Effect
time
35
Basic Econometric Model
• Data varies by
– state (i)
– time (t)
– Outcome is Yit
• Only two periods
• Intervention will occur in a group of
observations (e.g. states, firms, etc.)
36
• Three key variables
– Tit = 1 if obs i belongs in the state that will
eventually be treated
– Ait = 1 in the periods when treatment occurs
– TitAit -- interaction term, treatment states after the
intervention
• Yit = β0 + β1Tit + β2Ait + β3TitAit + εit
37
Yit = β0 + β1Tit + β2Ait + β3TitAit + εit
Before
Change
After
Change
Group 1
(Treat)
β0+ β1
β0+ β1+ β2+ β3
ΔYt
= β2+ β3
Group 2
(Control)
β0
β0+ β2
ΔYc
= β2
Difference
Difference
ΔΔY = β3
38
Research Question
• What happens to labor demand when
minimum wage increased?
• Economic significance: test of theory of
demand
• Policy significance: key question faced by
lawmakers every time there is a proposed
change in the minimum wage law.
39
NJ Minimum Wage Hike
• Federal MW stuck at $3.35 for most of the 90s
• Because of inflation, real value of MW fell
considerably
• Nov 1989 law raised MW in 2 steps
– To $3.80 on 4/1/90
– To $4.24 on 4/1/91
• NJ law
– Passed in early 1990
– Went into effect April 1, 1992
– Raised minimum wage from $4.25 - $5.05/hr, 18% increase
40
• In 1992, NJ slipped into a recession
• In March of 1992, State legislature voted to
phase it in over two years
– Governor vetoed
– Vote margin not large enough to override veto
• Law went into effect as planned
41
42
Questions
• Why is NJ a good setting to test the impact of
minimum wage on employment?
– recession: effects of min wage are unlikely to be
obscured
– an economy closely linked to nearby states: can
difference out seasonal employment effects using
PA as a control group
• Why is the fast food industry a good industry
to examine?
43
Fast Food Industry
1. Leading employer of low-wage workers
2. Low rate of non-compliance with MW regulations
3. Job requirements and products are homogeneous –
easy to measure employment and wages
4. Easy to construct a sample frame of franchised
restaurants
5. High response to telephone surveys
44
Research Methodology
• Examine employment before and after law
goes into effect in NJ fast food restaurants
• Compare this change to changes in
employment for employers not impacted by
law
– Fast food restaurants in PA
– “Control group”
45
• Telephone interview of fast food restaurants
before law goes into effect
• Ask store manager for basic information
– Employees (full and part time)
– Wages
– Price of a basic meal
• Re-survey the same stores in November
46
Table 1: Sample Frame
NJ Stores
PA Stores
Contacted
Interviewed
Contacted
Interviewed
Wave 1
364
331
109
79
Wave 2
331
321
79
78
47
Notes about Sample
• Restaurants from 4 chains – Burger King,
KFC, Wendy’s and Roy Rogers – no
McDonalds
• Key outcome, Full time equivalents
– FTE
– FTE = full-time + 0.5 × part-time
48
Table 2: Means at Wave 1
NJ
PA
T-stat on
difference
% BK
41.1
44.3
-0.5
% RR
24.8
21.5
0.6
FTE
20.4
23.3
-2.0
% full-time
32.8
35.0
-0.7
Starting wage
4.61
4.63
-0.4
Hours open
14.4
14.5
-0.3
Outcome
49
Distribution of Starting Wages
50
Table 3: Row 4, Columns (i)(ii)(iii)
Change in full time equivalent employment
Mean and standard errors
PA (mean of X2) NJ (mean of X1)
Diff (Δ=mean of X1 - mean of X2)
-2.28
0.47
2.75
(1.25)
(0.48)
(1.34)
51
Alternative Control Groups
• Maybe PA is a bad control - notice that
employment in NJ increased, but in PA it fell.
Most of the effect is generated by an decrease
in the employment in PA
• Are there other control groups available?
• High wage stores in NJ
– Stores currently paying above the new MW
– Will not be impacted by the new law – it is not
binding
52
Dollars
S
w*
wm
D
E*
Employment
53
Table 3: Row 4, Columns (iv)(vi)(vii)
Change in full time equivalent employment
Mean and standard errors
Low Wage
High Wage
stores in NJ (X1) stores in NJ (X2)
Diff (Δ=mean of X1 - mean of X2)
1.21
-2.16
3.36
(0.82)
(1.01)
(1.30)
54
• Regression models that make allowance for
other sources of variation in employment
growth produce very similar results
• The difference-in-differences estimates of the
impact of the min. wage on employment was
an increase of about 2.7 workers in the typical
fast-food restaurants
55
Summary and Discussion of the Results
• The paper finds that the increase in min. wage
increased employment
• It raises important questions about how labor
economists think about the impact of min.
wage
• Maybe the adverse effect of the min. wage is
relatively small
• And measurement error in the data generates
noisy estimates that mask the “true” effect
56
Causal Effects in the DD Model
57
Common Trends?
