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Trend in the Overall Unemployment Rate
Feb 2003: 5.8%
Graph copyright © 2003 by Pearson Education, Inc.
Positive Omitted Variable Bias
Don’t realize
that have 2
types of
workers.
Problem is
that young
workers both
earn less
and quit
more.
Estimated
slope is too
steep.
Graph copyright © 2003 by Pearson Education, Inc.
Demand Shifts Out
Due to
Changes in:
Technology,
Prices of
Other Inputs,
Demand for
Output
Graph by Harcourt, Inc.
Supply Shifts Out
Due to
Changes in:
Wages in
Other
Markets,
Unearned
Income,
Job
Conditions,
Population
Graph by Harcourt, Inc.
Total, Average and Marginal Product
Marginal product
is slope of total
product.
Average product
is rising when
marginal product
is above, falling
when marginal
product is below.
Marginal product
intersects
average product
at its maximum.
Graph by Harcourt, Inc.
Marginal Revenue Product, Labor Demand
Marginal Revenue Product = MR*MP.
Labor Demand is the downward sloping portion of Marginal
Revenue Product.
Graph by Harcourt, Inc.
Short-Run Demand Curve for the Market
Unlike in product market, don’t just add up individual demands.
A lower wage implies a lower output price, decreasing MRP and
shifting in each firm’s demand curve so at W2 end up at the star.
The resulting market demand is thus steeper either firm demand.
Graph by Harcourt, Inc.
Perfect Competition – the Market and the Firm
Too high of a wage (W2) and excess supply of labor results,
putting downward pressure on wages.
Too low of a wage (W1) and excess demand of labor results,
putting upward pressure on wages.
At WE the market is in equilibrium and firms are wage takers.
Graph by Harcourt, Inc.
Monopsony – i.e. only one employer
Marginal is
always above
average when
average is rising
(supply is ACL).
Intuitively, MCL
is above supply
because the firm
must raise all
wages to entice
more workers
into the market.
Graph by Harcourt, Inc.
A Minimum Wage with an Uncovered Sector
In the covered sector, minimum wage, W2, is above equilibrium so
there is an excess supply of labor (L3 – L2).
If there is an uncovered sector, these workers will move into it,
shifting out demand and lowering the wage to W3.
Results inefficient – W1 in both sectors maximized output.
Graph by Harcourt, Inc.
A Minimum Wage with a Shift in Demand
If the extra money earned with minimum wage W2
increases demand for output and labor demand shifts out,
then employment could increase.
Graph by Harcourt, Inc.
A Minimum Wage with a Monopsony
With minimum
wage W2, MCL
becomes flat
until C and then
jumps up to D
and follows the
original MCL.
Employment
thus increases
to L2 where
MRP=MCL
The competitive wage is W2, but the monopsony wage is W1. If a
minimum wage is set at W2, the competitive outcome is achieved.
Graph by Harcourt, Inc.