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Chapter 13
Labor Markets
Measuring Workers’ Pay
•Pay includes fringe benefits
Fringe benefits (附加利益) : compensation that a
worker receives, excluding direct money payments for
time worked, but including insurance, retirement
benefits, vacation time, and sick leave.
Wage: the price of labor defined over period of time;
expressed as currency per unit of labor worked; also
known as the nominal wage.
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Adjusting for Inflation:
Real vs. Nominal Wage
Real wage: the wage or price of labor adjusted for
inflation. In contrast, the nominal wage has not
been adjusted for inflation.
Real wage = Nominal wage
CPI
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Adjusting for Inflation:
Real vs. Nominal Wage
If the nominal wage for a truck driver increased
from $10 to $20 when the CPI increased from 1 to
1.285, then the real wage increased from
$10
 $10
1
to
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$20
 $15.56
1.285
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Wage Trends
The average wage in the United States in 2006 (in
2000 dollars) was $23.33 per hour, which included
$7.00 in fringe benefits (in 2000 dollars).
Figure 1 shows the trend for the average real
hourly wage in the United States from 1991 to
2005.
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Figure 1: The Average
Hourly Real Wage
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Wage Trends
Other U.S. Labor Market Trends
1. Workers with higher skills are paid more than
unskilled workers, and the gap is increasing.
2. College graduates earn more than high
school graduates, and the gap is increasing.
3. Women are paid less than men, although the
gap has become narrowed over the years.
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The Labor Market
Labor market: the market in which individuals
supply their labor time to firms in exchange for
salaries and wages.
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The Labor Market
Labor supply: the relationship between the quantity
of labor supplied by individuals and the wage.
Labor demand: the relationship between the
quantity of labor demanded by firms and the wage.
Labor demand is a derived demand.
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Figure 2: Labor Demand
Curve and Labor Supply Curve
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The Labor Market
Derived demand: the demand for an input derived
from the demand for the product produced with
that input.
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A Firm’s Employment Decisions
Firms follow a simple rule when hiring a worker:
If employing another worker increases the firm’s
profits, then the firm will employ that worker. If
employing another worker decreases the firm’s
profits, then the firm will not employ that worker.
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A Firm’s Employment Decisions
Marginal product of labor: the change in production
due to a one-unit increase in the labor input.
MP of labor
=
Change in Q
Change in L
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A Firm’s Employment Decisions
Marginal revenue product of labor: the change in
total revenue due to a one-unit increase in the
labor input.
MRP of labor
=
Change in TR
Change in L
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A Firm’s Employment Decisions
From Table 2:
1. The marginal product of labor is declining. The
firm is producing in the short run, and has a
fixed capital input.
2. The marginal revenue product of labor is
declining. Because the MRP = P × MP, a
decline in marginal product will result in a
declining marginal revenue product as well.
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A Firm’s Employment Decisions
If a firm is maximizing profit, it will hire the largest
number of workers for which the MRP is greater than
the wage. If the firm can hire fractional units of labor,
then the firm will continue to hire until the MRP
equals the wage.
If MRP＞W → continue to hire until the MRP equals the wage
MRP = W
If MRP＜W → reduce to hire until the MRP equals the wage
MRP = W
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The Firm’s Derived Demand Curve
Because the firm will hire workers using the rule
MRP = wage, the demand curve for labor is
determined completely by the marginal revenue
product of labor.
A higher wage will reduce the quantity of labor
demanded. A lower wage will increase the quantity
of labor demanded.
•P × MP＝W，或 MP＝ W/ P，(即隨著L↑→MP↓→W/P↓，
故 MP 即為廠商之勞動需求線。)
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Figure 3: Determining a
Firm’s Demand Curve for Labor
W=1700→hire one worker
W=800 →hire 4 workers
W=600→ hire 5 workers
W=250 →hire 7 workers
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What if the Firm Has Market Power?
If a firm has market power in the product market,
then the price of the good is no longer constant, so
P × MP = wage no longer holds.
MRP = wage is still the profit-maximizing rule. We
just need to calculate the marginal revenue
product of labor in a slightly different way.
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What if the Firm Has Market Power?
Change in TR
MRP 
Change in L
The marginal revenue product of labor should be
calculated as follows:
MRP
=
=
the marginal revenue times the
marginal product of labor
MR × MP
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What if the Firm Has Market Power?
• Since P = MR in a competitive firm, the marginal
revenue product of labor can also be calculated
as MP × P.