Card and Krueger 2000
58
A More Encouraging Example
• Jörn-Steffen Pischke, “The Impact of Length of the
School Year on Student Performance and Earnings:
Evidence from the German Short School Years,”
Economic Journal, 117, Oct. 2007, 1216-1242.
• Use variation generated by a sharp policy change in
Germany
59
• Until the 1960s, children in all German states except
Bavaria started school in the Spring.
• Beginning in the 1966-67 school year, the Springstarters moved to start school in the Fall.
• The transition to a Fall start required two short school
years for affected cohorts, 24 weeks long instead of
37.
• Students in these cohorts effectively had their time in
school compressed relative to cohorts on either side
and relative to students in Bavaria, which already had
a Fall start.
60
61
• This graph provides strong visual evidence of
treatment and control states with a common
underlying trend, and a treatment effect that
induces a sharp but transitory deviation from
this trend.
• A shorter school year seems to have increased
repetition rates for affected cohorts.
62
Minimum Wages in China
• In 1984, China recognized the minimum wage
principle that was embodied in the “Minimum Wage
Treaty” of the International Labour Organization
(ILO) in 1928 but did not implement its own
legislation.
• In 1993, China issued its first minimum wage
regulations
• In 1994, the regulations were written into China’s
new version of the Labor Law
63
The 1994 Legislation
• All enterprises should comply with paying local
minimum wages
• Local governments should set the minimum wage
according to five principles (considerable flexibility):
– local average wages; productivity; unemployment;
economic development; minimum living expenses
• Local government have incentives to restrain
minimum wages to attract foreign investment
• By the end of 1995, 24 provinces and municipalities
had set their own minimum wages.
64
The 2004 Legislation
• Promulgated in Feb and put into effect in Apr
• Extend coverage to township-village enterprises, to
employees in self-employed business, and to parttime workers
• Penalties for violation increased from an earlier range
of 20%-100% of the wage that was owed to a new
range of 100%-500% of the owed wage
• Employers were not to include subsidies such as
overtime pay or canteen and traveling supplements as
part of the wage when calculating minimum wages.
65
Problems with China’s Minimum Wages
• China tends to have difficulty in enforcing
compliance with its labor legislation especially in the
private sector
• The most common violations tend to involve
employers, including the value of subsidies and fringe
benefits such as overtime pay, travel supplements,
nightshift premiums, and employer’s portion of
pensions in the wage package
• Despite the weak enforcement, such legislation has
taken the first steps in establishing a legal basis for
the rights of workers in this area
66
Trend of Minimum Wage
67
Variation of Minimum Wage over Time
68
Minimum Wages Increase in 14 Provinces in 2010
Unit: yuan/month
Previous
Now
Shanghai
960
1120
Zhejiang
960
1100
Guangdong
860
1030
Beijing
860
960
Jiangsu
850
960
Tianjin
820
920
Shandong
760
920
Hubei
700
900
Fujian
750
900
Shanxi
720
850
Hunan
665
850
Jilin
650
820
Shaanxi
600
760
Ningxia
560
710
69
Beijing 2015
• Beijing raised its minimum wage from 1560 to
1720 yuan/month
• Meanwhile, minimum wage paid to part-time
workers was raised from 16.9 to 18.7
yuan/hour
• Minimum wage paid to part-time workers
during statutory holidays was raised from 40.8
to 45 yuan/hour
70
Hau, Huang and Wang, 2020
71
Hau, Huang and Wang, 2020
• Did adverse cost shocks accelerate
productivity growth of Chinese manufacturing
firms?
• Did other factors like firm ownership and
management quality affect this endogenous
response?
72
Hau, Huang and Wang, 2020
73
Summary
• Minimum wage
• Minimum wage in the US
• Minimum wage in China
74
Policy Application: Payroll Taxes
• Payroll taxes assessed on employers lead to a
downward, parallel shift in the labor demand
curve.
– The new demand curve shows a wedge between the
amount the firm must pay to hire a worker and the
amount that workers actually receive.
– Payroll taxes increase total costs of employment, so
these taxes reduce employment in the economy.
– Firms and workers share the cost of payroll taxes,
since the cost of hiring a worker rises and the wage
received by workers declines.
