(2) How well do they explain the facts? 12_01 WAGE (PRICE OF LABOR) QUANTITY OF LABOR Labor demand Market wage Amount of labor where quantity of labor supplied equals quantity of labor demanded Labor supply The Slowdown in Wage Growth 12_02 INDEX, 1992 = 100 110 100 90 80 70 60 1960 1965 1970 1975 1980 1985 1990 1995 2000 Real wage High growth trend Low growth trend
Two sides of the labor market: Firms and Workers Labor Demand The firms decision Labor Supply The workers decision Derived Demand for Labor Labor demand is a derived from firms 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 Market power? Not yet, lets 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 Example: Competitive Firm with P = $100 (T12.1) Workers Quantity produced Marginal Product Total Revenue Marginal Revenue Product 0 0 -- 0 -- 1 17 17 1700 1700 2 31 14 3100 1400 3 42 11 4200 1100 4 51 9 5100 900 5 58 7 5800 700 To derive the labor demand curve, first plot MRP by hand 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
To get market demand for labor, sum up firms demands for labor 12_04 WEEKLY WAGE (DOLLARS) WEEKLY WAGE (DOLLARS) WEEKLY WAGE (DOLLARS) 1,500 1,500 1,500 1,000 1,000 1,000 500 500 500 5 0 0 0 10 5 10 5 10 15 20 QUANTITY OF LABOR (NUMBER OF WORKERS) QUANTITY OF LABOR (NUMBER OF WORKERS) QUANTITY OF LABOR (NUMBER OF WORKERS) LABOR DEMAND IN THE MARKET LABOR DEMAND AT CAREERPRO LABOR DEMAND AT GETAJOB
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 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 Leisure includes school! Investing in human capital more human capital increase marginal product of a worker 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!!!!!!!
3 different labor supply curves 12_05 WAGE WAGE WAGE Labor supply Labor supply Labor supply QUANTITY OF LABOR QUANTITY OF LABOR QUANTITY OF LABOR INCOME EFFECT DOMINATES SUBSTITUTION EFFECT EQUALS INCOME EFFECT SUBSTITUTION EFFECT DOMINATES Backward bending labor supply curve 12_06 WAGE LABOR SUPPLY Substitution effect dominates in this region. Income and substitution effects balance out. Income effect dominates in this region. A Test: compare trend in labor productivity with trend in real wage 12_07 INDEX, 1992 = 100 110 100 90 80 Labor productivity 70 60 50 1960 1965 1970 1975 1980 1985 1990 1995 2000 High growth trend Low growth trend But productivity theory does not explain everything 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 Effects of Minimum Wage 12_09 Quantity of labor demanded Quantity of labor supplied Minimum wage Labor market equilibrium Labor demand Labor demand Labor supply Labor supply WAGE WAGE QUANTITY OF LABOR QUANTITY OF LABOR Surplus Market for Unskilled Workers Market for Skilled Workers Discrimination in competitive markets 12_08 WAGE Labor supply Actual marginal revenue product NUMBER OF WOMEN WORKERS 4. Because actual marginal revenue product is higher than the wage, other firms can hire these women at a higher wage but still below the marginal revenue product. 1. Prejudiced firm acts as if marginal revenue product is lower than it actually is. 2. Discrimination causes wages to fall by this amount. 3. Discrimination also causes lower employment for women. Effects of Labor Unions