Chapter 8
LABOR MARKETS
Chapter in a Nutshell
1. Like other markets, the forces of demand and supply underlie labor markets. The point of
intersection of the labor demand and labor supply curves determines the equilibrium wage and
level of employment. The demand for labor is derived from the demand for the product that
labor helps produce.
2. In a competitive market, a firm will maximize profits by hiring workers up to the point where
the value of the marginal product of labor equals the wage rate. Moreover, the value of the
marginal product curve of labor constitutes a firm’s demand curve for labor.
3. Even if U.S. wages are higher than Mexican wages, if U.S. labor is more productive than
Mexican labor, U.S. labor can still be competitive.
4. An increase in the market supply curve of labor causes the equilibrium wage to decrease and
the quantity of labor demanded to increase. As the market demand curve for labor increases,
both the equilibrium wage and the quantity of labor supplied increase.
5. To help the working poor, in 1938 Congress established a minimum wage, the smallest
amount of money per hour that an employer may legally pay a worker. The minimum wage
benefits workers who can find work at a wage level that exceeds the market equilibrium wage.
However, it harms workers who seek employment at the higher wage, but cannot. To the
extent that a higher wage causes labor to become more productive, the demand for labor
increases, thus offsetting the unemployment effects caused by the minimum wage.
6. Labor unions use several strategies to increase the wages of their members: (1) increase the
demand for labor; (2) restrict the supply of labor; (3) impose an above-equilibrium wage floor
on the market. The ability of a union to increase the wages of its members is threatened by
non-union labor, other factors of production (machinery) that may be substituted for labor, the
availability of good substitutes for the product that members help produce, and when labor’s
share of production costs is high.
7. If a union and management cannot negotiate a mutually acceptable contract, a strike may
occur. The air traffic controllers’ strike of 1981 was unsuccessful in increasing the wages and
improving the working conditions of union members. However, the Teamsters’ strike and the
United Parcel Service strike in 1997 resulted in economic gains for most union members.
8. Although international trade benefits most workers, not all workers gain from trade. The
world trading system has come under attack by some in industrial countries where rising
unemployment and wage inequality have made people feel apprehensive about the future.
Some workers are threatened with losing their jobs because of imports of goods produced by
foreign workers. Others fear that masses of immigrants will be at their company’s door,
offering to work for lower wages.
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Chapter 8: Labor Markets
Chapter Objectives
After reading this chapter, you should be able to:
1. Explain how a firm determines the quantity of workers demanded.
2. Explain why even if U.S. wages are higher than foreign wages, if U.S. labor is more
productive than foreign labor, U.S. labor can still be competitive.
3. Identify the advantages and disadvantages of a minimum wage law that raises the wage rate
above the market equilibrium level.
4. Describe the methods used by unions to increases the wages of their members and the factors
that give a union strength.
5. Explain why domestic workers are often fearful of imported goods and liberal immigration
policies.
Knowledge Check
Key Concept Quiz
1. derived demand
2. marginal product of labor
3. demand curve for labor
4. transplants
5. mediation
6. arbitration
7. shock effect
8. strikes
_____ a. additional output from hiring each worker
_____ b. forces all employees to join the recognized union
within a specified time
_____ c. a price floor
_____ d. demand for labor
_____ e. the value of the marginal product of labor
_____ f. increase in revenue to a firm from hiring an
additional worker
9. minimum wage
_____ g. when unions act on behalf of workers to negotiate
with employers
10. collective bargaining
_____ h. cannot be called unless a majority supports it
11. union shop
_____ i. can mitigate the adverse effects of a minimum
wage
12. value of marginal
product of labor
_____ j. when labor and management receive outside help
_____ k. a process that labor and management may agree to
when mediation fails
_____ l. are non-union
Chapter 8: Labor Markets
Multiple Choice Questions
1. When wages of apple pickers rise, fewer apple pickers are demanded because
a.
b.
c.
d.
consumers purchase fewer apples as apples become more expensive
producers switch to substitute resources
all of the above
consumers prefer lower wages
2. Pizza Hut will stop hiring delivery workers when
a.
b.
c.
d.
the value of the marginal product of such labor equals the wage rate
the value of the marginal product of such labor exceeds the wage rate
the value of the marginal product of such labor is less than the wage rate
Domino’s Pizza opens in the neighborhood.