– Payroll taxes result in deadweight losses.
75
The Impact of a Payroll Tax Assessed on Firms
Dollars
S
w1 + 1
A
w0
w1
B
w0 - 1
D0
D1
E1
E0
Employment
A payroll tax of $1
assessed on employers
shifts down the
demand curve (from
D0 to D1). The payroll
tax decreases the wage
that workers receive
from w0 to w1, and
increases the cost of
hiring a worker from
w0 to w1 + 1.
76
The Impact of a Payroll Tax Assessed on
Workers
S1
Dollars
S0
w0 + 1
w1
w0
w1 - 1
D0
D1
E1
E0
Employment
A payroll tax assessed
on workers shifts the
supply curve to the left
(from S0 to S1). The
payroll tax has the
same impact on the
equilibrium wage and
employment
regardless of who it is
assessed on.
77
Tax Incidence
• The manner in which the burden of a tax is shared
among participants in a market
• The lawmakers cannot easily dictate the distribution
of a tax burden
• The key feature of a payroll tax is that it places a
wedge between the wage that the firm pay and the
wage that the workers receive.
• The true incidence of the tax has little to do with the
way the tax is collected
78
The True Incidence of the Payroll Tax
Dollars
S0
Wages firms pay
Tax wedge
Wages workers receive
D0
E1
E0
Employment
79
• A payroll tax places a wedge between the wage that
workers receive and the wage that firms pay.
Comparing wages with and without the tax, you can
see that workers and firms share the tax burden. This
division of the tax burden between workers and firms
does not depend on whether the government levies
the tax on workers or levies the tax on firms.
• A tax burden falls more heavily on the side of the
market that is less elastic.
80
The Impact of a Payroll Tax Put on Firms
with Inelastic Supply
Dollars
S
w0
A
B
w0 – 1
D0
D1
E0
Employment
A payroll tax assessed on
the firm is shifted
completely to workers
when the labor supply
curve is perfectly
inelastic. The wage is
initially w0. The $1
payroll tax shifts the
demand curve to D1, and
the wage falls to w0 – 1.
81
82
Welfare Implication of a Payroll Tax
No-Tax Equilibrium
Payroll Tax
Equilibrium
Producer surplus
P
P*
Worker surplus
Q
Q*
Tax revenues
-
T
P+Q
P*+Q*+T
-
DL
Total gain from trade
Deadweight loss
83
Summary
• Payroll tax
– Welfare implication
84
Policy Application: The Labor Market
Impact of Immigration
• US witnessed a major resurgence in
immigration after 1956
– In the 1950s, only about 250,000 immigrants
entered the country annually
– Since 2000, over 1M legal and illegal immigrants
are entering the county annually
• A resurgence of large-scale immigration in
other developed countries
85
Immigration
• The key issue: what is the impact of
immigrants on the labor market opportunities
of native-born workers?
• As immigrants enter the labor market, the
labor supply curve shifts to the right.
– Total employment increases.
– Equilibrium wage decreases.
86
Effect on Native-born Workers
• Immigration reduces the wages and
employment of similarly-skilled native-born
workers, but native-born workers may be able
to increase their productivity by specializing in
tasks better suited to their skills.
• Competing native workers will have lower
wages; complementary native workers will
have higher wages.
87
The Short-Run Impact of Immigration When
Immigrants and Natives Are Perfect Substitutes
Dollars
Supply
w0
w1
Demand
N1
N0
E1
Employment
As immigrants and natives
are perfect substitutes, the
two groups are competing
in the same labor market.
Immigration shifts out the
labor supply curve. As a
result, the wage falls from
w0 to w1, and total
employment increases from
N0 to E1. At the lower wage,
the number of natives who
work declines from N0 to
N1.
88
The Short-Run Impact of Immigration when
Immigrants and Natives are Complements
Dollars
Supply
w1
w0
Demand
N0
N1
Employment
If immigrants and natives are
complements, they do not
compete in the same labor
market. The labor market
here denotes the supply and
demand for native workers.
Immigration makes natives
more productive, shifting out
the labor demand curve. This
leads to a higher native wage
and to an increase in native
employment.
