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Chapter 11
Labor Markets
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
In a perfectly
competitive market,
what determines the
level of wages?
The intersection of the
demand for labor and
the supply of labor
2
Wages
Market Supply and Demand
S
D
Quantity of Labor
3
What does the demand
curve for labor show?
The different quantities
of labor employers are
willing to hire at
different wage rates in
a given time period,
ceteris paribus
4
60
40
30
20
Total Output
50
Production Function
Total Output
10
Quantity of Labor
1
2
3
4
5
6
5
What is marginal
revenue product?
The increase in total
revenue to a firm
resulting from hiring an
additional unit of labor or
other variable resource
6
10
8
6
4
Marginal Product
12
Marginal Product Curve
Law of
Diminishing
Returns
2
Quantity of Labor
1
2
3
4
5
6
7
What is the demand
curve for labor equal to?
It is equal to the marginal
revenue product of labor
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$350
Demand Curve for Labor
$280
$210
$140
$70
1
2
3
4
5Q
9
Increase in
Quantity of labor an
employer will hire
Decrease in
Wage Rate
10
How do we measure
MRP in perfect
competition?
A perfectly competitive firm’s
marginal revenue product is
equal to the marginal
product of its labor times the
price of its product
11
What is
derived demand?
The demand for labor and
other factors of production
that depends on the
consumer demand for final
goods and services the
factors produce
12
What does the supply
curve for labor show?
The different quantities of
labor workers are willing to
offer employers at different
wage rates in a given time
period, ceteris paribus
13
$280
$210
$140
$70
Wage Rate per day
$350
Supply Curve of Labor
S
Quantity of Labor
10
20
30
40
50
14
Increase in Quantity of
labor willing to work
Increase in
Wage Rate
15
What is human capital?
The accumulation of
education, training,
experience, and health
that enables a worker to
enter an occupation and
be productive
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$280
$210
$140
$70
Wage Rate per day
$350
Competitive Labor Market
S
E
D
Quantity of Labor
10
20
30
40
50
17
$280
$210
$140
$70
Competitive Labor Market
Wage Rate per day
$350
E
S
D
Quantity of Labor
1
2
3
4
5
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Does the perfectly
competitive model apply
to workers in unions?
No
19
What are examples
of unions?
• Teamsters
• United Auto Workers
• National Education Assoc.
• American Federation of
Government Employees
20
How do unions attempt
to raise wages?
• Increase demand for labor
• Decrease supply for labor
• Power
21
What is
featherbedding?
Unions force firms to hire
more workers than are
required or to impose
work rules that reduce
output per worker
22
What else can unions
do to increase the
demand for labor?
Decrease competition
from other nations
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$280
$210
$140
$70
Wage Rate per day
$350
Unions cause an increase
in the demand for labor
E2
S
E1
Quantity of Labor
10
20
30
D1
40
D2
50
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Increase in wages
and employment
Increase in the
demand for labor
Union
featherbeds
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$350
$280
$210
$140
Wage Rate per day
$420
Unions cause a decrease
in the supply for labor
E2
S2
E1
D1
Quantity of Labor
10
20
30
S1
40
50
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How else can unions
raise wages?
Collective bargaining
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What is
collective bargaining?
The process of negotiations
between the union and
management over wages
and working conditions
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$280
$210
$140
$70
Wage Rate per day
$350
Collective Bargaining causes a
Wage Rate increase
S
Unemployment
D
Quantity of Labor
10
20
30
40
50
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What factors can
cause a change in the
demand for labor?
• Unions
• Prices of substitute goods
• Demand for final products
• Marginal product of labor
30
What factors can
cause a change in the
supply for labor?
• Unions
• Demographic trends
• Expectations of future income
• Changes in immigrations laws
• Education and training
31
What has happened
to union membership
since WWII?
Union power has declined
32
How does union
membership in the
U.S. compare to
other countries?
Union membership is far
below that of other
industrialized countries
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What is a
monopsony?
A labor market in which
a single firm hires labor
34
87%
75%
40%
32% 32%
29%
15%
24%
U.S. Japan Canada U.K. Germany Italy Denmark Sweden
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What is marginal
factor cost (MFC)?
The additional total
cost resulting from a
one-unit increase in
the quantity of labor
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What conclusion can be
drawn from a
monopsonistic market?
Because the monopsonist
can hire additional
workers only by raising
the wage rate for all
workers, the MFC > W
37
A Monopsonist determines its Wage Rate
$18
$12
$9
Dollars per hour
$15
MFC
E
S
F
D (MRP)
$6
Quantity of Labor
1
2
3
4
5
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How are wages
compared between the
two markets?
A monopsony hires
fewer workers and pays
a lower wage than a
firm in a competitive
labor market
39
Key Concepts
40
Key Concepts
• In a perfectly competitive market, what
determines the level of wages?
• What is marginal revenue product?
• What is the demand curve for labor equal to?
• How do we measure mrp in perfect
competition?
• What does the supply curve for labor show?
41
Key Concepts cont.
•
•
•
•
How do unions attempt to raise wages?
What is featherbedding?
What is collective bargaining?
What factors can cause a change in the
demand for labor?
• What factors can cause a change in the
supply for labor?
42
Key Concepts cont.
• What has happened to union membership
since WWII?
• How does union membership in the u.S.
Compare to other countries?
• What is a monopsony?
• What is marginal factor cost (mfc)?
• How are wages compared between the two
markets?
43
Summary
44
Marginal revenue product (MRP)
is determined by a worker’s
contribution to a firm’s total
revenue. Algebraically, the MRP
equals the price of the product
times the worker’s marginal
product (MP).
45
The demand curve for labor is the
curve showing the quantities of
labor a firm is willing to hire at
different prices of labor. The
marginal revenue product (MRP)
of labor curve is the firm’s
demand curve for labor. Summing
individual demand for labor
curves gives the market demand
curve for labor.
46
$350
Demand Curve for Labor
$280
$210
$140
$70
1
2
3
4
5Q
47
Derived demand means that a
firm demands labor because
labor is productive. Changes in
consumer demand for a product
cause changes in demand for
labor and for other resources
used to make the product.
48
The supply curve of labor is the
curve showing the quantities of
workers willing to work at different
prices of labor. The market supply
curve of labor is derived by
adding the individual supply
curves of labor.
49
$280
$210
$140
$70
Wage Rate per day
$350
Supply Curve of Labor
S
Quantity of Labor
10
20
30
40
50
50
Human capital is the
accumulated people make in
education, training, experience,
and health in order to make
themselves more productive.
One explanation for earnings
differences is differences in
human capital.
51
Collective bargaining is the
process through which a union
and management negotiate a
labor contract.
52
Monopsony is a labor market in
which a single firm hires labor.
Because the monopsonist faces the
industry supply curve of labor and
each worker is paid the same
wage, changes in total wage cost
exceed the wage rate necessary to
hire each additional worker. As a
result, the marginal factor cost
(MFC) of labor curve lies above the
supply curve of labor.
53
The monopsonist’s wage rate and
quantity of labor are determined
where the MFC equals MRP . Since
at this point the worker’s MRP is
greater than the wage paid, the
monopsonist exploits the workers.
54
A Monopsonist determines its Wage Rate
$18
$12
$9
Dollars per hour
$15
MFC
E
S
F
D (MRP)
$6
Quantity of Labor
1
2
3
4
5
55
END
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