Chapter 13: Labor Markets

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Chapter 13 Labor Markets
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Factors of Production

• What does it take to produce output (automobiles,
  carrots, shirts)?
• Machines
• Land for factories, testing products, etc.
• Labor
• Variable inputs
• Steel, fabric, chemicals, electricity, etc.

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Factors of production have demand and supply too

• Firms willingness to pay for resources is like
  consumers demand for end products.
• But, it is driven by declining marginal physical
  product of additional units produced.
• MR MPP (/output)(output/input)
• Supply of these resources is similar to supply
  for all other goods.
• Individual competitive companies see a single
  price for resources they consume (price takers)
• At market level, the marginal cost of each
  additional unit supplied does increase due to
  scarcity.

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Firms Factor Demand Curve Marginal Revenue
Product

• Marginal Revenue Product Additional revenue
  generated by employing or using an additional
  unit of an input factor.
• MRP MR MPP
• Recall, MPP Additional output with additional
  variable input (all else fixed).
• MRP Value of the marginal product VMP
• Holds for firm in perfectly competitive market
  only.
• Downward sloping

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• When a perfectly competitive firm employs one
  worker, it produces 20 units of output, and when
  it employs two workers, it produces 39 units of
  output. The firm sells its product at 10 per
  unit. What is the marginal revenue product
  connected with hiring the second worker?
• MRP MR MPP 1019 190.

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Choosing the quantity of inputsSet MRP MFC

• MFC Marginal Factor Cost
• Perfectly competitive firms are
• price takers for factors of
• production

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What shifts the Factor Demand Curve (MRP)?

• Output/Product Prices
• A rise in product price shifts the firms factor
  demand curve right.
• A fall in product price shifts the firms factor
  demand curve left.
• Other output shocks
• Most will have price effects, but some could keep
  prices the same

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Market Demand For Labor
Exhibit 7
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• Elasticity of Demand for Labor the percentage
  change in the quantity demanded of labor divided
  by the percentage change in the price of labor.
• EL Change in quantity of labor demanded
• Change in the wage rate

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Does Elasticity Matter?

• Ratio of Labor Costs to Total Costs
• The higher the labor cost/total cost ratio, the
  higher the elasticity of demand for labor
• The lower the labor cost/total cost ratio, the
  lower the elasticity of demand for labor
• IMPLICATION Inflation in wage rates will have a
  relatively larger effect on quantity of labor
  demanded in labor intensive industries
• Some agricultural products (fruits)
• Textiles

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Market Supply of Labor

• Why slope up?
• What shifts?
• Wage rates in other
• markets
• Other benefits

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Labor market Equilibrium
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Demand and supply of factors, Like labor for a
single competitive Firm that is a factor price
taker.
Demand and supply of factors Like labor, for an
entire labor Market (i.e. supply of
skilled Computer programmers)
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Will we ship all jobs oversees?

• Wages?
• US Wages 10/hour
• Mexican Wages 4/hour
• Productivity?
• US MPP of Labor 10 units output / hour labor.
• Mexican MPP of Labor 2 units output/hour labor.
• How do we compare these alternatives?

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Compare Marginal Units of output per spent on
input

• US Output per 1 input cost
• MPP of factor 10 1 unit / 1
• Cost of factor 10
• Mexico output per input cost
• MPP of factor 2 0.5 units / 1
• Cost of factor 4
• What would you do?

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Why do Wage Rates Differ?

• Assuming
• The demand for every type of labor is the same.
• There are no special non-pecuniary aspects to any
  job.
• Labor is homogeneous.
• Training costs are zero.
• All labor is mobile at zero cost.
• Conclusion there would be no difference in wage
  rates in the long run.

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Exhibit 10 Wage Rate Equalization across Labor
Markets
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Why Demand And Supply Curves Differ in Different
Labor Markets?

• Demand for Labor
• Different supply demand conditions for
  different products.
• MPP impacted by workers own abilities and skills,
  
• degree of effort, and other factors of
  production.
• Supply of Labor
• Different non-pecuniary qualities.
• Number of persons who can actually do a job.
• High training costs.
• Cost of moving across markets.

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• Workers in labor market X do the same work as
  workers in labor market Y but they earn 10 less
  an hour. Why?
• Cant know for sure, should be the same, but
• Non-pecuniary benefits less at company with
  higher wages (i.e., benefits).
• Maybe this is a short-run effect and wage rates
  will equilibrate over time.
• Maybe companies are located in different regions,
  with different amenities, or different competing
  labor markets (i.e. gas station attendants in
  Columbus probably earn more than attendants in
  Marietta.)

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Ch. 14 Wages, Unions, and Labor
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Union vs. Non-union wages
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What are the Objectives Of the Labor Union?
Exhibit 1
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Union Success depends on the Elasticity of Demand
for Labor
Exhibit 2
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Successful Unions get companies to believe that
supply curve is higher than it really is
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Arguments for/against Unions

• For
• Monopsony (company town.)
• Provide non-wage employment benefits.
• Against
• Increase wages, and costs of production.
• Reduce productivity and efficiency.
• Lower wages for non-union workers.

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MonopsonistSingle Buyer in Factor Market

• Situation (b) Without union, wages suppressed.
  Company should pay W2, but
• because they have monopsony power they pay W1.
• Situation (c) Union effectively forces the
  company to pay a higher wage and to
• recognize the supply curve S.

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Union Effects on Wages.
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Union Effects on Productivity

• Have a negative impact on productivity and
  efficiency.
• Often have unnecessary staffing requirements.
• Strikes disrupt production and prevent the
  economy from realizing its productive potential.
• Drive an artificial wedge between comparable
  labor in the union and nonunion sectors.
• In some sectors union firms have a higher rate of
  productivity.
• Unions might reduce employee turnover by giving a
  voice to worker concerns.
• Critic reduced job turnover is more a function
  of wages

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• Under what conditions will the minimum wage
  increase the number of people working?
• Monopsony, where wages are artificially low and
  hiring is artificially low.