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Chapter 22Market for Labor and Other Inputs
ECONOMICS EXPLORE APPLYby Ayers and Collinge
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Learning Objectives

1. State why the demand for labor is derived demand.
2. Use labor demand and supply curves to show how an
   equilibrium market wage rate is determined.
3. Discuss the characteristics of a purely
   competitive labor market and the wage- taking
   firm.
4. Ascertain the profit maximizing employment of
   labor for a wage taking firm.

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Learning Objectives

1. Describe labor markets in which market power over
   the wage rate is present.
2. Relate the similarities between the employment of
   labor and the employment of other resources.
3. Explain why the employment of labor has become
   increasingly global in scope.

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22.1 THE MARKET DEMAND FOR LABOR

• Unlike the product market, in which firms are
  sellers and households are buyers, in the labor
  market, individuals sell their labor services
  (suppliers) to firms (demanders).
• The market price of labor services is the wage
  rate, the amount the employee is paid per hour.

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The Market Demand for LaborA Derived Demand

• Labor demand slopes downward, meaning that.
• Higher wage rates decrease the quantity of labor
  demanded.
• Whereas, lower wage rates increase the quantity
  of labor demanded.

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Labor Demand
Wage Rate ()
9
7
Market Demand
Quantity of Labor (hours per day)
3,000
4,000
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Variation in the Demand for Labor
Economist often study the labor demands In three
distinct labor market segments.

• Occupation occupational labor demands are
  distinct for dissimilar because labor occupations
  require specific human capital.
• Geography labor demand varies geographically
  because of different economic conditions in towns
  and regions.
• Industry various industries compete for the same
  pool of workers.

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Derived Demand

• Labor demand is a derived demand, which means
  that the demand for labor exists only because
  there is a demand for labors output.

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Labor Demand
Wage Rate ()
Market Supply
9
7
Quantity of Labor (hours per day)
4,000
5,000
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Market for Labor

• Workers exchange their services to the labor
  market in exchange for the wages and salaries
  that they can earn.
• The market supply curve of labor shows the
  quantity of labor supplied at various wage rates.
• The positive slope of the market supply of labor
  tells us that higher wage rates attract a greater
  quantity of labor supplied.
• Labor supply can vary by occupation, area, and
  industry.

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Market for Labor
Wage Rate ()
Market Supply


9

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Market Demand
Quantity of Labor (hours per day)
3,000
5,000
4,000
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22.2THE EQUILIBRIUM WAGE RATE

• A purely competitive labor market exist when the
  demand for labor and the supply of labor
  establish an equilibrium wage rate and quantity
  of labor.
• The characteristics of a purely competitive labor
  market are.
• Many buyers and sellers of labor services
• Services of labor are homogeneous
• Market is free of barriers to entry and exit

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A Purely Competitive Labor Market

• In a purely competitive employers are wage
  takers.
• They can employ as much or as little labor as
  they desire, at the market wage rate.
• No one employer can influence the wage rate, so
  as wage takers, they have no market power over
  wages.
• For a wage taking firm, the wage rate is supply
  curve of labor to the firm.

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Competitive Labor Markets
Labor Market
Firm
Dollars
Dollars
Market Supply
Labor Supply to Firm
Market Wage
The interaction of labor demand and labor supply
sets the market wage.
Market Demand
Firms Demand
Total market labor
Labor (thousands)
Labor (single units)
Labor to Firm
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A Firms Employment of Labor

• The value to the firm of any workers labor, pat
  is a revenue resulting the from that workers
  marginal product.
• The revenue from the output an additional worker
  adds to the firms total output is termed the
  marginal revenue product of labor.
• Marginal revenue product
• Change in total revenue/Change in labor
• Or
• Marginal revenue x Marginal product.

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A Firms Employment of Labor
Marginal revenue product (change in total
revenue change in labor ) (marginal product x
marginal revenue)
25 20 15 10 5 0
Marginal revenue product
Marginal revenue product is downward sloping for
a price-taking firm due to the decrease in the
marginal product of labor.
0 1 2 3
4 5 6
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Marginal Revenue ProductA Price Taker
Marginal revenue product slopes downward for a
price maker for TWO reasons.
1 the marginal product of labor decreases as the
quantity of labor is increased.
2 price must be decreased in order to sell the
additional output that is produced when more
labor is employed. The decrease in price, which
results in less marginal revenue, also
contributes to the decrease in marginal revenue
product.

