Ch 18 - Labor Markets.pptx - Chapter 18 Labor Markets...

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Chapter 18 Labor Markets
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Overview Demand for Labor and Marginal Product of Labor Supply of Labor Equilibrium Why do different workers get paid different wages? General Economic Conditions in the Labor Market Human Capital Compensating Differentials  Unions Discrimination 2
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The Demand for Labor and the Marginal Product of Labor A firm is willing to hire a worker when the worker increases the  firm’s revenues more than the firm’s costs. The increase in revenue created by hiring an additional worker  is called the  Marginal Product of Labor (MPL) . The increase in costs from hiring an additional worker is (for a  competitive firm) simply the worker’s wage. So a firm will hire a worker if  MPL > Wage .
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The Demand for Labor and the Marginal Product of Labor The marginal product of labor falls as more labor  is used. Diminishing returns to labor More generally, diminishing returns to any factor of  production. Note: We are holding capital (e.g., machinery,  computers) constant and just varying labor. 4
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The Marginal Product of Labor MPL declines as more workers are hired. If the wage rate is high, not many will be hired, but if it’s low, more will be hired. Number of Cleaners Task Marginal Product of Labor (MPL per hour) One Clean restrooms, once a day $35 Two Empty trash $30 Three Clean restrooms, twice a day $24 Four Wash floors $20 Five Pick up outside trash $16 Six Clean restrooms, three times $12 Seven Eight Remove gum from the bottom of tables $8
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Demand for Labor and Marginal Product of Labor (MPL) For a Firm in a Competitive Market W E MPL = Demand for labor What each additional worker adds to revenue. +1+1 +1 +1 Supply to firm (Price-taker) $9 L * (profit-maximizing) Note: Also called Value of MPL, in $. 6 REEF Time
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Suppose the above graph represents a firm's marginal  product of labor for cleaners. If the market wage for  cleaners is $9, how many cleaners will the firm hire?
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Suppose the above graph represents a firm's marginal  product of labor for cleaners. If the market wage for  cleaners is $13, how many cleaners will the firm hire?
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The Market Demand Curve for Labor is the horizontal sum of the individual firm demand curves (MPL curves). W L A B C D MKT Firms 9 W*
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Supply of Labor W Hrs W Hrs (millions) Individual Market May be backward bending S S Mkt Market supply will be upward sloping. Why? 10 New entrants
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Labor Market Equilibrium Equilibrium in the labor market occurs at the intersection  of the market supply and demand curves for labor.
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