Transcript Chapter Goals

Introduction:
Thinking Like an Economist
CHAPTER
CHAPTER 17
1
Work and the Labor Market
Work banishes those three great evils:
boredom, vice, and poverty.
— Voltaire
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Work and the Labor
Market
17
1
Work and the Labor Market
 A labor market is a factor market in which individuals
supply labor services for wages to individuals and firms
that demand labor services
 The labor supply choice is between nonmarket activities
and legal market activities
 Incentive effect is how much a person will change hours
worked in response to the wage rate
• Economists focus on the incentive effect when
considering an individual’s choice of whether and
how much to work
17-2
Work and the Labor
Market
17
1
The Supply of Labor
Wage
Rate
Supply
of Labor
The labor supply curve has a
positive slope because the
opportunity cost of not working
increases as wages get higher
The higher the wage, the
higher the quantity of labor
supplied.
Q of Labor
17-3
Work and the Labor
Market
17
1
Real Wages and the Opportunity Cost of Work
 The upward sloping labor supply curve tells you that,
other things equal, as wages go up, the quantity of labor
supplied goes up
 Historically real wages have been increasing and people
have reduced the number of hours they work, but they still
work more hours than predicted
 This is explained by the income effect; higher incomes
make people richer, and richer people can afford to
choose more leisure causing a decrease in hours worked
17-4
Work and the Labor
Market
17
1
Income Tax, Work, and Leisure
 Taxes reduce the net wage of individuals, reducing the
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 “off the books”
17-5
Work and the Labor
Market
17
1
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
17-6
Work and the Labor
Market
17
1
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
17-7
Work and the Labor
Market
17
1
The Derived Demand for Labor
Wage
Rate
The demand for labor follows the basic
law of demand: the higher the wage, the
lower the quantity of labor demanded
The demand for labor by firms is a
derived demand meaning the demand
for factors of production by firms depends
on consumers’ demands
Demand for Labor
Q of Labor
17-8
Work and the Labor
Market
17
1
Factors Influencing the Elasticity of Demand for
Labor
 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
17-9
Work and the Labor
Market
17
1
Labor as a Factor of Production
 The traditional factors of production are land, labor,
capital, and entrepreneurship
 The labor market includes labor and entrepreneurship
 Entrepreneurship refers to labor services that require
high degrees of organizational skills, concern,
oversight responsibility, and creativity
 Days of entrepreneurship can be equivalent to weeks
and months of non-entrepreneurial labor
17-10
Work and the Labor
Market
17
1
•Rule for employing labor:
• MRP = MRC
• Marginal Revenue Product (MRP)
Marginal
Revenue
Product
=
Change in Total Revenue
Unit Change in Resource Quantity
• Marginal Resource Cost (MRC)
Marginal
Resource
Cost
=
Change in Total (Resource) Cost
Unit Change in Resource Quantity
17-11
Work and the Labor
Market
(1)
(2)
Units of Total Product
Resource
(Output)
0
1
2
3
4
5
6
7
(3)
Marginal
Product (MP)
(4)
Product
Price
7
6
5
4
3
2
1
$2
2
2
2
2
2
2
2
0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28
(5)
Total Revenue,
(2) X (4)
$0
14
26
36
44
50
54
56
]
]
]
]
]
]
]
17
1
(6)
Marginal Revenue
Product (MRP)
$14
12
10
8
6
4
2
$18
Purely
Competitive
Firm’s
Demand for
A Resource
Resource Wage
(Wage Rate)
16
14
12
10
8
6
4
D=MRP
2
0
-2
1
2
3
4
5
6
7
Quantity of Resource Demanded
17-12
Work and the Labor
Market
17
1
Competitive Labor Market
Labor Market
Individual Firm
a
($10)
WC
($10)
WC
D=MRP
(∑ mrp’s)
0
Wage Rate (Dollars)
Wage Rate (Dollars)
S
QC
(1000)
Quantity of Labor
0
e
b
c
s=MRC
d=mrp
qC
(5)
Quantity of Labor
17-13
Work and the Labor
Market
17
1
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
17-14
Work and the Labor
Market
17
1
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
Potential trade restrictions
Production techniques are not compatible with
foreign social institutions
• Focal point phenomenon is a situation where a
company moves to a country because others have
already moved there
17-15
Work and the Labor
Market
17
1
Determination of Wages
 Supply and demand forces strongly influence wages,
but they do not fully determine wages
 Real-world labor markets are filled with examples of
individuals or firms who resist these supply and demand
pressures:
• Labor unions
• Professional associations
• Agreements among employers
17-16
Work and the Labor
Market
17
1
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
17-17
Work and the Labor
Market
17
1
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
17-18
Work and the Labor
Market
17
1
The Labor Market and You
 Consider relative pay of jobs requiring a college degree
compared to jobs requiring only a high school diploma
 Consider the salaries of Ph.D.s compared to the salaries
of MBAs
 Among jobs you like, choose a job in a field in which the
supply of labor is limited, or the demand for labor is
significantly increasing
 Jobs in which the supply will likely be limited are those in
which social or political forces have placed restrictions
on entry or those requiring special abilities
17-19
Work and the Labor
Market
17
1
Labor Demand
 Consider relative pay of jobs requiring a college degree
compared to jobs requiring only a high school diploma
 Consider the salaries of Ph.D.s compared to the salaries
of MBAs
 Among jobs you like, choose a job in a field in which the
supply of labor is limited, or the demand for labor is
significantly increasing
 Jobs in which the supply will likely be limited are those in
which social or political forces have placed restrictions
on entry or those requiring special abilities
17-20