Work and the Labor Market
Work banishes those three great evils:
boredom, vice, and poverty.
— Voltaire
Work and the Labor Market
• A labor market is a factor market
• - individuals supply labor services for wages
• - firms demand labor services
• Incentive effect - how much a person will change hours worked
in response to the wage rate
19-2
Supply Positively Related to Price
The short-run supply elasticity is determined by
how easily the resource can be transferred
from one use to another, or resource mobility.
If resources are highly mobile then the supply curve will be elastic even
in the short run.
The supply of a resource will be more elastic in
the long run than the short run.
In the long run, investment can increase the
supply of both physical and human resources.
Resource Supply
Resource
price
As a resource’s price increases,
individuals have a greater
incentive to supply it.
Thus, a positive relationship
will exist between a resource’s P
2
price and the quantity supplied
in the market.
P1
S
B
A
Q1 Q2
Quantity
Income Tax, Work, and Leisure
• Taxes reduce net wage and incentive to
work
• An increase in the marginal tax rate is likely to reduce
the quantity of labor supplied
• EU countries, which have relatively high marginal tax
rates, are struggling with the problem of providing
incentives for people to work
• For welfare recipients, the tax penalties for working
create a great incentive to not work or to work in the
underground economy
19-5
The Elasticity of Labor Supply
• Elasticity of labor supply depends on:
•
•
•
•
Individuals’ opportunity cost of working
The type of labor market being discussed
The elasticities of individuals’ supply curve
Individuals entering and leaving the labor market
• Employees prefer an inelastic labor supply, but
employers prefer an elastic labor supply
• Estimates for labor supply elasticity are about 0.1
(inelastic) for heads of household and 1.1 (elastic) for
secondary earners
Time and Resource Supply Elasticity
The supply of CPA services for
example
Resource
price
S
If CPA wages increase from P1 to
P2, the short-run response will be
an increase in CPA services from
Q1 to Q2. Some CPAs work more
and some come out of retirement.
Given time, supply of the resource
(CPAs) becomes more elastic.
(Ssr
Slr) as more individuals
choose this field of training.
Slr
B
P2
P1
C
A
At the higher wage P2, Q3 CPA
services are supplied to the market.
The long-run supply of a resource
is almost always more elastic than
short-run supply.
Q1 Q2 Q3
Quantity
Immigration and the
International Supply of Labor
• International limitations on the flow of people
play an important role in elasticities of labor
supply
• Large differentials in wages mean that many people
from low wage countries would like to move to high
wage countries to earn higher wages
• EU countries have open borders among member
countries, allowing the flow of labor between low and
high wage countries
Derived Demand for Resources
The demand for resources is
derived from the demand for
the products that the
resources help produce.
A service station hires
mechanics because of
their customers’ demand
for repair services.
Demand Inversely Related to Price
Substitution in production:
If one input becomes more expensive, producers
will shift to lower-cost inputs.
The better the substitute inputs, the more
elastic the demand for the resource.
Substitution in consumption:
A high resource prices raises the product price
and consumers substitute other goods.
The more elastic product’s demand, the more
elastic is the demand for the resource.
The Demand for Resources
As a resource price increases,
producers will:
use substitute resources, or
face higher costs
These lead to higher prices and
a reduction in consumption.
At the lower output, firms use
less of the resource that
increased in price.
Resource
price
P2
B
A
P1
Both contribute to the
inverse relationship between
the price and quantity
demanded of a resource.
D
Q2 Q1
Quantity
Hiring Resources
Hire up to where
Marginal Revenue Product = Resource Price
Marginal revenue product (MRP):
Change in total revenue from the employment
of an additional unit of a resource.
MRP
=
Remember –
Marginal
product
Marginal
revenue
Marginal Marginal
product *revenue
change in output
= change in variable input
=
change in revenue
change in output
Numbers, Numbers, Numbers
A firm sells its product for $200 each (4).
The marginal product (3) shows how output changes
as workers (units of labor) are hired
The marginal revenue product (6) shows how hiring
an additional worker affects the firm’s total revenue.
