1 of 42 copyright © 2010 pearson education, inc. publishing as prentice hall · economics · r....

1 of 42Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.

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16

The Markets for Laborand Other Factorsof Production

Fernando Quijano

Prepared by:

CHAPTER

The Yankees were able to offer Sabathia

a better contract because of the much higher revenues the

team generates from ticket sales, cable

television, and broadcast television

and radio.


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16.1 The Demand for Labor

Explain how firms choose the profit-maximizing quantity of labor to employ.

16.2 The Supply of Labor

Explain how people choose the quantity of labor to supply.

16.3 Equilibrium in the Labor Market

Explain how equilibrium wages are determined in labor markets.

16.4 Explaining Differences in Wages

Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ.

16.5 Personnel Economics

Discuss the role personnel economics can play in helping firms deal with human resources issues.

16.6 The Markets for Capital and Natural Resources

Show how equilibrium prices are determined in the markets for capital and natural resources.

Chapter Outline and Learning Objectives

The Markets for Laborand Other Factorsof Production

CHAPTER 16


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Factors of production Labor, capital, natural resources, and other inputs used to produce goods and services.

The Markets for Labor and Other Factors of Production


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The Demand for Labor

Derived demand The demand for a factor of production; it depends on the demand for the good the factor produces.

The Marginal Revenue Product of Labor

Marginal product of labor The additional output a firm produces as a result of hiring one more worker.

Marginal revenue product of labor (MRP) The change in a firm’s revenue as a result of hiring one more worker.

Explain how firms choose the profit-maximizing quantity of labor to employ.

16.1 LEARNING OBJECTIVE


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FIGURE 16-1The Marginal Revenue Product of Labor and the Demand for Labor

The Demand for Labor Explain how firms choose the profit-maximizing quantity of labor to employ.


The marginal revenue product of labor equals the marginal product of labor multiplied by the price of the good.

The marginal revenue product curve slopes downward because diminishing returns cause the marginal product of labor to decline as more workers are hired.

A firm maximizes profits by hiring workers up to the point where the wage equals the marginal revenue product of labor. The marginal revenue product of labor curve is the firm’s demand curve for labor because it tells the firm the profit-maximizing quantity of workers to hire at each wage.

For example, using the demand curve shown in this figure, if the wage is $600, the firm will hire 4 workers.


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TABLE 16-1

The Relationship between the Marginal Revenue Product of Labor and the Wage

WHEN … THE FIRM …

MRP > W, should hire more workers to increase profits.

MRP < W, should hire fewer workers to increase profits.

MRP = W, is hiring the optimal number of workers and is maximizing profits.





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n (1)QUANTITY OF LABOR

(2)OUTPUT OF

iPODS PER WEEK

(3)MARGINAL

PRODUCT OF LABOR

(4)PRODUCT

PRICE

(5)TOTAL

REVENUE

(6)MARGINAL REVENUE PRODUCT OF LABOR

(7)WAGE

(8)ADDITIONAL

PROFIT FROM HIRING ONE ADDITIONAL

WORKER

0 0 — $200 $0 — $500 —

1 6 6 180 1,080 $1,080 500 $580

2 11 5 160 1,760 680 500 180

3 15 4 140 2,100 340 500 –160

4 18 3 120 2,160 60 500 –440

5 20 2 100 2,000 –160 500 –660

6 21 1 80 1,680 –320 500 –820

Hiring Decisions by a Firm That Is a Price Maker

Solved Problem 16-1 Explain how firms choose the profit-maximizing quantity of labor to employ.


YOUR TURN: For more practice, do related problem 1.5 at the end of this chapter.


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n The market demand curve for labor is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers.

The Market Demand Curve for Labor




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• Increases in human capital.

Human capital The accumulated training and skills that workers possess.

• Changes in technology.

• Changes in the price of the product.

• Changes in the quantity of other inputs.

• Changes in the number of firms in the market.

Factors That Shift the Market Demand Curve for Labor

The five most important variables that cause the labor demand curve to shift are the following:




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The Supply of Labor

FIGURE 16-2

The Labor Supply Curve

FIGURE 16-3

A Backward-Bending Labor Supply Curve

Explain how people choose the quantity of labor to supply.


As the wage increases, the opportunity cost of leisure increases, causing individuals to supply a greater quantity of labor. Therefore, the labor supply curve is upward sloping.

As the wage rises, a greater quantity of labor is usually supplied. As the wage climbs above a certain level, the individual is able to afford more leisure even though the opportunity cost of leisure is high. The result may be a smaller quantity of labor supplied.


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The market supply curve of labor is determined by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor.

• Increases in population.

