12/21/2015 Contents Demand for Labor Supply for Labor Equilibrium in the Labor Market Microeconomics The Markets for Labor Chapter By Tran Thi Kieu Minh, MSc The Demand for Labor ©Kieu Minh, FTU, 2014 The versatility of supply and demand (a) The market for apples Labor market Labor demand Governed by supply and demand Derived demand Labor services = inputs into the production of other goods Price of apples Supply P (b) The market for apple pickers Wage of apple pickers Supply W Demand Demand Q Quantity of apples L Quantity of apple pickers The basic tools of supply and demand apply to goods and to labor services Panel (a) shows how the supply and demand for apples determine the price of apples Panel (b) shows how the supply and demand for apple pickers determine the wage of apple pickers 12/21/2015 The Demand for Labor The Demand for Labor The competitive profit-maximizing firm Assumptions Price VMP L = MP L x P output Marginal revenue product (MRP L) and for labor Diminishes as the number of workers rises Additional taker Pay the market wage Get the market price for goods Decide Firm is competitive in both markets For goods Value of the marginal product of labor (VMPL) Quantity of goods to sell Quantity of labor to hire revenue from hiring one additional unit of labor The value-of-marginal-product curve is the labordemand curve For a competitive, profit-maximizing firm Firm is profit-maximizing The Demand for Labor The value of the marginal product of labor MRP L Competitive, profitmaximizing firm hires workers up to the point where Value of the marginal product of labor = wage Market wage What causes the labor-demand curve to shift? The output price Technological change Demand for labor: VMPL = MP L ˣ P of output Technological Value of marginal product (demand curve for labor) Labor-saving Profit-maximizing quantity Quantity of labor advance Can raise MPL: increase demand for labor technology Can reduce MPL: decrease demand for labor Supply of other factors Affect marginal product of other factor 12/21/2015 The Supply of Labor The Individual Supply of Labor The trade-off between work and leisure Labor-supply curve backward bending supply of labor curve Reflects how workers’ decisions about the labor-leisure trade-off Respond to a change in opportunity cost of leisure Equilibrium in the Labor Market The Supply of Labor 12 The market labor supply Wage (price of curve Upward – sloping curve Supply labor) Wages in competitive labor markets What causes the laborsupply curve to shift? Changes in supply or demand for labor Changes in tastes Changes in alternative opportunities Immigration Adjusts to balance the supply & demand for labor Equals the value of the marginal product of labor Change the equilibrium wage Change the value of the marginal product by the same amount Quantity of labor 12/21/2015 Equilibrium in a labor market A shift in labor supply Wage (price of labor) Wage (price of labor) Supply Equilibrium wage, W An increase in Supply, S1 labor supply S2 W1 W2 reduces the wage Demand Quantity of labor Equilibrium employment, L Like all prices, the price of labor (the wage) depends on supply and demand Because the demand curve reflects the value of the marginal product of labor, in equilibrium workers receive 13 the value of their marginal contribution to the production of goods and services Demand Quantity of labor L1 L2 and raises employment When labor supply increases from S1 to S2, perhaps because of an immigration of new workers, the equilibrium wage falls from W1 to W2 At this lower wage, firms hire more labor, so employment rises from L to L2 The change in the wage reflects a change in the value of the 14 marginal product of labor: With more workers, the added output from an extra worker is smaller Productivity and wages A shift in labor demand 16 Wage (price of labor) Supply An increase in labor demand W2 W1 increases the wage D2 Demand, D1 Quantity of labor L1 L2 and increases employment Standard of living - depends on our ability to produce goods and services Wages = productivity -s measured by the value of the marginal product of labor Highly productive workers are highly paid Less productive workers are less highly paid Workers today Are better off than workers in previous generations When labor demand increases from D1 to D2, perhaps because of an increase in the price of the firm’s output, the equilibrium wage rises from W to W 2, and employment rises from L to L2 Again, the change in the wage reflects a change in the value of the marginal product of labor:15 With a higher output price, the added output from an extra worker is more valuable 12/21/2015 Productivity and wage growth in the United States Time period Growth rate of productivity Growth rate of real wages 1959-2006 2.1% 2.0% 1959-1973 1973-1995 1995-2006 2.8 1.4 2.6 2.8 1.2 2.5 Growth in productivity is measured here as the annualized rate of change in output per hour in the nonfarm business sector Growth in real wages is measured as the annualized change in compensation per hour in the nonfarm business sector divided by the implicit price deflator for that sector These productivity data measure average productivity—the quantity of output divided by the quantity of labor—rather than marginal productivity, but average and marginal productivity are thought to move closely together 17 ... Quantity of labor to hire revenue from hiring one additional unit of labor The value-of-marginal-product curve is the labordemand curve For a competitive, profit-maximizing firm Firm is profit-maximizing... of Labor The Individual Supply of Labor The trade-off between work and leisure Labor- supply curve backward bending supply of labor curve Reflects how workers’ decisions about the labor- leisure... the labor- demand curve to shift? The output price Technological change Demand for labor: VMPL = MP L ˣ P of output Technological Value of marginal product (demand curve for labor) Labor- saving