89
The Long-Run Impact of Immigration When
Immigrants and Natives Are Perfect Substitutes
• In the SR, immigrants lower the wage
• The increased profitability will raise the
returns to K, therefore attract K flows into the
market as old firms expand and new firms start
• The increase in K will shift the demand curve
for labor to the right and tend to attenuate the
(-) impacts of the initial labor supply shock
90
An Illustration Using Cobb-Douglas
• q = AKαL1- α
• constant returns to scale
• suppose price of output is $1
– r = $1 × αAKα-1L1-α (rate of return to capital)
– w = $1 × (1-α)AKαL-α (wage)
• or
– r = $1 × αA(K/L)α-1
– w = $1 × (1-α)A(K/L)α
91
• r = $1 × αA(K/L)α-1 and w = $1 × (1-α)A(K/L)α
• In the SR, the increase in L will raise r and
lower w
• In the LR, K will adjust such that r falls to its
“normal” level (r is fixed in the LR)
• It implies that (K/L) is fixed in the LR
• which in turn implies that w is also constant in
the LR
92
The Long-Run Impact of Immigration When
Immigrants and Natives Are Perfect Substitutes
Dollars
Supply
w0
w1
Demand
N0
N0 +
Immigrants
Employment
Immigration initially
shifts out the labor
supply curve so the
wage falls from w0 to
w1. Over time, capital
expands as firms take
advantage of the
cheaper workforce,
shifting out the labor
demand curve and
restoring the original
wage and level of
native employment.
93
Spatial Correlations
• The cross-city correlations estimated between wages
and immigration
• Compares native earnings in cities where immigrants
are a substantial fraction of the labor force with cities
where immigrants are a relatively small fraction
• If immigrants and natives are substitutes, native
earnings should be lower if they reside in labor
markets where immigrants are in abundant supply
• Empirically, the correlation is very small (-). But
again, correlation does not imply causation
94
The Mariel Boatlift
• On April 20, 1980, Fidel Castro declared that Cuban
nationals wishing to move the US could leave freely
from the port of Mariel.
• By September 1980, about 125,000 Cubans, mostly
low-skilled workers, had chose to undertake the
journey – a sizable demographic impact on Miami’s
labor force (↑ 7%)
95
The Mariel Boatlift
In April 1980, asylum-seeking Cubans created a
crisis that led to a massive boatlift to Florida.
Castro branded the refugees escoria -- "trash" -and opened the port of Mariel to over 125,000
Cubans wishing to leave.
96
Card 1990
The Mariel Flow
Before
After
Miami
8.3
9.6
Comparison cities
10.3
12.6
Unemployment rate of blacks in
Difference-in-differences
-1.0
The trend of wages and employment opportunities for Miami’s
population was barely affected by the Mariel flow.
97
The Native Labor Market’s Response to Immigration
Dollars
Dollars
S0
S2
S0
S1
PLA
S3
PPT
w0
w0
w*
w*
wLA
Demand
Demand
Employment
Employment
(a) Los Angeles
(b) Pittsburgh
Originally, both markets pay equilibrium wages of w0. After
immigration into Los Angeles, both markets eventually converge to
a new equilibrium wage at w*, which is less than w0.
98
The Immigration Surplus
Dollars
S¢
S
A
B
w
0
C
w
1
F
D
0
N
M
Employment
Prior to immigration, there are
N native workers in the
economy and national income
is given by the trapezoid ABN0.
Immigration increases the labor
supply to M workers and
national income is given by the
trapezoid ACM0. Immigrants
are paid a total of FCMN
dollars as salary. The
immigration surplus gives the
increase in national income that
accrues to natives and is given
by the area in the triangle BCF.
99
Calculating the Immigration Surplus
• Immigration surplus = ½ × (w0-w1) × (M-N)
• Immigration surplus / National income =
½ × (% change in native wage rate)
× (% change in employment)
× (labor’s share of national income)
100
Summary
• Immigration
– Analytical framework
– An empirical study
101
The Cobweb Model
• Many labor markets do not adjust instantaneously to
shifts in supply or demand curves
• Markets for highly skilled workers, for example,
exhibits systematic periods of booms and busts.
• Two assumptions of the cobweb model:
– Time is needed to produce skilled workers.
– Persons decide to become skilled workers by looking at
conditions in the labor market at the time they enter school.
102
Cobweb Model (continued)
• A “cobweb” pattern forms around the equilibrium.
• The cobweb pattern arises when people are
misinformed.
• The model assumes naïve workers who do not form
rational expectations.
• Rational expectations are formed if workers correctly
perceive the future and understand the economic
forces at work.
103
The Cobweb Model in the Market for New Engineers
Dollars
S
w1
w3
w*
w2
w0
D¢
D
E0
E2
E*
E1
Employment
The initial equilibrium wage
in the engineering market is
w0. The demand for
engineers shifts to D¢, and
the wage will eventually
increase to w*. Because
new engineers are not
produced instantaneously
and because students might
mis-judge future
opportunities in the market,
a cobweb is created as the
market adjusts to the
increase in demand.