60 50 40 30 20 10 0 -10 -20 -30 -40
Marginal revenue product
0 1 2 3
4 5 6
Quantity of Labor
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Hiring Labor

• Marginal cost of labor The additional cost of
  employing one more unit of labor.
• Marginal cost of labor
• Change in total cost/Change in quantity of labor
  
• The market wage rate equals the marginal cost of
  labor for a wage taker.
• Profit-maximizing firms will hire to the point
  where (Hiring Rule)
• MCL MRPL

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Marginal Revenue Product and the Demand for Labor
Dollars
Marginal Cost of Labor

16 ( market wage)
Marginal Revenue Product
3
Quantity of Labor
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Employment of Labor and the Output Market
Marginal Revenue Product for price maker
Dollars
Marginal Cost of Labor


16 ( market wage)
Marginal Revenue Product for price taker
3
2
Quantity of Labor
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22.3MARKET POWER IN THE LABOR MARKET

• Monopsony - only one employer of labor
• Monopoly - only one seller of labor, a labor
  union
• Bilateral monopoly - only one employer and
  only one seller of labor

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A Monopsony Firm

• The monopsonist makes its hiring decisions in the
  following two steps.
• It employs the amount of labor for which the
  marginal cost of labor equals the marginal
  revenue product.
• It pays the lowest possible wage rate for that
  labor.

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Monopsony Firm and Upward- Sloping Supply of
Labor Curve
Marginal Cost of Labor
Dollars
Supply of Labor
10
Step 1
9
8
Step 2
Marginal Revenue Product
Labor
3
4
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Monopoly A Sole Supplier of Labor Services

• Monopolies in the output market possess market
  power because they can raise prices above the
  level indicated by the intersection of supply and
  demand.
• Labor unions are like monopolies in that they are
  able to command a higher price for their output
  by.
• Reducing the supply of labor.
• Eliminating competition for jobs among workers.
• Monopolizing the supply of labor services.

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Bilateral Monopoly

• A bilateral monopoly occurs when a monopsony
  buyer of labors services must obtain those
  services from a monopoly seller, such as a labor
  union.
• Under a bilateral monopoly, the wage rate depends
  on bargaining power
• Depending upon whether the employer or
  representative of the employee bargains more
  effectively, the wage result can be above or
  below equilibrium.

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22.4THE EMPLOYMENT OF OTHER INPUTS

• The marginal revenue product can be calculated
  for any input, as can its marginal cost.
• The rule for the profit-maximizing amount of
  labor applies to other inputs
• Employ an input up to the point where its
  marginal revenue equals its marginal cost.

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The Marginal Revenue Product of Capital
The marginal revenue product of capital is
computed in the same way as marginal revenue
product of labor. But in this case, the quantity
of capital varies and the other inputs are held
constant.

Marginal product revenue
12 10 8 6 4 2 0
Marginal cost of capital

0 1 2 3
4 5 6
Quantity of capital
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22.5 EXPLORE APPLYInternationalizing the Work
Force

• A portion of U.S. imports are made by foreign
  firms employing foreign workers, but some imports
  are made by U.S. based multinational firms.
• Workforce diversity is the norm in many
  countries.
• Some U.S. employers hire foreign born workers
  because they claim that they will do the jobs
  that American workers will not do.
• Self employed entrepreneurs who are foreign born
  add add another dimension to the Internalization
  of the work force.

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Internationalizing the Work Force
U.S. EMPLOYMENT-BASED IMMIGRATION
YEAR NUMBER OF IMMIGRANTS 1990
58,192 1991 59,525 1992
116,198 1993 147,012 1994
123,291 1995
85,336 1996 117,499 1997
90,607 1998
77,517 1999
56,817 2000 107,024
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Terms along the Way

• derived demand
• purely competitive labor market
• marginal revenue product of labor
• marginal cost of labor
• monopsony
• monopoly
• bilateral monopoly

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Test Yourself

• A labor market demand curve is
• downward sloping like the demand curve for goods
  and services.
• upward sloping.
• horizontal.
• vertical.

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Test Yourself

• 2. Which defines the marginal revenue product of
  labor?
• Change in total revenue/change in output.
• Change in total revenue/change in labor.
• Change in marginal revenue/change in the wage
  rate.
• Change in output/change in input.

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Test Yourself

• 3. A marginal revenue product curve shows
• a firms labor market supply.
• a firms labor demand.
• the market supply.
• the marginal cost of labor.

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Test Yourself

• 4. The marginal cost of labor equals
• the change in total cost/the change in output.
• change in total cost/change in labor.
• change in total cost/change in the wage rate.
• change in output/change in labor.

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Test Yourself

• 5. The marginal cost of labor for a wage-taking
  firm ________ as it hires more labor.
• increases.
• decreases.
• remains constant.
• first increases, then decreases.

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Test Yourself

• 6. In a purely competitive labor market the
  market wage is determined by
• the demand for labor.
• the supply of labor
• both the demand and supply of labor.
• neither the demand nor supply of labor.

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The End! Next Chapter 23 Earnings and Income
Distribution"