The Labor Market © 2003 South-Western/Thomson Learning

The Labor MarketThe Labor Market

© 2003 South-Western/Thomson © 2003 South-Western/Thomson LearningLearning

Factor Markets in Factor Markets in General General

Product MarketsProduct Markets

Markets in which firms Markets in which firms sell goods and services sell goods and services to households or other to households or other

firmsfirms

Factor Markets in Factor Markets in General General

Factor MarketsFactor Markets

Markets in which Markets in which resources -capital, resources -capital,

land, labor, and land, labor, and natural resources - are natural resources - are

sold to firmssold to firms

Product and Factor Product and Factor MarketsMarkets

Households Firms

S

D

S

D

Demand for Goods

and Services

Supply of Goods

and Services

Demand for

Resources

Supply of Resources

Factor Markets

Product Markets

Labor Markets in Labor Markets in Particular Particular

•Defining a Labor MarketDefining a Labor Market•Competitive Labor Competitive Labor

MarketsMarkets•Firms in Labor MarketsFirms in Labor Markets


Perfectly Competitive Labor Perfectly Competitive Labor MarketMarket

Market with many Market with many indistinguishable sellers of indistinguishable sellers of labor and many buyers, and labor and many buyers, and that involves no barriers to that involves no barriers to

entry or exitentry or exit


Labor markets are perfectly Labor markets are perfectly competitive if:competitive if:

1)1) There are many buyers There are many buyers (firms) and sellers (firms) and sellers (households) of labor(households) of labor

2)2) All workers appear the All workers appear the same to firmssame to firms

3) No barriers to 3) No barriers to entering/exiting the labor entering/exiting the labor marketmarket


Demand side of a labor Demand side of a labor market includes all firms market includes all firms hiring labor in that labor hiring labor in that labor marketmarket–the firms may or may not the firms may or may not compete in the same compete in the same marketmarket

Demand for Labor by a Demand for Labor by a Single FirmSingle Firm

•Goals and ConstraintsGoals and Constraints•The Firm’s Employment The Firm’s Employment

Decision When Only Labor Decision When Only Labor Is VariableIs Variable

•The Firm’s Employment The Firm’s Employment Decision When Several Decision When Several

Inputs Are VariableInputs Are Variable

Demand for Labor by Demand for Labor by Single Firm Single Firm

Derived DemandDerived Demand

The demand for an input The demand for an input that arises from, and that arises from, and

varies with, the demand varies with, the demand for the product it helps for the product it helps

to produceto produce

Goals and ConstraintsGoals and Constraints

Wage TakerWage Taker

In competitive labor markets, each In competitive labor markets, each firm is a wage taker: it takes the firm is a wage taker: it takes the

market wage rate as a given.market wage rate as a given.


The firm faces three constraints in The firm faces three constraints in deciding how much labor to employ:deciding how much labor to employ:

1.1. Its technologyIts technology

2.2. The market priceThe market price

3.3. The market wage rateThe market wage rate


Marginal Revenue Marginal Revenue Product (MRP)Product (MRP)

The change in revenue The change in revenue from hiring one more from hiring one more

workerworkerL

TRMRP

The Profit-Maximizing The Profit-Maximizing Employment LevelEmployment Level

•Marginal approach to profit: a firm Marginal approach to profit: a firm should take any action that adds more should take any action that adds more to its revenue than to its costto its revenue than to its cost

•Hire another worker when MRP > WHire another worker when MRP > W

•Do notDo not hire another worker when hire another worker when MRP < WMRP < W

The Profit-Maximizing Employment Level

2

Number of Workers

Dollars

$200

MRP

1 3 4 5 6 7 8

150

6050

100

Wage

The Firm’s Labor The Firm’s Labor Demand CurveDemand Curve

n 1Number

of Workers

Dollars

Firm’sLabor Demand

Curve

n 2

W 2

W 1

W 2

W 1

B

A


n1Number

of Workers

Dollars

Firm’sLabor

DemandCurve

n2

W2

W1

W2

W1

n3

MRP1

B

MRP2

C

A


Market Labor Demand Market Labor Demand CurveCurve

Curve indicating the total Curve indicating the total number of workers all firms number of workers all firms in a labor market want to in a labor market want to employ at each wage rateemploy at each wage rate


100Number

of Workers

HourlyWage

HourlyWage

HourlyWage

HourlyWage

d

80Number

of WorkersNumber

of Workers

Numberof Workers

LD

N2 = 80 + 40+ 30 + ...

N1 = 100 + 50+ 90 + ...

