AP Economics
Mr. Bernstein
Module 71:
The Market for Labor
December 18, 2014
AP Economics
Mr. Bernstein
The Market for Labor
• You are (or will be) a supplier of labor
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AP Economics
Mr. Bernstein
The Market for Labor: Basics
• Labor is a Factor market (not Product market)
• Workers have a decision between labor and leisure
• Labor Supply Curves can be built and compared to
Labor Demand Curves to determine equilibrium
• Equilibrium can be found in perfect competition
and imperfect competition markets
• Price = Wage
• Equilibrium is where worker’s MU from add’l hour
of labor = MU from one hour of leisure
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AP Economics
Mr. Bernstein
Supply of Labor
• Substitution Effect
Hourly wage
Higher wage increases
opportunity cost of leisure…
higher price of leisure means
worker substitutes fewer
hours of leisure for work
Labor supply
IE>SE,
downward
sloping
SE>IE, upward
sloping
Hours of work
(week)
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AP Economics
Mr. Bernstein
Supply of Labor
• Income Effect
As income rises, people
consume more leisure
(leisure is a normal good)
…for most people, the
supply curve is upward
sloping
Hourly wage
Labor supply
IE>SE,
downward
sloping
SE>IE, upward
sloping
Hours of work
(week)
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AP Economics
Mr. Bernstein
Shifts in the Supply of Labor
• Changes in preferences or social norms
• Post-WWII acceptance of women in workplace
• Changes in population
• Immigration + birth rate > death rate
• Changes in opportunity
• Increasing demand for health care, movement of
manufacturing jobs overseas
• Changes in wealth
• Wealth effect (home, investments, etc.) is similar to
income effect, increases consumption of leisure
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AP Economics
Mr. Bernstein
Equilibrium in the Labor Market
• Combine the demand Wage
from many firms and
individuals
• Demand is downward W*
sloping
• Supply is upward sloping
• Value of W* = Marginal
Product of last unit of labor hired
Market Labor
Supply
Market Labor
Demand
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AP Economics
Mr. Bernstein
Imperfect Competition in the Product Market
• In Perfect Competition Wage
VMPL = P * MPL = W
• Here, MR<P
• MRPL = MPL x MR…
and is < VMPL
• MRPL is the firm’s
Demand curve
VMPL
MRPL
Em
Ec Quantity of Labor (workers)
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AP Economics
Mr. Bernstein
Imperfect Competition in the Product Market
• Fewer units of labor
are used if firm has
pricing power (Em)
than if they are
price takers (Ec)
Wage
VMPL
MRPL
Em
Ec Quantity of Labor (workers)
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AP Economics
Mr. Bernstein
Imperfect Competition in the Labor Market
• A monopsony is a
Wage
single buyer of a
factor
$12
• MFCL, or Marginal
Factor Cost of Labor,
$10
rises with the
upward sloping Labor
Supply curve & is > W
MFCL
Labor Supply
3
Quantity of Labor (workers)
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AP Economics
Mr. Bernstein
Imperfect Competition in the Labor Market
• Hire where
Wage
MPRL = MFCL
• Monopsony pays
W* < MRPL
Remember, whether
Perfect or Imperfect
Markets, firms hire
where MRPL = MFCL
MFCL
Labor Supply
W*
MRPL
E*
Quantity of Labor (workers)
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