Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 28 The Labor Market: Demand, Supply, and Outsourcing Introduction In World War I, the British military developed the first pilotless powered aircraft. Today, autopilots are commonplace, and robots are also capable of driving vehicles on busy city streets. So, with regard to the technological issues, robots could replace humans in many jobs. In this chapter, you will learn the economic issues surrounding the question of whether robots actually will replace humans in performing these tasks. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-2 Learning Objectives • Understand why a firm’s marginal revenue product curve is its demand labor curve • Explain in what sense the demand for labor is a “derived” demand • Identify the key factors influencing the elasticity of demand for inputs Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-3 Learning Objectives (cont'd) • Describe how equilibrium wage rates are determined for perfectly competitive firms • Explain what labor outsourcing is and how it is ultimately likely to affect U.S. workers’ earnings and employment prospects • Contrast the demand for labor and wage determination by a product market monopolist with outcomes that would arise under perfect competition Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-4 Chapter Outline • Labor Demand for a Perfectly Competitive Firm • The Market Demand for Labor • Wage Determination in a Perfectly Competitive Market • Labor Outsourcing, Wages, and Employment • Monopoly in the Product Market • The Utilization of Other Factors of Production Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-5 Did You Know That ... • Data from the National Association of Colleges and Employers indicates that only about 75 percent of employers now conduct campus interviews, down from nearly 90 percent in 2007? • The overall demand for college graduates in the labor market is restrained due to the dampened level of economic activity. • A firm will hire employees up to the point at which the marginal benefit of hiring a worker will just equal the marginal cost. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-6 Labor Demand for a Perfectly Competitive Firm • We will start our analysis under the assumption that the market for input factors is perfectly competitive • We will further assume that the output market is perfectly competitive • This provides a benchmark against which to compare other labor markets or product markets that are not perfectly competitive Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-7 Labor Demand for a Perfectly Competitive Firm (cont'd) • Assumptions – Each employer is one of a very large number of employers – Workers do not need special skills – Workers are free to move from one employer to another – The firm is a price taker in the labor market Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-8 Labor Demand for a Perfectly Competitive Firm (cont'd) • Marginal Physical Product (MPP) of Labor – The change in output resulting from the addition of one more worker – The change in total output accounted for by hiring the worker, holding all other factors of production constant – Eventually declines because of the law of diminishing marginal product Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-9 Labor Demand for a Perfectly Competitive Firm (cont'd) • Marginal Revenue Product (MRP) – The marginal physical product (MPP) times the marginal revenue (MR) – The additional revenue obtained from a one-unit change in labor input – The MRP represents the incremental worker’s contribution to the firm’s total revenues Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-10 Figure 28-1 Marginal Revenue Product, Panel (a) Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-11 Figure 28-1 Marginal Revenue Product, Panel (b) Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-12 Labor Demand for a Perfectly Competitive Firm (cont'd) • Marginal Factor Cost (MFC) – The cost of using an additional unit of an input – For example, if a firm can hire all the workers it wants at the going wage rate, the MFC of labor is the wage rate. Marginal factor cost = Copyright ©2014 Pearson Education, Inc. All rights reserved. change in total cost change in amount of resources used 28-13 Labor Demand for a Perfectly Competitive Firm (cont'd) • In a perfectly competitive labor market – The market determines the wage – The individual employer is a wage taker – All workers are hired for the same wage – MFC = wage Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-14 Labor Demand for a Perfectly Competitive Firm (cont'd) • General rule for hiring – The firm hires workers up to the point at which the additional cost associated with hiring the last worker is equal to the additional revenue generated by hiring that worker Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-15 Labor Demand for a Perfectly Competitive Firm (cont'd) • The MRP Curve: Demand For Labor – The MRP curve is the demand curve for labor for the firm – This tells us how many workers will be hired at various possible wage rates – The firm will hire any worker who can contribute to revenues by more than they contribute to costs Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-16 Labor Demand for a Perfectly Competitive Firm (cont'd) • Derived Demand – Input factor demand derived from demand for the final product being produced • The factors of production are needed to manufacture a final good or to provide a final service Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-17 Figure 28-2 Demand for Labor, a Derived Demand Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-18 Example: E-Books’ Popularity Is Reducing Demand for Authors’ Labor • The popularity of e-books is bad news for authors. • The lower prices of e-books mean that their marginal-revenue-product-of-labor curves are shifted leftward and downward as compared to what they are for physical books. • Thus, at any given wage rate, publishers desire to buy less labor from authors. