Chapter 3 The Demand for Labor

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Chapter 3The Demand for Labor
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Short Run Labor Demand

• Short run short enough period of time that
  capital is fixed
• Marginal Product of Labor (MPL )
• increase in output (Q) from adding one unit of
  labor (L), holding other inputs constant.
• Law of Diminishing Marginal Returns
• Holding other inputs constant, as the amount of a
  single input increases, its marginal product will
  eventually decrease.
• Marginal Revenue (MR)
• increase in total revenue (TR) from producing one
  more unit of output.

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Short Run Labor Demand

• MR for a firm
• identical to price if firm sells its product in a
  perfectly competitive industry.
• MRP(1-1/e) where eelasticity of product demand
  if firm faces a downward sloping product demand
  curve.
• If firm sells product in a perfectly competitive
  industry, e is infinite and MRP.
• As a firm increases the sales of its product, MR
  generally falls. The steeper the product demand
  curve is, the steeper the MR curve.

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Product Demand Curves

Monoplistic product market
Perfectly competitive product market
D
DMR
MR
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Short Run Labor Demand

• Marginal Revenue Product of Labor (MRPL)
• increase in total revenue from adding one more
  unit of labor, ceteris paribus.
• MPL MR
• MRPL will fall as L increases for 2 reasons
  potentially
• MPL decreases as L increases.
• MR falls as L (and output) increases unless the
  firm is in a competitive product market.

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Short Run Labor Demand

• Marginal Expense of Labor (MEL )
• increase in total cost (TC) from adding one more
  unit of labor
• DTC / DL
• If a firm is in a competitive labor market,
• MELW
• If firm is in a monoposonistic labor market
• MELgtW.

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Short Run Labor Demand
Competitive labor market
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Short Run Labor Demand
Monopsonistic Labor Market
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Short Run Labor Demand

• Profit maximization L where MRPL MEL

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Short Run Labor Demand

• Assume competitive product and labor markets
• Analyze the effect of an increase in product
  demand on
• employment in market, at firm.
• firm profits (change in area between MRPL and
  MEL)
• Analyze the effect of an increase in labor supply
  on
• employment in market, at firm.
• firm profits

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Short Run Labor Demand

• Use short run supply/demand model to discuss
  winners/losers from
• More open immigration laws
• NAFTA/CAFTA
• Increase in minimum wage

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Long Run Labor Demand

• In the LR, all inputs can be varied.
• Assume two inputs L and K.
• In the LR, the profit maximizing condition
• MRPL MEL
• MRPK MEK
• If the firms purchase their labor and capital in
  competitive markets,
• MEL W
• MEK C.
• where Wwage rate
• C cost per period of a unit of K.

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Long Run Labor Demand

• If the firms sell their products in competitive
  product markets,
• MRPLPMPL
• MRPKPMPK
• Using these facts, the profit maximizing
  conditions can be rewritten as
• PMPL W
• PMPK C
• Which can be rewritten as
• W/MPL C/MPK P

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Long Run Labor Demand

• Long run effect of an increase in price of
  capital on labor.
• substitution effect for every given level of
  output, use more labor and less capital.
• scale effect an increase in price of capital
  reduces product supply, reduces equilibrium
  quantity produced, and reduces amount of labor
  employed.
• L K are
• gross substitutes if subst effect gt scale effect
• gross complements if subst effect lt scale effect

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Long Run Labor Demand

• When there are more than two inputs, any pair can
  be classified as gross substitutes or complements
  depending on whether the scale or substitution
  effect dominates.

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Long Run Labor Demand

• Other Applications of Labor Demand Models.
• Minimum wages and monopsony.
• Effect of a payroll tax.
• does it matter whether tax is levied on employer
  or employee?
• how does the elasticity of labor supply affect
  incidence of tax?
• how does the elasticity of labor demand affect
  incidence of tax?
• Effects of employment subsidies.
• given to employers.
• given to employees.
• Financing medical payments for black lung
  disease.
• tax on coal workers' wages (surface versus land)
• tax on coal (unions versus management)