3. If wages in Poland are lower than wages in Germany, German manufacturers
a.
b.
c.
d.
will shift all of their production to Poland
all Polish workers will move to Germany
Germany will be unable to compete with Poland
Germany may remain competitive if German workers are more productive
4. The minimum wage
a.
b.
c.
d.
is an example of a price floor
can result in unemployment
leads to a decline in the quantity of labor demanded
all of the above
5. An increase in the minimum wage may do all of the following except
a.
b.
c.
d.
increase the demand for labor
increase the productivity of labor
shift the demand curve for labor to the right
shift the supply curve for labor to the left
6. If some medical doctors decide to unionize, they are probably attempting to improve all of
the following except
a.
b.
c.
d.
wages
hours and working conditions
the allocation of medical resources
recruiting of union members for jobs
7. When unionized university professors attempt to increase their salaries, they may use all of
the following strategies except
a.
b.
c.
d.
increase the demand for labor
restrict the supply of labor
decrease the marginal productivity of professors
impose an above-equilibrium salary floor
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Chapter 8: Labor Markets
8. If the American Medical Association creates stringent certification requirements, it is trying
to
a.
b.
c.
d.
restrict the supply of doctors
increase the productivity of doctors
improve the quality of medical care
decrease the demand for doctors
9. When auto workers in Detroit are able to increase wages and set them at above-equilibrium
levels, it results in
a.
b.
c.
d.
increased incomes for auto workers in Detroit
an increase in supply of auto workers in non-union firms
a decrease in the quantity demanded of auto workers in Detroit
all of the above
10. Japanese automobile transplants are not characterized as
a.
b.
c.
d.
being non-union
having higher productivity than American auto firms
paying higher wages than American auto firms
being Japanese automobile assembly plants
11. Economists tend to agree that wage stagnation remedies that lead to increasing import prices
will do all of the following except
a.
b.
c.
d.
increase consumer prices
slow economic growth
increase the productivity of the U.S. worker
backfire as a policy prescription
12. International trade benefits most workers except by
a.
b.
c.
d.
enabling them to shop for the cheapest consumption goods
allowing them to become more productive
generating jobs and income
reducing the wage gap between skilled and unskilled workers
13. All of the following strategies may be used by labor unions to increase the wages of seasonal
fruit pickers except
a.
b.
c.
d.
decreasing the supply of fruit pickers
imposing an above-equilibrium wage floor
making the demand curve for fruit pickers inelastic
increasing the productivity of fruit pickers
14. When labor migrates from Albania to Italy
a.
b.
c.
d.
output increases and wages increase in Italy
output increases and wages decrease in Italy
output decreases and wages increase in Italy
output decreases and wages decrease in the United States
Chapter 8: Labor Markets
81
15. If the U.S. decides to impose tariffs on goods imported from Europe
a.
b.
c.
d.
the demand curve for U.S. workers shifts to the right
the demand curve for U.S. workers shifts to the left
the supply curve for U.S. workers shifts to the right
the supply curve for U.S. workers shifts to the left
16. The labor supply curve shifts to the right if
a.
b.
c.
d.
wages are reduced
wages are increased
leisure becomes more than attractive than work
employers invest in equipment that makes the workplace safer
17. The demand for labor
a.
b.
c.
d.
shifts to the right as wages are increased
shifts to the left as wages are decreased
is derived from the demand for the good or service that labor helps produce
is downward sloping at high wages and upward sloping at low wages
18. If workers are employed under the provisions of a union shop, Boeing can hire
a.
b.
c.
d.