104
Dollars
S
w0
D¢
D
E0
Employment
105
Dollars
S
w1
w0
D¢
D
E0
Employment
106
Dollars
S
w1
w0
D¢
D
E0
Employment
107
Dollars
S
w1
w0
D¢
D
E0
E1
Employment
108
Dollars
S
w1
w2
w0
D¢
D
E0
E1
Employment
109
Dollars
S
w1
w2
w0
D¢
D
E0
E2
E1
Employment
110
Dollars
S
w1
w3
w2
w0
D¢
D
E0
E2
E1
Employment
111
Dollars
S
w1
w3
w*
w2
w0
D¢
D
E0
E2
E*
E1
Employment
112
Noncompetitive Labor Markets:
Monopsony
• Monopsony market exists when a firm is the
only buyer of labor.
– the one-company town, e.g., a coal mine in a
remote location
• Monopsonists must increase wages to attract
more workers.
• Two types of monopsonist firms:
– Perfectly discriminating
– Nondiscriminating
113
Perfectly Discriminating Monopsonist
• Perfectly discriminating monopsonists are able
to hire different workers at different wages.
• To maximize firm surplus (profits), a perfectly
discriminating monopsonist “perfectly
discriminates” by paying each worker his or
her reservation wage.
114
The Hiring Decision of a Perfectly
Discriminating Monopsonist
Dollars
S
A
w*
w30
VMPE
w10
10
30
E*
Employment
The labor supply curve gives
the marginal cost of hiring.
Profit maximization occurs at
point A. The monopsonist
hires the same number of
workers as a competitive
market, but each worker is
paid his or her reservation
wage.
115
Nondisriminating Monopsonist
• Must pay all workers the same wage,
regardless of each worker’s reservation wage.
• Must raise the wage of all workers when
attempting to attract more workers.
• Employs fewer workers than would be
employed if the market were competitive.
116
Calculating the Marginal Cost of Hiring for
a Nondiscriminating Monoposonist
Wage (w)
Number of
Persons Willing
to Work at That
Wage (E)
w×E
Marginal Cost of
Labor
$4
0
$0
-
5
1
5
$5
6
2
12
7
7
3
21
9
8
4
32
11
117
The Hiring Decision of a
Nondiscriminating Monopsonist
Dollars
MCE
VMPM
S
A
w*
wM
VMPE
EM
E*
The marginal cost of hiring
exceeds the wage, and the
marginal cost curve lies
above the supply curve.
Profit maximization occurs
at point A; the monopsonist
hires EM workers and pays
them all a wage of wM.
Employment
118
The Impact of the Minimum Wage on a
Nondiscriminating Monopsonist
Dollars
MCE
S
A
w*
wwM
The minimum wage may
increase both wages and
employment when imposed
on a nondiscriminating
monopsonist. A minimum
wage set at w- increases
employment to E-.
VMPE
EM
E-
Employment
119
Upward-Sloping Labor Supply Curve for a
Competitive Firm
• A firm could have some degree of monopsony power
even in a competitive market
• Mobility costs can introduce a great deal of inertia
into the labor market
– A firm wishing to hire more workers will have to keep
raising its wage to compensate for the costs incurred as
they switch jobs
• Monitoring problem when the firm is large
– As the firm expands its employment and finds it more
difficult to monitor its workers, the firm may want to pay a
higher wage to keep the workers in line
120
Monopoly in the Product Market:
A Review
• Firms that have monopoly power can influence
the price of the product that they sell.
• Monopolist faces a downward sloped market
demand curve for its output and an even lower
downward sloped marginal revenue curve.
121
The Output Decision of a Monopolist
Dollars
MC
pM
p*
A
MR
q M q*
D
Output
A monopolist faces a
downward-sloping demand
curve for her output. The
marginal revenue from selling
an additional unit of output is
less than the price of the
product. Profit maximization
occurs at point A where the
monopolist produces qM units
of output and sells each unit of
output at a price of pM dollars.
122
A Monopolist’s Hiring Decision
• It hires up to the point where the contribution
of the last worker hired equals the cost of
hiring.
• The marginal revenue product of labor gives
the additional revenue from hiring an extra
person
• MRPE = MR × MPE
123
The Labor Demand Curve of a Monopolist
Dollars
w
A
MRPE
EM
E*
VMPE
Employment
The marginal revenue
product is less than the
worker’s value of
marginal product. Profit
maximization occurs at
point A where the
monopolist hires fewer
workers (EM) than
would be hired in a
competitive market.
124
Summary
• Cobweb model
• Non-competitive markets
125