• If the firm has market power, the marginal
revenue drops faster than the price.
Thus, the marginal revenue product of labor will
fall faster in a firm with market power than in a
competitive firm.
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The Market Demand for Labor
The market demand for labor is derived by the
summing up the quantity of labor demanded by all
firms, at every given wage.
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Figure 4: Summing Firms’ Demands to
Get the Labor Market Demand Curve
Sums up to this quantity
This quantity
Plus This quantity
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Labor Supply
In economics, the decision to supply labor is
analyzed as a decision between working and
leisure.
Leisure: a generic term used by economists for
nonwork activities; it may include activities such as
painting the house, going bowling, or hiking.
Price of leisure: wage; the opportunity cost of not
working.
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Labor Supply
•
勞動供給是人們對消費和休閒的選擇所決定的。
•
工資率是休閒的機會成本，當工資率上升時，休閒的成
本增加，因此工作的意願提高，此稱為替代效果。但工
資率上升時，可享受較高的所得，所得效果可能使休閒
的需求增加，因而工作意願減少。工資率上升是否會提
高工作意願，視替代效果和所得效果大小而定。
•
影響勞動供給的因素：
非工作所得—非工作所得多，工作意願降低。
教育—教育是一種投資；受教育必須放棄工作機會。
所得稅—所得稅使淨工資下降，產生替代和所得效果
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Labor Supply
•
•
•
•
•
設每人對時間的運用為：休閒或工作(為了消
費。)
每天24小時有H小時用於工作，每小時工資W，
工作H小時則得HW。
若消費品C的單價為P，全部工資購買C可得
HW/P單位的C。
若此人不休閒只工作則可得24W/P單位的C，可
得A point。若不工作則有24小時的休閒，可得B
point。聯結AB線即為預算線。其slope的絕對值
為W/P。
令L代表休閒，設某人的滿足程度決定於C and L，
則其效用函數為：U(C,L)。
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Labor Supply
當工資率不斷變動時，預算線
上移 (I0, l1, l2, l3) ，形成勞動
選擇點之改變。將 w 與勞動
選擇點畫於同一圖上，即為勞
動供給。
W↑→L↓→H↑→Labor supply
is a positive curve.
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Labor Supply
The effects of a wage change can be broken down
into two effects:
1. The income effect
2. The substitution effect
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Labor Supply
Substitution effect: the higher the hourly wage, the
more attractive work will seem relative to the other
activities. As a result, the quantity of work supplied
will increase when the wage increases.
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Labor Supply
Income effect: a price change will either increase
(if the price decreases) or decrease (if the price
increases) your ability to purchase all goods by
changing your real income.
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The Shape of Supply Curves
The supply curve will be upward sloping
if the income effect is small the substitution effect.
The supply curve will be downward sloping
if the income effect is greater than the substitution
effect.
This situation is also known as the backwardbending labor supply curve.
The supply curve will be vertical if the income
effect equals the substitution effect.
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Figure 5: Three Labor Supply Curves
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Figure 6: Backward-Bending
Labor Supply Curve
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Work vs. Another Alternative:
Getting Human Capital
Human capital: a person’s accumulated knowledge
and skills.
On-the-job training: the building of skills of a firm’s
employees while they work for the firm.
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Work vs. Another Alternative:
Getting Human Capital
Benefits: College will improve your skills and
increase your probability of landing a higherpaying job (higher pay).
Costs: College will cause you to forego earning
income and pay tuition.
As with any economic decision, you decide to go
to college if you perceive the benefits to be greater
than the costs.
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Figure 7: Higher Education
and Economic Success
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Labor Productivity
Labor market equilibrium: the situation in which the
quantity of labor supplied equals the quantity of
labor demanded; the point of intersection of the
labor supply and the labor demand curve.
Labor productivity: output per hour of work.
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Figure 8: Labor Productivity
Growth and Real Wage Growth
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Labor Productivity
Figure 8 shows a strong correlation between labor
productivity and the real wage.
When the growth rate of labor productivity is low,
real wages drop or rise slowly. When the growth
rate of labor productivity is high, real wages rise
more rapidly.
This observation suggests that the growth rate of
labor productivity is a major explanation for wage
changes over time.
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Compensating Wage Differentials
Compensating wage differential:
a difference in wage for people with similar skills
based on some characteristics of the job, such as
riskiness, discomfort, or convenience of time
schedule.
