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Chapter 4 Labor Market Equilibrium McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Equilibrium in a Single Competitive Labor Market • Competitive equilibrium occurs when supply equals demand, generating a competitive wage and employment level. • It is unlikely that the labor market is ever in an equilibrium, since supply and demand are dynamic. • The model suggests that the market is always moving toward equilibrium. 4-2 Equilibrium in a Competitive Labor Market Dollars S P w* Q D0 EL E* EH Employment The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*. In equilibrium, all persons who are looking for work at the going wage can find a job. The triangle P gives the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains from trade, or the sum P + Q. 4-3 The “single wage” property of a competitive equilibrium • The “single wage” property of a competitive equilibrium has important implications for economic efficiency. – workers of given skills have the same value of marginal product of labor in all markets. • If workers were mobile and entry and exit of workers to the labor market was free, then there would be a single wage paid to all workers. 4-4 Competitive Equilibrium in Two Labor Markets Linked by Migration Nominal wage Nominal wage s SN SS SS A wN B w* w* wS C DN Employment (a) The Northern Labor Market DS Employment (b) The Southern Labor Market Suppose the wage in the northern region (wN) exceeds the wage in the southern region (wS). Southern workers want to move North, shifting the southern supply curve to the left and the northern supply curve to the right. In the end, wages are equated across regions at w*. 4-5 Wage Convergence Across States 5.7 LA Percent Annual Wage Growth GA NH ME VT VA 5.5 MS AR 5.3 MD MA IA FL NC SC KS MI CT DE TN AL NE 5.1 OK TXMO RI MN PA WI NJ WV IN OH IL CO UT WA NY KY AZ ND 4.9 SD MT CA NM NV 4.7 ID OR WY 4.5 .9 1.1 1.3 1.5 Manufacturing Wage in 1950 1.7 1.9 Source: Olivier Jean Blanchard and Lawrence F. Katz, “Regional Evolutions,” Brookings Papers on Economic Activity 1 (1992): 1-61. 4-6 The Impact of a Payroll Tax Assessed on Firms Nominal wage S w1 + t A w0 w1 B w0 t D0 A payroll tax of $t assessed on employers shifts down the demand curve (from D0 to D1). The payroll tax decreases the wage that workers receive from w0 to w1, and increases the cost of hiring a worker from w0 to w1 + t. D1 E1 E0 Employment 4-7 The Impact of a Payroll Tax Assessed on Workers S1 Nominal wage S0 w0 + t w1 w0 w1 t D0 D1 E1 E0 D0 A payroll tax assessed on workers shifts the supply curve to the left (from S0 to S1). The payroll tax has the same impact on the equilibrium wage and employment regardless of who it is assessed on. Employment 4-8 The Impact of a Payroll Tax put on Firms with Inelastic Supply A payroll tax assessed on the firm is shifted completely to workers when the labor supply curve is perfectly inelastic. Nominal wage S D0 w0 A B w0 – t D0 The wage is initially w0. The $t payroll tax shifts the demand curve to D1, and the wage falls to w0 – t. D1 E0 Employment 4-9 The Impact of an Employment Subsidy Nominal wage An employment subsidy of $t per worker hired shifts up the labor demand curve, increasing employment. S w0 + t B w1 w0 A w1 – t D1 D0 E0 E1 The wage that workers receive rises from w0 to w1. The wage that firms actually pay falls from w0 to w1 – t. Employment 4-10 The SR Impact of Immigration when Immigrants and Natives are Complements Nominal wage Supply If immigrants and natives are complements, they do not compete in the same labor market. Immigration makes natives more productive, shifting out labor demand curve. a higher native wage and an increase in native employment. w1 w0 Demand N0 N1 Native worker Employment 4-11 The SR Impact of Immigration When Immigrants and Natives Are Perfect Substitutes Nominal wage Supply w0 As immigrants and natives are perfect substitutes, the two groups are competing in the same labor market. Immigration shifts out the labor supply curve. wage falls from w0 to w1, and total employment increases from N0 to E1. w1 Demand N1 N0 E1 Natives + Immigrants Employment At the lower wage, the number of natives who work declines from N0 to N1. 