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LABOR MARKETS

LABOR MARKETS. Questions: (1) Where do the labor demand and supply curves come from? (2) How well do they explain the facts?. The Slowdown in Wage Growth. Labor Demand The firm’s decision Labor Supply The worker’s decision. Two sides of the labor market: Firms and Workers.

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LABOR MARKETS

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  1. LABOR MARKETS

  2. Questions: (1) Where do the labor demand and supply curves come from? (2) How well do they explain the facts?

  3. The Slowdown in Wage Growth

  4. Labor Demand The firm’s decision Labor Supply The worker’s decision Two sides of the labor market: Firms and Workers

  5. Derived Demand for Labor • Labor demand is a derived from firm’s profit maximization decisions • Firm chooses output to maximize profits (MC = P) • This amount of output implies a level of labor input (short run) • a production function all over again

  6. Market power? Not yet, let’s first start with competition • A firm in a competitive market for its good: takes price as given • But now also assume that the labor market is competitive: firm takes wage as given

  7. Example: Competitive Firm with P = $100 (T12.1)

  8. To derive the labor demand curve, first plot MRP by hand

  9. Marginal Revenue Product Equals Wage • Condition for Profit Maximization • In symbols: MRP = W • For firms in competitive markets: • MRP = PxMP • example 1700 = 100x17 or 1400 = 100x14 • This implies that MP = W/P • Marginal product of labor equals real wage

  10. To get market demand for labor, sum up firms’ demands for labor

  11. What if firm has market power as in a monopoly? • Still must have MRP = W • But in this case MRP does not equal P=MP • because P is not fixed • P must decrease as L and Q go up

  12. Derivation of Labor Supply • analogy with earlier analysis of consumer behavior: purposeful choices (work versus “leisure”) with limited resources (only 24 hrs in a day) • The “price of leisure” is the opportunity cost of not working = wage • As the wage rises, the price of leisure rises • thus the person will work more

  13. “Leisure” includes school! • Investing in human capital • more human capital increase marginal product of a worker

  14. Substitution versus income effect in labor supply • Recall the two effects for a good • the two effects go in the same direction • in case of labor supply the two effects go in opposite directions • hence labor supply can slope down!!!!!!!

  15. 3 different labor supply curves

  16. Backward bending labor supply curve

  17. A Test: compare trend in labor productivity with trend in real wage

  18. Compensating wage differentials salaries in the business school versus the economics department “Efficiency” Wages Long Term Employment Contracts wage is related to productivity over long periods, but not short periods But productivity theory does not explain everything

  19. Effects of Minimum Wage

  20. Discrimination in competitive markets

  21. Effects of Labor Unions

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