Lecture 5 Labor Market Equilibrium PDF_1

Lecture 5 Labor Market Equilibrium PDF_1 - Labor Market...

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Labor Market Equlilibrium (Ch. 4 & 5)
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Equilibrium in a Single Competitive Market We are now putting Labor Supply and Labor Demand together (drum roll…) wage w * L D Employment L S E *
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Equilibrium in a Single Competitive Market Why are we getting excited about competitive markets? They are efficient No reshuffling of workers can increase efficiency Societal Welfare decreases if more or less workers are employed Market Maximizes Welfare E * wage w * L D Employment L S
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Equilibrium in a Single Competitive Market The graph shows that total surplus, the sum of Producer Surplus and Consumer Surplus, is maximized Any other level of employment results in a deadweight loss to society! E * wage w * L D Employment L S Producer Surplus Consumer Surplus
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More than one Market What if there are two competitive markets West East Assuming that all labor is homogenous both markets should have the same wage What happens if the wages in the two markets differ? => Migration
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More than one Market Assume: Wage higher in the West Workers will now migrate from East to West Labor Supply in the West will increase => Wages in the West will decrease Labor Supply in the East will decrease => Wages in the East will increase Process will continue until both markets pay the same wage This process improves the welfare in the economy
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Dollars Dollars Employment Employment w W w * w* w E D N D S ( a ) West Labor Market ( b ) East Labor Market Society as a whole gains!! 1 S L 2 S L 2 S L 1 S L
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Wage Differentials and Mobility This means that workers should Migrate from low-wage to high wage areas Study comparing wage differentials in 1950 to subsequent wage growth shows some limited evidence Wage differentials decrease Takes 30 years for full convergence NOT VERY FAST!
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Percent Annual Wage Growth Manufacturing Wage in 1950 .9 1.1 1.3 1.5 1.7 1.9 4.5 4.7 4.9 5.1 5.3 5.5 5.7 AL AZ AR CA CO CT DE FL GA ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY
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Monopsony Note: In a competitive Labor Market the Marginal Cost of Hiring equals the wage Hence, it is profit-maximizing to hire until VMP E =wage Let’s look at the MC of hiring for a Non- competitive firm
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Monopsony In general the marginal cost of hiring can be written as Sigma = Elasticity of Labor Supply Let’s look at a graph 1 1 E MC w σ ⎛⎞ =⋅ + ⎜⎟ ⎝⎠
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Monopsony
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Lecture 5 Labor Market Equilibrium PDF_1 - Labor Market...

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