7_Labor Demand 2

# 7_Labor Demand 2 - LECTURE 7 LABOR DEMAND 2 Introduction to...

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LECTURE 7 LABOR DEMAND 2 Introduction to Labor Economics Economics 440 Prof. Brown

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OUTLINE Review labor demand model Labor demand case study: Put Illinois to Work Scale and substitution effects Perfect Complements Perfect Substitutes Skill-biased Technological Change
FIRM’S OBJECTIVE FUNCTION Maximize profit: g = G × ± − ² × ³ − ´ × µ

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MAXIMIZING PROFIT IN THE SHORT RUN The E that maximizes profit in the short run One caveat: Holds if VMP of labor is decreasing gG± ² = ³ w E VMP E
ALTERNATIVE WAY TO THINK ABOUT SR DEMAND FOR LABOR q p MC To maximize profit: MC=p p M q*

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ALTERNATIVE WAY TO THINK ABOUT SR DEMAND Firm’s profit maximizing condition: gG = ± In the short run K is fixed, so the MC of production is just the labor cost of producing one more unit. → gG = ² ´ Rewriting the firm’s profit maximizing condition: ² ´ = ± → ² = ± × g³ ´ µg³ ´ = ²
SR LABOR DEMAND = VMP OF LABOR E w VMP E An decrease in w results in an unambiguous increase in E hired.

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LONG RUN In the LR the firm can adjust both Labor and Capital. We can think of the Firm’s profit maximization problem as a two step problem: 1. Determine the cost minimizing quantities of E and K to produce each possible q. 2. Choose the q that maximizes profit by setting p=MC (thus determining E and K).
COST MINIMIZATION E K q 0 -w/r C 0 To minimize the cost at any output level: gG ± gG ² = ³ ´ Set slopes of isoquant and isocost equal to each other.

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7_Labor Demand 2 - LECTURE 7 LABOR DEMAND 2 Introduction to...

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