Marginal Product
Variable
factor
(1)
0
1
2
3
4
5
6
7
Output
(per week)
(2)
0.0
5.0
9.0
12.0
14.0
15.5
16.5
17.0
=
change in (2)
change in (1)
Price
(per unit)
(4)
(3)
----5.0
4.0
3.0
2.0
1.5
1.0
0.5
$200
$200
$200
$200
$200
$200
$200
$200
MRP
Total Revenue
=
(5)
(2) * (4)
$
0
$1,000
$1,800
$2,400
$2,800
$3,100
$3,300
$3,400
=
(3) * (4)
(6)
---1000
800
600
400
300
200
100
Units of
Labor
Total
Output
Marginal
Product
Product
Price
1
14
$5
2
26
$5
3
37
$5
4
46
$5
5
53
$5
6
58
$5
7
62
$5
Total
Revenue
MRP
Units of
Labor
Total
Output
Marginal
Product
Product
Price
Total
Revenue
MRP
1
14
14
$5
70
70
2
26
12
$5
130
60
3
37
11
$5
185
55
4
46
9
$5
230
45
5
53
7
$5
265
35
6
58
5
$5
290
25
7
62
4
$5
310
20
Time and the Elasticity of
Demand for Resources
With time, the demand for a
resource becomes more elastic
(Dsr
Dlr):
the easier it is to switch
to substitute inputs, and/or,
the more elastic the demand
for the products the resource
helps to produce.
The long-run demand for a
resource is almost always more
elastic than demand in the
short-run.
Resource
price
P2
C
B
A
P1
Dlr
Dsr
Q3
Q2 Q1
Quantity
• Four factors that influence the
elasticity of demand for labor are:
• The elasticity of demand for the firm’s good
• The relative importance of labor in the production
process
• The possibility, and cost, of substitution in production
• The degree to which the marginal productivity falls
with an increase in labor
Equilibrium in the Labor Market
Wage
Rate
Supply
of Labor
Equilibrium is where the
quantity demanded of labor
is equal to the quantity
supplied
Equilibrium wage is We
We
Demand for
Labor
Qe
Equilibrium quantity is Qe
Q of Labor
19-18
Shifting Resource Demand
1. Changes in product demand
- cause the demand for its input resources to
change in the same direction.
2. Changes in the productivity of a resource
- If productivity rises, the demand rises.
3. Changes in the price of related inputs
- The following increase resource demand:
an increase in a substitute input price
a decrease in a complimentary input price
-The following decrease resource demand:
a decrease in a substitute input price
an increase in a complimentary input price
Shift Factors of Demand
• Technology both increases/decreases the
demand for labor
• International competitiveness may increase the demand
for labor in the U.S. in spite of lower wages in foreign
countries because:
U.S. workers may be more productive
Transportation costs are lower
Foreign companies can avoid trade restrictions
Production techniques are not compatible with
foreign social institutions
• Focal point phenomenon - a company moves to a
country because others have already moved there
•
•
•
•
The Role of Other Forces in Wage
Determination
• Real-world labor markets are filled with examples of
individuals or firms who resist these supply and
demand pressures through;
• Labor unions
• Professional associations
• Agreements among employers
Labor Market in Action
Wage
Rate
Supply
of Labor
The effect of an above
equilibrium wage is an
excess supply of labor
and jobs must be
rationed
W1
We
Excess supply of labor
QD
QS
Demand for
Labor
Q of Labor
Labor Market in Action
Wage
Rate
S0
S1
The effect of an
increase in the supply
of labor will cause:
Equilibrium wage to
decrease
W0
W1
Equilibrium quantity
to increase
D
Q0
Q1
Q of Labor
Imperfect Competition and the
Labor Market
• Monopsony is a market in which a
single firm is the only buyer of labor
• If a monopsonist hires another worker, the
equilibrium wage will rise
• The marginal factor cost is above the supply curve
• A bilateral monopoly is one in which a single seller
of labor (a union) faces a single buyer of labor
19-24
Monopsony, Union Power, and the Labor
Market
Marginal
Factor Cost
W
S
WU
Monopsony equilibrium is at point
A where fewer workers are
hired, QM, and the wage, WM
A union pushes for a higher
wage, WU, and a lower quantity
of workers, QU
A
WC
WM
D
MR
QU QM QC
In a competitive labor market,
equilibrium is WC and QC
Q
In bilateral monopoly the wage
will be between WU and WM and
quantity between QU and QM
Fairness and the Labor Market
• Social and political views of fairness
play a role in wage determination
• Efficiency wages are wages paid above the going
market wage to keep workers happy and productive
• Comparable worth laws mandate comparable pay
for comparable work
• Living wage laws require employers to pay a
worker a wage that would support a family of four
at the poverty level
Job Discrimination and the
Labor Market
• The three types of demand-side discrimination are:
• Discrimination based on individual characteristics
that will affect job performance (young
salespeople)
• Discrimination based on correctly-perceived
statistical characteristics of the group (younger
workers)
• Discrimination based on individual characteristics
that do not affect job performance or are
incorrectly perceived (older workers)
Institutional Discrimination
• Institutional discrimination - the structure of the
job makes it difficult for certain groups of individuals
to succeed
• Institutions can have built-in discrimination
• Institutional factors have an effect on
things such as pay, but workplace
discrimination also explains a portion
Discrimination
1. Wage Discrimination
Lower wages for minorities
2. Employment Discrimination
Fewer jobs available for minorities
Wage Discrimination
When majority workers are preferred to
minority workers (or men to women), demand for
minority workers is reduced.