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Discrimination
Discrimination: not hiring workers even though
their marginal product is as high as or exceeds the
marginal product of other workers; alternatively,
paying a lower wage to a worker when the
worker’s marginal product of labor is equal to or
greater than other workers’ marginal product of
labor.
Discrimination may be based on race, gender, or
other observable differences of workers.
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Discrimination
• Fifty years ago, women earned about 50 percent
of the wages of men. Today, women earn 80
percent of the wages of men.
• In the 1950s, blacks earned 60 percent of the
wages of whites. The gap has narrowed to 70
percent since then.
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Figure 9: Discriminationin the Labor Market
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Discrimination
In Figure 9, discrimination is depicted as an
incorrect perception that the discriminated-against
worker has a lower marginal revenue product.
Discrimination will lead to a suboptimal profits
made by the firm. If the firm hires more of the
workers it previously discriminated against, its
profits will rise.
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Minimum Wage Laws
Minimum wage laws: government legislation
requiring that firms pay a worker a wage no lower
than the legislated minimum. The minimum wage
is effectively a price floor, where paying a wage
lower than the floor is not legal.
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Figure 10: Effects of a Minimum Wage
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Minimum Wage Laws
Effects of Minimum Wage Laws
• A minimum wage rate set higher than the
market equilibrium will create unemployment.
• A minimum wage set lower than the market
equilibrium will have no effect.
• A minimum wage is more likely to cause
unemployment in the market for unskilled
workers.
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Minimum Wage Laws
Minimum Wages of Some States (as of April 2007)
Alaska: $7.15 per hour
Arizona: $6.75 per hour
California: $7.50 per hour
Massachusetts: $7.50 per hour
Texas: $5.15 per hour
Washington: $7.93 per hour
District of Columbia: $7.00 per hour
Source: Department of Labor, Wage and Hour Division (http://www.dol.gov/esa/minwage/america.htm).
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Fixed Wage Contracts
Piece-rate system: a system in which workers are
paid a specific amount per unit of output that they
produce.
Examples:
• Lettuce growers pay harvesters and packers
per box of lettuce that they pack.
• Cotton pickers are paid per 100 pounds of
cotton that they pick.
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Deferred Wage Payments
Deferred wage contract: an agreement between a
worker and an employer under which the worker is
paid less than the marginal revenue product when
young, and subsequently paid more than the
marginal revenue product when old.
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Deferred Wage Payments
Examples:
• Lawyers and accountants, who are paid a lot
more once they become partners
• Generous retirement benefits
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Labor Unions
Labor union: a coalition of workers organized to
improve the wages and working conditions of the
group’s members.
Examples:
• United Auto Workers (UAW)
• United Farm Workers (UFW)
• American Federation of Labor (AFL)
• Congress of Industrial Organizations (CIO)
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Labor Unions
Industrial union: a union organized within an
industry, whose members come from a variety of
occupations.
Craft union: a union organized to represent a
single occupation, whose members come from the
same industries.
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Labor Unions
National Labor Relations Act (1935): a law that
gives workers the right to organize into unions and
bargain with employers.
National Labor Relations Board: the government
agency that ensures firms do not illegally prevent
workers from organizing and that monitors the
election of union officials.
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Labor Unions
Labor unions can raise wages by restricting labor
supply. By restricting the supply of workers in the
union, the supply of non-union workers increase,
and the equilibrium wages drop for non-union
workers.
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Figure 11: The Effect
of Unions on Wages
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Labor Unions
Other explanations for why union workers have
higher wages:
• Unions can reduce the exit of workers when a
dispute with management occurs. This is
beneficial when exit from the firm is costly.
• The “collective voice” role of unions provides
workers with a means through which they can
improve productivity.
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Monopsony and Bilateral Monopoly
Monopsony: a situation in which there is a single
buyer of a particular good or service in a given
market.
Bilateral monopoly: a situation in which there is
one buyer and one seller in a market.
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Key Terms
•
•
•
•
•
•
•
•
fringe benefits
wage
real wage
labor market
labor demand
labor supply
derived demand
marginal revenue product
of labor
• backward-bending labor
supply curve
• human capital
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•
•
•
•
•
•
•
•
•
•
•
on-the-job training
labor market equilibrium
labor productivity
compensating wage
differential
piece-rate system
deferred payment contract
labor union
industrial union
craft union
monopsony
bilateral monopoly
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