only union workers on a permanent basis
both union and nonunion workers on a permanent basis
only workers who previously worked in a union shop
nonunion workers provided that they join a union within a specified period of time
19. Critics of free trade between the United States and developing countries argue that it has
resulted in
a. a decrease in the demand for unskilled American workers which caused their real
wages to decline
b. unskilled American workers= becoming less productive, and thus less employable
c. less incentive for American employers to grant bonuses and stock options to productive
workers
d. the demand for skilled American workers to decrease more than the demand for
unskilled workers
20. If the demand for labor is elastic, an increase in the minimum wage will
a.
b.
c.
d.
increase the amount of wage earnings which workers receive
decrease the amount of wage earnings which workers receive
leave unchanged the amount of earnings which workers receive
cause the demand curve for labor to shift to the left
21. To promote conservation of electricity, public utilities sometimes enact a variable pricing
system called
a.
b.
c.
d.
monopoly pricing
competitive pricing
price discrimination
peak-load pricing
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Chapter 8: Labor Markets
22. Sources of market failure include all of the following except
a.
b.
c.
d.
public goods
competitive market behavior
externalities
inadequate information
23. Concerning pollution, the trading of emission certificates is essentially a
a.
b.
c.
d.
market solution
non-market solution
subsidy solution
taxation solution
24. What type of regulation attempts to combat a variety of side effects in a market economy that
relate to health, safety, and the environment?
a.
b.
c.
d.
economic regulation
antitrust regulation
social regulation
fair-return regulation
25. Owners of major league baseball teams justify governmental subsidies to help construct
stadiums on the grounds that baseball
a.
b.
c.
d.
provides spillover benefits to the people of the local community
provides profits for the owners of the local team
allows taxes to local businesses to decrease
siphons money away from other local establishments
26. The Food and Drug Administration provides an example of
a.
b.
c.
d.
social regulation
antitrust regulation
fair trade regulation
economic regulation
True-False Questions
1.
T
F
All workers gain from international trade.
2.
T
F
Industries inevitably leave high wage locations for low wage areas.
3.
T
F
Demand for labor is derived demand.
4.
T
F
During the 1980s and 1990s, wage inequality rose sharply in the United
States.
5.
T
F
The widening wage gap in the United States can be explained by the
increased competition from developing countries’ imports.
6.
T
F
The value of the marginal product of labor is calculated as the product of
wages and price of goods and services.
Chapter 8: Labor Markets
83
7.
T
F
The marginal product of labor is not subject to the law of diminishing
returns.
8.
T
F
The minimum wage is an example of a price ceiling.
9.
T
F
Minimum wage laws can create unemployment.
10.
T
F
The shock effect describes the effect of labor productivity increases due
to the establishment of a minimum wage.
11.
T
F
Unions typically try to impose an above-equilibrium wage floor on the
market.
12.
T
F
In trying to achieve wage increases, unions sometimes restrict the supply
of labor.
13.
T
F
Most transplants pay higher wages and have higher productivity than
American firms.
14.
T
F
Firms maximize profits by hiring workers up to the point where the value
of the marginal product of labor exceeds the wage rate.
15.
T
F
Strikes may occur when union and management cannot negotiate a
contract.
16.
T
F
An increase in the market demand curve of labor causes the equilibrium
wage to increase.
17.
T
F
An increase in the market demand curve of labor causes the equilibrium
wage to increase.
18.
T
F
Unions typically try to make the demand curve for labor more elastic.
19.
T
F
Collective bargaining does not pertain to hours of employment.
20.
T
F
The ability of a union to increase wages is threatened by non-union
labor.
21.
T
F
To attract professional sports teams, many local governments have
provided subsidies for the construction of stadiums and arenas.
22.
T
F
With peak load pricing, electricity customers pay higher prices during
daytime hours than evening hours.
23.
T
F
The Sherman Act directly deals with issues involving social regulation.
24.
T
F
Many public utilities have been granted exclusive franchises to provide
telephone service, electricity, and natural gas to a local community.
25.
