Chapter 15 Labor Markets

Chapter 15 Labor Markets - CHAPTER 15 Competitive and...

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CHAPTER 15 Competitive and Monopsonistic Labor Markets Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its…market price David Ricardo rofessional football players earn more than ministers or nurses. Social workers with college degrees generally earn less than truck drivers, who may not have completed high school. Professors of accounting typically earn more than professors of history with equivalent educational background and teaching experience. Even if your history professor is an outstanding teacher, capable of communicating effectively and concerned about students’ problems, she probably earns less than a mediocre teacher of accounting. Why do different occupations offer different salaries? Obviously not because of their relative worth to us as individuals. Just as there is a market for final goods and services—calculators, automobiles, dry cleaning—there is a market for labor as a resource in the production process. In this competitive labor market, the forces of supply and demand determine the wage rate workers receive. By concentrating on the economic determinants of employment—those that relate most directly to production and promotion of a product—we do not mean to suggest that other factors are unimportant. Many noneconomic forces influence who is employed at what wage, including social status, appearance, sex, race, and personal acquaintances. Our purpose is simply to show how economic forces affect the wages paid and the number of employees hired. Such a model can show not only how labor markets work, but how attempts to legislate wages, like minimum wage laws, affect the labor market. The general principles that govern the labor market also apply to the markets for other resources, principally land and capital. The use of land and capital has a price, called rent or interest, which is determined by supply and demand. Furthermore, land, capital, and labor are all subject to the law of diminishing marginal returns. Beyond a certain point and given a fixed quantity of at least one resource, more land, labor, or capital will produce less and less additional output. The Demand for and Supply of Labor Labor is a special kind of commodity, one in which people have a personal stake. The employer buys this commodity at a price: the wage rate the laborer receives in exchange P
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Chapter 15 Competitive and Monopsonistic Labor Markets 2 for his or her efforts. In a competitive market, the price, or wage rate, of labor is determined just as other prices are, by the interaction of supply and demand. To understand why a person earns what he does, then, we must first consider the determinants of the demand and supply of labor. The Demand for Labor The demand for labor is the assumed inverse relationship between the real wage rate and the quantity of labor employed during a given period, everything else held constant. The demand curve for labor generally slopes downward. At higher wage rates, employers will hire fewer workers than at lower wage rates.
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Chapter 15 Labor Markets - CHAPTER 15 Competitive and...

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