Minority workers receive lower wages.
Impact of Wage Discrimination
Wages
Employment discrimination
causes the demand for
minority services to
decrease.
The result is lower
demand, and the
equilibrium wage will be at
a lower level, Ww > Wm .
S
Ww
Wm
A
B
Dwhites
Dminorities
Q m Qw
Employment
Employment Discrimination
Discriminated workers are restricted in the types
of jobs and occupations they enter.
Supply in the unrestricted jobs will increase, causing
wages to fall in these jobs.
When the supply (of minorities) to an occupation is
restricted, the wages (of white males) will rise.
Wages
Wr
Wages
Sr
Wn
Du
Quantity
Su
Wn
Wu
Du
Quantity
Employment Discrimination
Discrimination is costly to employers.
When employers can hire equally productive minorities
(or women) at a lower wage than whites (men), the
profit motive gives them a strong incentive to do so.
Employers who ignore minority and gender status
when employing workers will have lower wage costs
than employers who discriminate.
Evolution of Labor Markets
• Labor markets as we now know them
developed in the 1700s and 1800s
• The political and social rules pushed wage rates down to
subsistence levels, work weeks were long, and working
conditions were poor
• Labor laws and unions have evolved in response to
workers’ political pressure
• Laws, such as minimum wage or child labor laws, play
an important role in the structure of labor markets
Unions and Collective Bargaining
• In the late 1800s and early 1900s, the government
supported business’ opposition to workers’ right to strike
• In the 1930s the Wagner Act guaranteed workers the
right to form unions, strike, and bargain collectively
• In 1947 the Taft-Hartley Act was passed limiting
union activities and also provided for:
• States could pass right-to-work laws
• Closed shops were illegal
• Union shops were allowed
• Prohibited secondary boycotts
19-35
Unions and Collective Bargaining
• Unions were weakened in 1981 when Ronald
Reagan fired striking air traffic controllers
• Union membership has declined in recent years
partly due to the unions’ successes
• Today, nearly 50% of union members work for the
government
• These unions are becoming stronger and will
likely be exerting their influence
19-36
Changes in Union Membership,
1895-2007
After the Depression in the
1930s, unions grew in importance,
but since the mid-1970s the
importance of unions has declined
Percent of the
Labor Force
30
25
20
15
10
5
0
1930
1940
1950
1960
1970
1980
1990
2000
2010
19-37
The 10 Fastest Growing US Occupations in
Percentage Terms, 2000-2010
Occupation
Computer software engineer,
applications
Computer support specialists
Computer software engineers,
systems
Computer systems administrators
Data communication analysts
Desktop publishers
Database administrators
Personal and home care aides
Computer system analysts
Medical assistants
Thousand Jobs Percentage
2000
2010
Increase
380
760
100%
506
317
996
601
97
90
229
119
38
106
414
431
329
416
211
63
176
672
689
516
82
77
66
66
62
60
57
The 10 Most Rapidly Declining US Occupations in
Percentage Terms, 2000-2010
Occupation
Railroad brake, signal, and switch
operators
Shoe machine operators
Telephone operators
Radio mechanics
Loan interviewers
Motion picture projectionists
Meter readers
Rail track layers
Farmers and ranchers
Shoe and leather workers
Thousand Jobs Percentage
2000
2010
Increase
22
9
-59%
9
54
7
139
11
49
12
1294
19
4
35
5
101
8
36
9
965
15
-56
-35
-29
-27
-27
-27
-25
-25
-21