The Labor Market

Chapter 29

The Labor Market

Supply of labor – number of people willing to work at different wage-levels

Demand for labor – number of workers needed by companies at different wage levels

Chapter 29 2

Employment Measures

Unemployment Rate

Average Work Week

Chapter 29 3

The Labor Market

Labor market determines real wages

Chapter 29 4

The Labor Market

Chapter 29 5

Determinants of Labor Demand

Product demand Productivity A change in price of substitutes of labor

(machines)

Chapter 29 6

Labor Demand

Regardless of how many people are willing to work, it is up to employers to decide the demand for labor.

Chapter 29 7

Derived Demand

The demand for labor and other factors of production depend on the demand for final goods and services.

Chapter 29 8

The Labor-Demand Curve

The number of workers hired is not completely dependent upon the demand for the product.

The quantity of labor demanded also depends on its price (the wage rate).

Chapter 29 9

The Labor-Demand Curve

Marginal Physical Product (MPP) is the change in total output associated with one additional unit of input.

Marginal Revenue Product (MRP) - the change in total revenue associated with one additional unit of input.

Chapter 29 10

MRC – Marginal Resource Cost

If a firm hires a new employee at a higher wage, they must increase wages of existing workers to preserve morale.

Thus, it costs more than just the 1 person’s wages to hire a person

Chapter 29 11

The Hiring Decision

Marginal revenue product determines how much labor will be hired.

This is a MC < MB situation.

Chapter 29 12

Forecasting Work Requirements1. Determine expected production for department

for specific time period 10,000 T-shirts per month

2. Determine how many labor hours it will take to meet production goal

Each worker makes 10/hr 10,000/10 = 1000 hours3. Convert work hours to work days

With 8 hr shifts 1000/8 = 125 days4. Divide needed workdays by workdays-per-period

With 20 workdays/month 125/20 = 6.25 people

Chapter 29 13

Forecasting Work Requirements5. Make allowances for absences, training, and

leaves Round up to 7 people

6. Search for other ways to meet your schedule i.e. overtime, transfers, borrow employees, temps instead of 7 line workers to do 6.25 work, hire 6 & work a

little overtime

Chapter 29 14

Staffing Goal

Your goal: make sure employees on hand matches workload

Chapter 29 15

Overstaffing

Costs increase Flexibility increase Efficiency drops Coaching & training opportunities may be

taken

Chapter 29 16

Understaffing

Can get you behind schedule Costs may end up higher as you try to make

up the difference Can bring out creativity

Chapter 29 17

Incentives to Hire

Changes in Productivity More work from each worker

Changes in Product Price More money from each item sold

Chapter 29 18

Labor Supply

The willingness and ability to work specific amounts of time at alternative wage rates in a given time period.

Chapter 29 19

Determinants of Labor Supply

Work conditions Benefits A change in price of goods & services

Chapter 29 20

Income vs. Leisure

The opportunity cost of working is the amount of leisure time that must be given up in the process.

Higher wage rates are needed to compensate for the increasing opportunity cost of labor.

The marginal utility of income may decline as you earn more.

Chapter 29 21

Wages

Nominal Wages – amount of money received per hour, day, week, month or year

Real Wages – purchasing power of nominal wage – the goods & services you can buy Depends on nominal wages and prices of goods &

services

Chapter 29 22

Real Wages

If nominal wage increases 8% in a year and prices increase 5% in the same year, real income increased 3%.

An increase in Productivity increases real wages.

Real wage increases leads to inflation.

Chapter 29 23

Substitution Effect of Wages

An increased wage rate encourages people to work more hours

A worker might also respond to higher wage rates by working less, not more.

Chapter 29 24

Income Effect of Wages

An increased wage rate allows a person to reduce hours worked without losing income.

Chapter 29 25

An Individual’s Labor Supply

Chapter 29 26

Market Labor Supply

The market labor supply is the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period.

The labor supply curve shifts when the determinates of labor supply change.

Chapter 29 27

Shifts in Market Supply

Over time, the labor supply curve has shifted leftward: A rise in living standards. Income transfer programs that provide economic

security when not working. Increased diversity and attractiveness of leisure

activities.

Chapter 29 28

Institutional Constraints

A worker’s responsiveness to wage changes is often constrained by institutional constraints such as specified work hours such as 8 – 5 shifts.

Chapter 29 29

Monopsony

The firm has monopolistic hiring power Company employs large portion of labor for the

area Labor force is relatively immobile The firm becomes a wage-setter:▪ work here or starve

Chapter 29 30

Ologopsony

3 or 4 firms in the area They could compete using high wages to attract the

best labor They could cooperate & secretly set low wages.

(incentive to cheat)

Chapter 29 31

Unions

Unions were formed to counter monopsony power.

Collective bargaining to force employers to improve wages & work conditions

Higher wages unions bring may lead to higher unemployment

Chapter 29 32

Minimum Wage

The lowest hourly wage an employer is allowed to pay a worker.

Currently for the U.S. = $7.25/hr.

Individual States

Chapter 29 33Source: www.dol.gov

Minimum Wage

$7.25 x 40 hours = $290/week

$290 x 4.3 weeks = $1,250/month

$290 x 50 weeks = $14,500/year

Chapter 29 34

Case Against Raising Minimum Wage Wages must be raised for many workers. Causes unemployment Helps teenagers rather than low-skilled

workers

Chapter 29 35

Case For Raising Minimum Wage Removes monopsony power – all companies

are paying better Higher wages leads to increased labor supply Higher wages leads to increased sales & more

jobs Increase in productivity will offset the extra

wages paid – happy workers!

Chapter 29 36

Satisfaction

According to Maslow: job satisfaction and job dissatisfaction are not opposites.

Job Dissatisfaction comes from pay & benefits meeting basic needs of survival & safety

Job Satisfaction is determined by the work itself meeting upper-level psychological needs: Affiliation,

Power & achievement.Chapter 29 37

Efficiency Wage

A company’s wages are above the equilibrium wage.

The theory: Increase in productivity will offset the extra wages

paid Increased loyalty Reduced absenteeism & tardiness More choice in workers

Chapter 29 38

Efficiency Wage

Chapter 29 39

Efficiency Wage

In Practice Temporary effect only Lowers employment

Chapter 29 40

Efficiency Wage Result

Chapter 29 41

New S S

Wage Differentials

Different jobs pay different wages Determined by supply & demand of skills

Almost everyone can cook French Fries Few people can hit baseballs like Albert Pujols Since there are fewer homerun hitters, the supply is

low, thus wages are high. The “Superstar” effect

Chapter 29 42

Income Profiles

Chapter 29 43Source: Economics by Boyes & Melvin

College Income Premium (ratio)

Chapter 29 44Source: Economics by Boyes & Melvin

Human Capital

Why go though 8 years of Medical school (& buy malpractice insurance) to become a doctor if you will make the same money as a used car salesman?

You want the smartest people to become doctors (job is important) so you give incentives.

Chapter 29 45

Employment Discrimination

Employer Limits pool of workers to choose from – must pay

higher wages Worker

May not want to work with people of other race/sex. Leads to lower wage.

Consumer May have preference for who serves them – this

leads to higher pricesChapter 29 46