$1210

Firm A Firm B Firm C

Labor Market

40 50 30 90

$1210

d

d

Shifts in the Market Labor Shifts in the Market Labor Demand CurveDemand Curve

n1 Number of Workers

Hourly Wage

BA

n2

$10

Number of Workers

Hourly Wage

B

(a) Typical Firm

(b) Labor Market

A

L 1D

d d L 2D

N 1 N 2

1 2

Shifts in the Market Shifts in the Market Labor Demand CurveLabor Demand Curve

Complementary InputComplementary Input

An input whose An input whose utilization utilization increasesincreases the the

marginal product of marginal product of another inputanother input

Shifts in the Market Shifts in the Market Labor Demand CurveLabor Demand Curve

Substitute InputSubstitute Input

An input whose An input whose utilization utilization decreases decreases the the

marginal product of marginal product of another inputanother input

Shifts in the Market Labor Shifts in the Market Labor Demand CurveDemand Curve

Number of Workers

Hourly Wage

M ore of a

Substitu table Input

M ore of a

C om plem entary Input

d

d

d

3

1

2

Change in Change in TechnologyTechnology

•When many firms acquire When many firms acquire a new technology, the a new technology, the market labor demand market labor demand curve will curve will –shift rightward if the shift rightward if the technology is technology is complementary with laborcomplementary with labor–shift leftward if the shift leftward if the technology is substitutable technology is substitutable for laborfor labor

Change in Price of Other Change in Price of Other InputsInputs

•When the price of When the price of some some other inputother input decreases, the decreases, the market labor demand market labor demand curve may shiftcurve may shift–rightward if the input is rightward if the input is complementary with laborcomplementary with labor–leftward if the input is leftward if the input is substitutable for laborsubstitutable for labor

Labor SupplyLabor Supply

•Individual Labor SupplyIndividual Labor Supply•Market Labor SupplyMarket Labor Supply

•Shifts in the Market Labor Shifts in the Market Labor Supply CurveSupply Curve

•Short-Run versus Long-Run Short-Run versus Long-Run Labor SupplyLabor Supply

Labor Supply Labor Supply

Reservation WageReservation Wage

The lowest wage rate at The lowest wage rate at which an individual would which an individual would supply labor to a particular supply labor to a particular

labor marketlabor market

Market Labor Supply Market Labor Supply

Labor Supply CurveLabor Supply Curve•Curve indicating the Curve indicating the number of people who want number of people who want jobs in a labor market at jobs in a labor market at each wage rateeach wage rate–the higher the wage rate, the higher the wage rate, the greater the quantity of the greater the quantity of labor suppliedlabor supplied

Market Labor Supply Market Labor Supply Curve Curve

Shifts in the Market Shifts in the Market Labor Supply Curve Labor Supply Curve

A market labor supply A market labor supply curve will shift when curve will shift when –something other than a something other than a change in the wage rate change in the wage rate causes a change in the causes a change in the number of people who number of people who want to work in a want to work in a particular marketparticular market

Shifts in the Market Shifts in the Market Labor Supply Curve Labor Supply Curve

A market labor supply curve A market labor supply curve will shift when will shift when –there is a change in the market there is a change in the market wage rate in other labor wage rate in other labor marketsmarkets–there are changes in the cost of there are changes in the cost of acquiring human capitalacquiring human capital–there are changes in populationthere are changes in population–there are changes in tastesthere are changes in tastes

Short-Run vs. Long-Short-Run vs. Long-Run Labor Supply Run Labor Supply

Long-Run Labor Supply Long-Run Labor Supply CurveCurve

Curve indicating how many Curve indicating how many (qualified) people will want to (qualified) people will want to work in a labor market after work in a labor market after

full adjustment to a change in full adjustment to a change in the wage ratethe wage rate

Long-Run Labor Long-Run Labor Supply Curve Supply Curve

Fig 9, animatedFig 9, animated

30,000 60,000 90,000 Numberof Workers

HourlyWage

25

$40

L 1S

LLRS L2

S

B

A

C

Labor Market Labor Market EquilibriumEquilibrium

What Happens When What Happens When Things Change? Things Change?

•A Change in Labor A Change in Labor DemandDemand

•A Change in Labor A Change in Labor SupplySupply

•Labor Shortages and Labor Shortages and SurplusesSurpluses

A Change in Labor A Change in Labor DemandDemand

In the short runIn the short run, a shift in , a shift in labor demand moves along labor demand moves along

a short-run labor supply a short-run labor supply curvecurve

In the long runIn the long run, the , the resulting increase in wage resulting increase in wage

rate will cause the short-run rate will cause the short-run labor supply curve to shift labor supply curve to shift

alsoalso

A Change in Labor A Change in Labor DemandDemand

5,000 Numberof Workers

HourlyWage

8,000 12,000

30

$40

L2S

L1D

L2D

Numberof Workers

(a)Labor Market

(b)Typical Firm

W1

W3

W2

50 80 120

Dollars

20

30

$40

20

L1S

C

1d

2d

A

B

c

b

a

A Change In Labor A Change In Labor SupplySupply

Labor ShortageLabor Shortage

The quantity of labor The quantity of labor demanded demanded exceeds the exceeds the

quantity quantity suppliedsupplied at the at the prevailing wage rateprevailing wage rate

A Change in Labor A Change in Labor SupplySupply

Labor SurplusLabor Surplus

The quantity of labor The quantity of labor supplied supplied exceeds the exceeds the

quantity quantity demandeddemanded at the at the prevailing wage rateprevailing wage rate

Documents

The Labor Market © 2003 South-Western/Thomson Learning