Chapter 9 - Wage determination and superstar salaries. After completing this unit, you should be able to: Explain how buyers in the labor market make hiring and salary decisions, demonstrate the importance of the value of the marginal product of labor and the marginal cost of labor, explain why there are pay differences across occupations.
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock PowerPoint Prepared by Z Pan Chapter Wage Determination and Superstar Salaries Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: BARTON SILVERMAN/© The New York Times/Redux Pictures After studying this chapter, you should be able to: Ø Ø Explain how buyers in the labor market make hiring and salary decisions Demonstrate the importance of the value of the marginal product of labor and the marginal cost of labor Copyright © 2013 John Wiley & Sons, Inc Ø Ø Explain why there are pay differences across occupations Explain why individual salary comparisons are not valid for determining how much society values different occupations Pay differences across occupations Ø In 2001 Alex Rodriguez signed a 10-year contract for $252 million with the Texas Rangers team In 2011 Ø Tiger Woods ’s earnings were $75 million Ø Oprah Winfrey ’s earnings were $290 million Average annual earnings for registered nurses, elementary school teachers, and fire fighters were $67,000, $56,000, and $47,000, respectively Copyright © 2013 John Wiley Ø The labor market Ø Ø In the labor market, the demand and supply of labor determines worker earnings and the quantity of labor hired Wages and other labor earnings are simply prices that are determined by the market interactions between buyers and sellers of labor Copyright © 2013 John Wiley THE BUYERS OF LABOR Ø The buyers of labor are business firms Restaurants, accounting firms, banks, school districts, hospitals, and all the other producers of goods and services in the economy Ø For superstars: movie studios, sports teams, and those hiring superstars for marketing or endorsement purposes Ø Copyright © 2013 John Wiley The Marginal Cost of Labor The Marginal Cost of Labor is the increase in costs that businesses incur from hiring the worker Including: wages, costs of advertising, screening and interviewing job candidates, training, related taxes and employee benefits Copyright © 2013 John Wiley The Marginal Benefit of Hiring Labor The Marginal Benefit of hiring an additional worker depends on the output that you gain by hiring the worker Described by production function: Ø Ø A Production Function shows the amount of output that can be produced with different amounts of inputs Total Product is the total output produced at a given level of input use Copyright © 2013 John Wiley An example of production function Copyright © 2013 John Wiley Marginal Product of Labor The Marginal Product of Labor (MPL) is the additional output gained from hiring an additional worker, ceteris paribus Copyright © 2013 John Wiley Marginal Product of Labor Copyright © 2013 John Wiley 10 The value of the marginal product of labor Copyright © 2013 John Wiley 15 Determinants of MPL and VMPL Ø Anything that affects labor productivity Ø Motivation Human Capital (The acquired skills and knowledge that makes workers more productive) Ø Access to capital equipment and technology Ø Ø Price of output Copyright © 2013 John Wiley 16 The Firm ’s Profit Maximizing Hiring Decision Optimal Number of Workers to Hire In determining the optimal number of workers to hire in order to maximize Java ’s profits, we compare the marginal benefits and marginal costs of hiring each additional worker Copyright © 2013 John Wiley 17 The Firm ’s Profit Maximizing Hiring Decision Marginal benefits and marginal costs of hiring workers at Java Copyright © 2013 John Wiley 18 The Firm ’s Profit Maximizing Hiring Decision Java’s profits are maximized when hiring 4th worker Copyright © 2013 John Wiley 19 Maximum Wage to Pay a Given Worker Ø Ø Ø A firm will earn profit whenever it can pay a worker less than his or her value of marginal product of labor A firm will break even if it pays the worker a wage equal to his or her VMPL So the maximum wage a firm is willing and able to pay a worker = VMPL Copyright © 2013 John Wiley 20 Firm ’s Demand Curve for Labor Copyright © 2013 John Wiley 21 Summary of the Profit-Maximizing Hiring Decision Copyright © 2013 John Wiley 22 The sellers of labor Ø Ø The supply of labor comes from workers who sell their time and effort to employers The sellers of labor are individuals, like athletes Cristiano Ronaldo and Tiger Woods, actress Cameron Diaz, and you Copyright © 2013 John Wiley Ø 23 LABOR MARKET EQUILIBRIUM Copyright © 2013 John Wiley 24 Shifts in the Demand and Supply of Labor Copyright © 2013 John Wiley 25 THE SUPERSTAR LABOR MARKET Ø Lisa Leslie, Kobe Bryant both top players in their sport However, in 2009 Kobe Bryant earned $29 million from the Lakers, while Lisa Leslie earned only $100,000 from the Sparks (the maximum in the WNBA at 26 Copyright © 2013time) John Wiley that Ø Marginal Value vs Total Value of Labor Wage reflects marginal value, not total value of labor Copyright © 2013 John Wiley 27 Questions/Discussions 1) 2) Professional U.S soccer players earn much less than professional U.S baseball players Using economic reasoning, explain why From an economic perspective, are professional sports players worth their multimillion-dollar salaries? Explain why or why not Copyright â 2013 John Wiley 28 Key Concepts ã ã • • • • • Production function Total product Marginal product of labor Law of diminishing marginal product Value of the marginal product of labor Human capital Profit Copyright © 2013 John Wiley 29 ... this chapter, you should be able to: Ø Ø Explain how buyers in the labor market make hiring and salary decisions Demonstrate the importance of the value of the marginal product of labor and the... elementary school teachers, and fire fighters were $67,000, $56,000, and $47,000, respectively Copyright © 2013 John Wiley Ø The labor market Ø Ø In the labor market, the demand and supply of labor determines... of MPL and VMPL Ø Anything that affects labor productivity Ø Motivation Human Capital (The acquired skills and knowledge that makes workers more productive) Ø Access to capital equipment and technology