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Labor Markets Key Concepts 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) o 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 WE WE SL=MRC 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: 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