4-12 The LR Impact of Immigration When Immigrants and Natives Are Perfect Substitutes Immigration initially shifts out the labor supply curve so the wage falls from w0 to w1. Over time, capital expands as firms take advantage of the cheaper workforce, shifting out the labor demand curve and restoring the original wage and level of native employment.. Nominal wage Supply w0 w1 Demand N0 N0 + Immigrants Employment 4-13 The LR Impact: The Native Labor Market’s Response to Immigration Nominal wage Nominal wage S0 S2 S0 S1 PLA S3 PPT w0 w0 w* w* wLA Demand Demand Employment Employment (a) Los Angeles (b) Pittsburgh Originally, both markets pay equilibrium wages of w0. After immigration into Los Angeles, both markets eventually converge to a new equilibrium wage at w*, which is less than w0. 4-14 Decadal change in log weekly wage Scatter Diagram Relating Wages and Immigration for Native Skill Groups 0.2 0.1 0 -0.1 -0.2 -0.1 -0.05 0 0.05 0.1 0.15 0.2 Decadal change in immigrant share 4-15 The Immigration Surplus Nominal wage S S A B w0 C w1 F D 0 N M Employment Prior to immigration, there are N native workers in the economy and national income is given by the trapezoid ABN0. Immigration increases the labor supply to M workers and national income is given by the trapezoid ACM0. Immigrants are paid a total of FCMN dollars as salary. The immigration surplus gives the increase in national income that accrues to natives and is given by the area in the triangle BCF. 4-16 The Cobweb Model 蛛網模型 • Two assumptions of the cobweb model: – Time is needed to produce skilled workers. – Persons decide to become skilled workers by looking at conditions in the labor market at the time they enter school. (people may be misinformed) • A “cobweb” pattern forms around the equilibrium. 4-17 The Cobweb Model in the Market for New Engineers Nominal wage S w1 w3 w* w2 w0 D D E0 E2 E* E1 The initial equilibrium wage in the engineering market is w0. The demand for engineers shifts to D, and the wage will eventually increase to w*. Because new engineers are not produced instantaneously and because students might misjudge future opportunities in the market, a cobweb is created as the market adjusts to the increase in demand. Employment 4-18 Noncompetitive Labor Markets: Monopsony 專買 • Monopsony market exists when a firm is the only buyer of labor. • Monopsonists must increase wages to attract more workers. • Two types of monopsonist firms: – Perfectly discriminating – Nondiscriminating 4-19 Perfectly Discriminating Monopsonist • Discriminating monopsonists are able to hire different workers at different wages. • To maximize firm surplus (profits), a perfectly discriminating monopsonist “perfectly discriminates” by paying each worker his or her reservation wage. 4-20 The Hiring Decision of a Perfectly Discriminating Monopsonist Nominal wage A perfectly discriminating monopsonist faces an upwardsloping labor supply curve and can hire different workers at different wages. S A w* w30 VMPE w10 10 30 E* Employment Therefore the labor supply curve gives the marginal cost of hiring. Profit maximization occurs at point A. The monopsonist hires the same number of workers as a competitive market, but each worker is paid his or her reservation wage. 4-21 The Hiring Decision of a Nondiscriminating Monopsonist Nominal wage MCE VMPM S A A nondiscriminating monopsonist pays the same wage to all workers. The marginal cost of hiring exceeds the wage, and the marginal cost curve lies above the supply curve. w* wM VMPE E M E* Profit maximization occurs at point A; the monopsonist hires EM workers and pays them all a wage of wM. Employment 4-22 The Impact of the Minimum Wage on a Nondiscriminating Monopsonist Nominal wage MCE S A w* w The minimum wage may increase both wages and employment when imposed on a nondiscriminating monopsonist. A minimum wage set at w increases employment to E. wM VMPE EM E Employment 4-23 Monopoly in the Product Market: A Review • Firms that have monopoly power can influence the price of the product that they sell. • Monopolist faces a downward sloped market demand curve for its output and an even lower downward sloped marginal revenue curve. 4-24 The Output Decision of a Monopolist Price MC pM p* A MR q M q* A monopolist faces a downwardsloping demand curve for her output. The marginal revenue from selling an additional unit of output is less than the price of the product. Profit maximization occurs at point A where the monopolist produces qM units of output and D sells each unit of output at a price Output of pM dollars. 4-25 The Labor Demand Curve of a Monopolist The marginal revenue product gives the worker’s contribution to a monopolist’s revenues (or the worker’s marginal product times marginal revenue), and is less than the worker’s value of marginal product. Nominal wage w A MRPE EM E* VMPE Profit maximization occurs at point A where the monopolist hires fewer workers (EM) than would be hired in a competitive market. Employment 4-26