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-19 The Market Demand for Labor • The downward-sloping portion of each firm’s MRP curve is also its demand curve for labor • When we go to the entire market for labor, we will also find that the quantity of labor demanded varies inversely with wage rate changes Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-20 Figure 28-3 Derivation of the Market Demand Curve for Labor Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-21 The Market Demand for Labor (cont'd) • Price elasticity of demand for labor similar to elasticity for goods • Percentage change in quantity demanded divided by percentage change in price of labor – Inelastic < I – Unit-elastic = 1 – Elastic > 1 Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-22 The Market Demand for Labor (cont’d) • Determinants of Demand Elasticity for Inputs – The price elasticity of demand for a variable input will be greater: 1. The greater the price elasticity of demand for the final product 2. The easier it is to employ substitute inputs 3. The larger the proportion of total costs accounted for by the particular variable input 4. The longer the time period available for adjustment Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-23 Wage Determination in a Perfectly Competitive Labor Market • Having developed the demand curve for labor in a particular industry, let’s turn to the labor supply curve • By adding supply to our analysis, we can determine the equilibrium wage rate that workers earn in an industry, such as in Figure 28-4 • We can think in terms of a supply curve for labor that slopes upward in a particular industry Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-24 Figure 28-4 The Equilibrium Wage Rate and the Magneto Optical Disk Industry Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-25 Wage Determination in a Perfectly Competitive Labor Market (cont’d) • Reasons for labor demand curve shifts 1. Change in demand for the final product 2. Change in labor productivity 3. Change in the price of related factors Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-26 Wage Determination in a Perfectly Competitive Labor Market (cont’d) • A change in the demand for the final product that labor is producing will shift the market demand curve for labor in the same direction • A change in labor productivity will shift the market labor demand curve in the same direction Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-27 Wage Determination in a Perfectly Competitive Labor Market (cont’d) • A change in the price of a substitute input will cause demand for labor to change in the same direction • A change in the price of a complimentary input will cause the demand for labor to change in the opposite direction Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-28 Wage Determination in a Perfectly Competitive Labor Market (cont’d) • Labor supply curves may shift in a particular industry for a number of reasons: 1. Change in wages in other industries 2. Changes in working conditions 3. Job flexibility Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-29 Example: Why Contract Attorneys’ Wages Have Plummeted • There are two reasons for the recent drop in wages for contract attorneys. • The derived market demand for their skills has decreased, as law firms are earning lower prices for contract litigation. • At the same time, the supply of attorneys specializing in contract law has increased. • Together, these changes account for the fact that average hourly wage for new contract attorneys has fallen from $30 to less than $20. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-30 Labor Outsourcing, Wages, and Employment • Outsourcing – A firm’s employment of labor outside the country in which the firm is located Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-31 Labor Outsourcing, Wages, and Employment (cont'd) • Outsourcing – Some U.S.-based companies outsource labor to other countries. – Some firms based around the globe outsource labor to the United States. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-32 Figure 28-5 Outsourcing of U.S. Computer Technical-Support Services Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-33 Labor Outsourcing, Wages, and Employment (cont'd) • Question – How are U.S. workers affected by outsourcing? • Answers – If cheaper labor is available in other countries, this will dampen the demand for U.S. labor – But as the volume of global commerce rises, there may be more of a demand by foreign firms to hire U.S. workers as well Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-34 Figure 28-6 Outsourcing of Accounting Services by Canadian Firms Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-35 International Example: China’s Declining Status as an Outsourcing Destination • The incentive to outsource to China has diminished in recent years. – So many firms from around the world are hiring Chinese labor that the market demand for labor has increased. – China’s population is aging, which means that there are fewer young workers entering the labor force. • Taken in combination, this increased demand and decreased supply of labor have caused an increase in the market wage. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-36 Labor Outsourcing, Wages, and Employment (cont'd) • Gauging the net effects of outsourcing on the U.S. economy – Labor outsourcing by U.S. firms tends to reduce U.S. wages and employment. Whenever foreign firms engage in labor outsourcing to the United States, however, U.S. wages and employment increase Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-37 Labor Outsourcing, Wages, and Employment (cont'd) • Summing up the economic implications of outsourcing – Even in the best of times, workers experience short-run ups and downs in wages and jobs. In the United States, after all, about 4 million jobs come and go every month. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-38 Labor Outsourcing, Wages, and Employment (cont'd) • Summing up the economic implications of outsourcing (cont’d) – Outsourcing is a two-way street – Labor outsourcing does not just involve U.S. firms purchasing the labor services of residents located abroad – This phenomenon also entails the purchase of labor services from U.S. workers who provide outsourcing services to companies located in other nations Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-39 Labor Outsourcing, Wages, and Employment (cont'd) • Summing up the economic implications of outsourcing (cont’d) – Not all workers gain equally from the trade of outsourced labor services, and some people temporarily lose, in the form of either lower wages or reduced employment opportunities – Nevertheless, specialization and trade of labor services through outsourcing generate overall gains from trade for participating nations, such as India, Canada, and the United States Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-40 What If … the government required U.S. firms to hire only workers who reside in the United States? • Prohibiting the hiring of foreign labor would put an end to international labor outsourcing. • U.S. firms would either pay higher wages for U.S. workers, or they would not replace outsourced workers. • Either way, overall output would be less. • The resulting decrease in supply would lead to higher equilibrium prices for goods and services. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-41 Monopoly in the Product Market • Now, let’s assume that the firm sells its product in an imperfectly competitive market (we assume the firm purchases inputs under perfect competition still) • In other words, we are considering output market structures of monopoly, oligopoly, and monopolistic competition • For the remainder of the chapter, we simply refer to a monopoly situation for ease of analysis Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-42 Monopoly in the Product Market (cont'd) • Constructing the monopolist’s input demand curve – In reconstructing the demand schedule for an input, we must recognize that • The marginal physical product falls because of the law of diminishing marginal product as more workers are added • The price (and marginal revenue) received for the product sold also falls as more is produced and sold Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-43 Figure 28-7 A Monopolist’s Marginal Revenue Product, Panel (a) Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-44 Figure 28-7 A Monopolist’s Marginal Revenue Product, Panel (b) Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-45 Monopoly in the Product Market (cont'd) • Question – Why does the monopolist hire fewer workers? • Answer – The marginal benefit to the monopolist of hiring an additional worker is affected by the fact that the monopolist faces a reduction in the price charged on all units in order to be able to sell more of the product Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-46 The Utilization of Other Factors of Production (cont'd) • Cost minimization – To minimize total costs for a particular rate of production, the firm will hire factors of production up to the point at which the marginal physical product per last dollar spent on each factor is equalized Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-47 The Utilization of Other Factors of Production (cont'd) • Cost minimization MPP of labor Price of labor = MPP of capital Price of capital Copyright ©2014 Pearson Education, Inc. All rights reserved. = MPP of land Price of land 28-48 Policy Example: A “Reclassification Regulation” Cuts Overall Labor Employment • Many firms employ independent contractors to perform labor tasks alongside regular employees. • Recently, the Internal Revenue Service ruled that a number of U.S. companies had improperly classified some workers as independent contractors and had thereby failed to withhold Social Security and Medicare taxes. • The IRS ruling increased the effective wage rate for these workers. • Some of the affected firms responded by hiring the contractors as regular employees, while others terminated the services of the contractors. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-49 The Utilization of Other Factors of Production (cont’d) • Profit maximization revisited – MRP of labor = Price of labor (wage) – MRP of land = Price of land (rent) – MRP of capital = Price of capital (cost per unit of service) Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-50 You Are There: Combating U.S. Unemployment via Job-Search Outsourcing • Recently, U.S. resident Frankie Balint used an outsourcing company in India to help him locate prospective employers and to apply for available jobs. • The online firm JobSerf.com collected information about his qualifications and submitted online job applications on his behalf. • So, employees based in India did the work of successfully matching Balint with his new employer. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-51 Issues & Applications: Will You Be Replaced by an App? • Digital technologies can pilot planes, drive cars, teach students, and perform surgeries. • Whether these technologies will replace human labor depends on the cost minimization rule. • Firms will use robots only if the ratio of their marginal physical product to their input price exceeds the same ratio for a human input. • Because human labor is both relatively productive and relatively inexpensive as compared with robots, it is unlikely that firms will choose to eliminate the input of human labor. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-52 Summary Discussion of Learning Objectives • Why a firm’s marginal revenue product curve is its labor demand curve – In competitive markets, firms hire labor to the point at which the wage equals MRP • The demand for labor as a “derived demand” – The demand for labor by perfectly competitive firms is derived from the demand for the final products they produce Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-53 Summary Discussion of Learning Objectives (cont'd) • Key factors affecting the elasticity of demand for inputs – Price elasticity of demand for the final product – Ease of substitution of other inputs – Proportion of total costs – Time period Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-54 Summary Discussion of Learning Objectives (cont'd) • How equilibrium wage rates at perfectly competitive firms are determined – The wage at which the quantity of labor supplied by all workers equals the quantity of labor demanded by all firms • U.S. wage and employment effects of labor outsourcing – Decreased demand for U.S. workers when cheaper labor is available overseas – Increased demand for some U.S. labor Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-55 Summary Discussion of Learning Objectives (cont'd) • Contrasting the demand for labor and wage determination under monopoly with outcomes under perfect competition – A monopolist’s labor demand curve is to the left of that of a perfectly competitive industry. – Marginal revenue for a monopolist is less than price. – Fewer workers are employed by the monopolist. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28-56