Labor Market Equilibrium

1
Chapter 4

• Labor Market Equilibrium

2
Demand, Supply, and the Equilibrium Wage

• For a firm
• For a Market

w
S Market clearing wage
D
A wage change is a movement along a curve. A
technology change and input price changes (other
than for labor) are examples of curve shifts.
E
w
S
D
E
3
Payroll Tax Assessed on Firms
w
S
wt
w
w
D
D
E
E
E
4
Payroll Tax Assessed on Workers
S
w
S
w
w
w-t
D
E
E
E
5
Who Pays More? The Worker or the Firm?
S
w
w
worker
w
firm
w-t
D
D
E
E
E
Payroll tax assessed on firm
6
Who Pays More? The Worker or the Firm?
S
w
S
wt
worker
w
firm
w
D
E
E
E
Payroll tax assessed on worker
7
Who Pays More? The Worker or the Firm?
w
S
w
worker
w
w-t
firm
D
D
E
E
E
Payroll tax assessed on firm
8
Who Pays More? The Worker or the Firm?
w
S
wt
worker
w
S
firm
w
D
E
E
E
Payroll tax assessed on worker
9
Impact of minimum wagein labor market Theory

• (A) Perfectly competitive labor market
  (employers cannot influence the wage rate paid)
• If the minimum wage impose a binding constraint
  in the labor market, then the minimum wage
  creates unemployment
• More workers will be willing to work at the given
  wage (the minimum wage) than what employers want
  to hire
• (B) Non-competitive labor market (employers can
  partially influence the wage rate paid)
• In this model, a binding minimum wage leads
  employers to increase their demand for labor, so
  employment will increase
• More on this later

10
The Impact of a Minimum Wage

• w

S
Excess supply of labor at wages gt w
w
Excess demand for labor at wages lt w
D
E
E
11
Why is it difficult to see the impact of minimum
wage laws?

• (1) Minimum wages are set nominally. The real
  impact of a minimum wage law changes over time.

Wmin / p
time
12
Why is it difficult to see the impact of minimum
wage laws?

• Since new minimum wages are set over time

Wmin / p
time
13
Minimum wage- nominal and real wages
14
Minium Wage and Poverty
15
Why is it difficult to see the impact of minimum
wage laws?

• So over time, a given minimum wage has less
  impact on employment

Wmin / p
S
Wmin / p
Time1
Wmin / p
Time2
D
E
16
Why is it difficult to see the impact of minimum
wage laws?

• (2) Growing demand obscures the impact of a
  minimum wage.

S
Wmin
D
D
E
17
Why is it difficult to see the impact of minimum
wage laws?

• (3) Uncovered sectors.
• In this case, an increase in the minimum wage (or
  the introduction of a minimum wage) may lead to a
  reallocation of workers across covered and
  uncovered sectors.
• As a result, employment may increase or decrease.

18
Monopsonists and Labor Demand

• A firm has monopsony power if it faces an upward
  sloping labor supply curve.
• A pure monopsony is a labor market with only one
  employer.

MCE
W
S
VMPE
E
19
Monopsonists and Labor Demand

W
MCE
S
VMPN
Monopsony Profit
w
wN
VMPE
E
EN
20
What happens if a minimum wage is imposed?

W
MCE
S
VMPN
wmin
wN
VMPE
E
EN
21
What happens if a minimum wage is imposed?

New MCE
W
MCE
S
VMPN
wmin
wN
VMPE
E
EN
22
What happens if a minimum wage is imposed?

New MCE
W
MCE
S
VMPN
wmin
wmin
wN
VMPE
E
EN
Emin
23
What happens if a minimum wage is imposed?

New MCE
W
MCE
S
VMPN
wmin
wmin
wN
VMPE
E
EN
Emin
24
What happens if a minimum wage is imposed?

New MCE
W
MCE
S
wmin
wmin
VMPN
wN
VMPE
E
EN
Emin
25
What happens if a minimum wage is imposed?

W
MCE
S
VMPN
wN
wmin
VMPE
E
EN
26
Card and Krueger Paper

• We will talk about the Card and Krueger minimum
  wage paper at this point.

27
What if natives and immigrants are perfect
substitutes?
S
w
S
w
w
D
E
E
EN0
EN1
Employment increase
Native job losses
But, the assumption of perfect substitutes is
questionable at best.
28
What if natives and immigrants are compliments?
S
W
Native labor market
If natives and immigrants are compliments, then
immigration shifts the native labor demand curve
E
E
D
D
E
E
E
Native employment increase
29
Mariel Boatlift Paper

• We will talk about the Card Mariel boatlift
  paper at this point.

30
End Chapter 4