Market for Labor and Other Inputs

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Market for Labor and Other Inputs

• Just like other markets, sorta

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Demand and Supply for Labor

• Demand for labor not based on utility
  maximization, but profit maximization
• Supply for labor not based on profit
  maximization, but utility maximization

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Demand for Labor is Derived Demand

• People usually dont hire workers because they
  get utility from having employees
• Demand for labor is derived from the
  profitability of that labor
• Profitability of labor based on comparison of
  wages and revenues generated from workers

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Demand for Labor is Derived Demand

• Profit maximization
• Marginal Revenue Marginal Costs
• DLMRPL MPLMR
• MPL?Q/?L
• MR ?R/?Q
• MRPL MPLMR?Q/?L ?R/?Q
• MRPL ?R/?L

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Demand for Labor is Derived Demand

• Wage (W) here is complete compensation package,
  wages plus retirement plus health benefits plus
• MC of labor W ?C/?L
• Profit Maximization Condition, when applied to
  hiring labor, hire until
• W MRPL
• ?C/?L ?Q/?L ?R/?Q
• ?C/?L / ?Q/?L ?R/?Q
• MC MR

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Marginal Product of Labor
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Marginal Product of Labor and Marginal Revenue
Product Competition in Product Market
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Marginal Product of Labor and Marginal Revenue
Product Competition in Product Market
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Marginal Product of Labor and Marginal Revenue
Product Competition in Product Market

• VMP MRP in Competitive Case is P MP, called
  the Value of the Marginal Product, the value, in
  the market, of the extra output of an extra unit
  of labor
• In perfect competition, workers receive a wage
  equal to value they add, at the margin

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Marginal Product of Labor and Marginal Revenue
Product Price Maker Product Market
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Marginal Product of Labor and Marginal Revenue
Product Price Maker Product Market

• Downward sloping MP and downward sloping MR give
  us a downward sloping MRP--gets to zero faster
  than competitive case

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Demand for Labor in the Long Run

• Both Capital and Labor adjustable in Long Run
• W / MPL MCL marginal cost if only labor
  increased
• r / MPK MCK marginal cost if only capital
  increased (r is price of capital)
• MCL MCK (can choose to expand using labor or
  capital, choose lowest cost method)

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Demand for Labor in the Long Run

• MCL MCK
• W/MPL r/MPK
• MPL / W MPK /r
• Just like utility maximization condition
• MUX/ PX MUY /PY

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Supply of Labor Demand for Leisure (Time off
from work)
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Supply of Labor Demand for Leisure (Time off
from work)
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Supply of Labor Demand for Leisure (Time off
from work)
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Demand for Leisure A normal good

• Higher levels of income, higher demand for
  leisure
• As wage goes up, income does too
• Income effect can be strong for labor, as wage
  affects buying power a lot (unlike the price of
  one good you might buy)
• At high enough income levels, income effect may
  overtake substitution effect

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Demand for Leisure with Income Effect
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Backward Bending Supply of Labor due to Income
Effect
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Individual Supply vs. Market Supply of Labor

• Backward bending part usually higher than most
  make (but does affect early retirements!)
• Backward bending part at different places for
  different people
• Higher wages in one field relative to other
  fields attracts more people n that field
• Backward bending part is overcome by supply from
  new entrants

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Another alternative to work Acquiring Human
Capital

• Capital roundabout means of production
• Human Capital Investment in ones self
• Capital Market Problem 13th amendment
• Education, on-the-job training, experience--see
  Fig. 13.7
• General vs. firm-specific human capital

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Other reasons for differences in wages

• Compensating wage
• Discrimination

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Characteristics of Minimum Wage Workers

• http//www.bls.gov/cps/minwage2002.htm