Chapter 5

Chapter 5 - Chapter 5 Invisible hand theorem labor market...

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Chapter 5 Invisible hand theorem – labor market participants are in search of their own selfish goals attain an outcome that no one in the market consciously sought to achieve Single Competitive Labor Market: - intersection of labor supply (S) and labor demand (D) curves in a competitive market - generating the competitive wage, w*, and employment, E* o w* is the market-clearing wage - each firm hires workers up to the point where the value of marginal product of labor equals the competitive wage - no unemployment in a competitive labor market - helps us understand why wages and employment seem to go up or down in response to particular economic or political events - Efficiency: o Total revenue accruing to the firm can be easily calculated by adding up the value of marginal product of the first worker, the second worker, and all workers up to E* o Gives the value of total product produced by all workers in a competitive equilibrium o Labor demand curve gives the value of total product o Supply curve gives the wage required to bribe additional workers into the labor market o Worker surplus – difference between what the worker receives (competitive wage w*) and the value of the worker’s time outside the labor market gives the gains accruing to workers o Competitive market maximizes the total gains from trade accruing to the company o Efficient allocation – allocation of persons to firms that maximizes the total gains from trade in the labor market Competitive Equilibrium across Labor Markets: - economy consists of many labor markets with workers who have similar skills - if there were free entry and exit of workers in and out of labor markets, the national economy would eventually be characterized by a single wage, w* - incentives for firms to move across markets evaporate once the regional wage differential disappears - Efficiency: o Workers of given skills have the same value of marginal product of labor in all markets o To allocate workers to those places where they are most productive o Through an “invisible hand”, workers and firms that search selfishly for better opportunities accomplish a goal that no one in the economy had in mind: an efficient allocation of resources - Wage Levels:
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o Wage convergence – great deal of interest in determining whether regional wage differentials in the US narrow over time o Strong negative relationship between the rate of wage growth and the initial wage level so that the states with the lowest wages in 1950 subsequently experienced the fastest wage growth o It may take a few decades before wages are equalized across markets o Also found in countries where the workforce is less mobile o Efficient allocation of workers across labor markets and the resulting wage convergence are not limited to labor markets within a country, but might also occur when we compare labor markets across countries o “conditional” convergence is the result of when one compares two countries with roughly similar endowments of human capital, the wage
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This note was uploaded on 04/06/2008 for the course ECON 380 taught by Professor Gradstudent during the Fall '07 term at UNC.

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Chapter 5 - Chapter 5 Invisible hand theorem labor market...

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