T
F
Concerning the regulation of public utilities, a problem of fair-return
pricing is that excessive production costs may be incurred by utilities.
26.
T
F
Although government officials in California deregulated their electricity
market in 1996, they maintained a ceiling on the retail cost of electricity
that was below the wholesale cost. This contributed to shortages of
electricity in California.
84
Chapter 8: Labor Markets
Application Questions
1. The following data describes the demand curve for cherry pickers in the Yakima Valley of
Washington State. Cherries sell for $6 a pound.
Workers
Cherry Output
(pounds)
Marginal Product
(MP)
0
0
1
100
100
2
300
200
3
Value of
Marginal Product
(VMP)
1800
4
850
5
1050
6
7
1500
200
100
600
300
a. Complete the table.
b. If the weekly wage rate is $300, what is the level of employment? Graph a wage curve,
and the value of the marginal product curve.
c. If a minimum wage of $600 per week is legislated, what is the new level of
employment? Will everyone benefit from this minimum wage?
Chapter 8: Labor Markets
2. The following table shows the demand and supply schedules in the Spanish and Portuguese
farms for daily laborers.
Spain
Portugal
QD
(millions)
QS
(millions
QD
(millions)
QS
(millions)
$70
30
70
$40
0
16
60
40
60
35
4
12
50
50
50
30
8
8
40
60
40
25
12
4
30
70
30
20
16
0
Wage
Wage
a. What is the equilibrium wage rate in Spain? What is the equilibrium wage rate in
Portugal?
b. What is the wage differential between Spain and Portugal? What kinds of changes
would you expect to occur if labor is completely mobile?
c. Do you think that the wage differential will inevitably lead to one country shifting all
of its production to the other country?
Answers to Knowledge Check Questions
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86
Chapter 8: Labor Markets
Key Concept Answers
1. d
4. l
2. a
5. j
3. e
6. k
7. i
8. h
9. c
10. g
11. b
12. f
Multiple Choice Answers
1. c
6. d
2. a
7. c
3. d
8. a
4. d
9. d
5. d
10. c
11.
12.
13.
14.
15.
c
d
c
b
a
16.
17.
18.
19.
20.
d
c
d
a
b
21.
22.
23.
24.
25.
d
b
a
c
a
26. a
True-False Answers
1. F
6. F
2. F
7. F
3. T
8. F
4. T
9. T
5. F
10. T
11.
12.
13.
14.
15.
T
T
F
F
T
16.
17.
18.
19.
20.
T
T
F
F
T
21.
22.
23.
24.
25.
T
F
F
T
T
26. T
Application Question Answers
1. a. Below is the completed table showing the demand for cherry pickers in the Yakima
Valley of Washington state.
Workers
Cherry Output
(pounds)
Marginal Product
(MP)
Value of
Marginal Product
(VMP)
0
0
1
100
100
$600
2
300
200
1200
3
600
300
1800
4
850
250
1500
5
1050
200
1200
6
1150
100
600
7
1200
50
300
Chapter 8: Labor Markets
The following graph shows the value of the marginal product curve for cherry pickers in
the Yakima Valley of Washington state. The value of marginal product = the wage per
week = $300 at an employment level of seven workers.
Wage ($100/worker)
b.
87
VMP
Wage
Workers
As the following graph shows, employment will decline to six workers. The law will
force some workers into unemployment. Owners of cherry orchards will face higher
labor costs and a decrease in profits.
Wage ($100/worker)
c.
VMP
Legislated Minimum Wage
Wage
Workers
2. a. The equilibrium wage in Spain is $50.
The equilibrium wage in Portugal is $30.
b. The wage differential is $20. Labor will tend to move from Portugal to Spain. Capital
may flow to Portugal from Spain.
c. No, the wage differential will not inevitably lead to one country shifting all of its
production to the other country. Such a shift also depends on the productivity of labor in
these countries. If productivity of Portuguese workers is lower than the productivity of
Spanish workers, lower wage rates in Portugal will not be sufficient to attract such a
move.