Download Labor Markets Key Concepts

Labor Markets Key Concepts
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The firm uses marginal analysis (the weighing of costs and benefits) to determine what the
profit maximizing quantity of labor to hire
o Profit maximizing quantity of labor rule: MRP = MRC
MRP = Price (output they’re producing) x MPL
o MRP = Demand for labor (primarily for the firm, but also for the market if the event
correlates with an aggregate change in the value of output workers are producing)
 DERIVED DEMAND FOR LABOR—if the demand for the product workers are
making increases (increasing price of the output) then MRP increases, thus
demand for labor increases
 A change in productivity due to a technological development or improved
training techniques increases the marginal product of labor, thus MRP of labor
MRC = cost of hiring an additional worker/unit of capital
o In a perfectly competitive labor market the MRC is constant for a firm hiring labor
(perfectly horizontal supply curve) due to the fact that every additional unit hired will be
paid the same wage rate
The market for labor/capital is comprised of the downward sloping demand curve (made up of
firms wanting to hire workers) and an upward sloping supply curve (made up of individuals
willing to work)
Differentiating from the FIRM hiring labor and the MARKET establishing the equilibrium wage
rate is a crucial concept you must understand
o A firm hiring labor CANNOT influence the equilibrium wage rate!!!!! Firms are wage
takers because they are hiring from the perfectly competitive labor market
o Only a change in the labor market’s demand or supply will impact equilibrium market
wage rate
o The best rule is to think rationally and as straightforward as possible about the event
you are asked to analyze...
Monopsonist’s can reduce the quantity of labor they hire and pay a lower wage rate due to
their control of the hiring in a market for labor (frequently monopsonists exist in small rural
towns where one large industry/plant dominates the occupations of people within the area)
o Monopsonists have a MRC that is greater than the market supply of labor due to the
fact that the monopsonist must increase the wage rate to attract more workers,
however they cannot wage discriminate so they must pay a higher wage to every
previous worker hired
o Monopsonist adheres to the profit maximizing quantity of labor to hire rule: MRP = MRC
o Monopsonist will pay workers what they are willing to work for and not a dollar more,
as indicated by the supply curve (QL intercept of the SL curve)
Minimum wage is illustrated as an effective price floor (above equilibrium wage rate)
o In perfectly competitive labor market:
 Creates a surplus of labor & unemployment—quantity supplied @ minimum
wage > quantity demanded @ minimum wage = decrease in employment
o For the firm hiring labor from the perfectly competitive labor market:
 Increased wage rate creates a new supply for labor curve/MRC (perfectly
horizontal)
 The new profit maximizing quantity of labor to hire for the firm has decreased
(MRP = MRC)
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For the monopsonist:
 The minimum wage floor becomes the new horizontal MRC UNTIL the
MRC/minimum wage floor intersects the labor supply curve
 The monopsonist will now hire the quantity of labor that corresponds to the
point where the MRC/minimum wage floor intersects the labor supply curve
 This quantity of workers will now be paid the wage rate imposed by the
government = minimum wage
Quick note on monopsonies: to determine the wage rate and quantity of labor hired IF the
monopsonist were a perfectly competitive labor market, MRC moves over to the labor supply
curve (upward sloping market supply curve). This new equilibrium point (MRP = MRC) is the
wage rate and profit maximizing quantity of labor that WOULD be hired in a perfectly
competitive labor market
Key Graphs:
Perfectly Competitive Labor Market & Firm Hiring Labor
Wage Rate
Wage Rate
Note:
SL
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WE
WE
SL=MRC
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DL=MRP
DL
QL
QE
Perfectly competitive
requires side-by-side graphs
Labor market sets up wage
taken by firm hiring labor
Firm’s SL = MRC & DL = MRP
Events effecting the firm
WILL NOT impact wage rate
QL
QH
Monopsony
MRC
SL
Note:
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WM
DL=MRP
QH
Hires Q where MRC = MRP
Pays wage equal to what the
market is willing to work for
at QH  Y-intercept of SL=QH