Factors That Shift the Market Supply Curve of Labor

• Changing demographics.

• Changing alternatives.

The Market Supply Curve of Labor

The Supply of Labor Explain how people choose the quantity of labor to supply.



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Equilibrium in the Labor Market

FIGURE 16-4




As in other markets, equilibrium in the labor market occurs where the demand curve for labor and the supply curve of labor intersect.


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FIGURE 16-5

The Effect of an Increase in Labor Demand

The Effect on Equilibrium Wages of a Shift in Labor Demand


Increases in labor demand will cause the equilibrium wage and the equilibrium level of employment to rise:

1. If the productivity of workers rises, the marginal revenue product increases, causing the labor demand curve to shift to the right.

2. The equilibrium wage rises from W1 to W.2.

3. The equilibrium level of employment rises from L1 to L2.




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Will Your Future Income Depend on Which Courses You Take in College?

Makingthe

Connection



YOUR TURN: Test your understanding by doing related problem 3.3 at the end of this chapter.


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FIGURE 16-6

The Effect of an Increase in Labor Supply

The Effect on Equilibrium Wages of a Shift in Labor Supply

Equilibrium in the Labor Market Explain how equilibrium wages are determined in labor markets.


Increases in labor supply will cause the equilibrium wage to fall but the equilibrium level of employment to rise:

1. As population increases, the labor supply curve shifts to the right.

2. The equilibrium wage falls from W1 to W2.

3. The equilibrium level of employment increases from L1 to L2.


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Explaining Differences in Wages

Baseball Players Are Paid More Than College Professors

Don’t Let This Happen to YOU!Remember That Prices and Wages Are Determined at the Margin



The marginal revenue product of baseball players is very high, and the supply of people with the ability to play Major League Baseball is low. The result is that the 750 Major League Baseball players receive an average wage of $3,260,000.

The marginal revenue product of college professors is much lower, and the supply of people with the ability to be college professors is much higher. The result is that the 663,000 college professors in the United States receive an average wage of $81,000, far below the average wage of baseball players.

FIGURE 16-7



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Technology and the Earnings of “Superstars”

Why does Angelina Jolie earn more today relative to the typical actor than stars did in the 1940s?

Makingthe

Connection

YOUR TURN: Test your understanding by doing related problems 4.10 and 4.11 at the end of this chapter.



The increase in the relative incomes of superstars is mainly due to technological advances.


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Compensating differentials Higher wages that compensate workers for unpleasant aspects of a job.

Compensating Differentials

Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ.



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Are U.S. Firms Handicapped by Paying for Their Employees’Health Insurance?


Did paying for employees’ health care contribute to Chrysler’s bankruptcy in 2009?

Makingthe

Connection



The equilibrium level of overall compensation in the economy is determined by the supply of and the demand for labor. Fringe benefits (such as health insurance) are just part of that compensation.


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Discrimination

Economic discrimination Paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender.




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1. Differences in education

2. Differences in experience

3. Differing preferences for jobs

Differences in Education

Some of the difference between the incomes of whites and the incomes of blacks can be explained by differences in education.

Discrimination

Most economists believe that only a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Instead, most of the gap is explained by three main factors:




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Discrimination

Table 16-2

Why Do White Males Earn More Than Other Groups?

GROUP ANNUAL EARNINGS

White males $50,364

White females 36,891

Black males 36,233

Black females 31,114

Hispanic males 30,151

Hispanic females 26,695




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Women are much more likely than men to leave their jobs for a period of time after having a child.

Differences in Experience

Significant differences between the types of jobs held by women and men is likely a reflection in job preferences.

Differing Preferences for Jobs


Discrimination




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“WOMEN’S JOBS” “MEN’S JOBS”

OCCUPATIONWEEKLY

EARNINGS

PERCENTAGE OF WORKERS

WHO ARE WOMEN OCCUPATION

WEEKLY EARNINGS

PERCENTAGE OF WORKERS

WHO ARE WOMEN

Preschool and kindergarten teachers $567 97% Electricians $805 2%

Dental assistants 508 92 Aircraft mechanics 889 2

Child care workers 368 92 Aircraft pilots 1,358 4

Receptionists 482 92 Fire fighters 901 5

Teacher assistants 410 92 Engineering managers 1,713 8

Hairdressers 425 90 Aerospace engineers 1,557 10

Health care supportoccupations 454 88 Civil engineers 1,337 11

Maids and housekeeping cleaners 366 84

Computer software engineers 1,455 20

Cashiers 356 74 Chief executives 1,882 26

Table 16-3

“Men’s Jobs” Often Pay More Than “Women’s Jobs”


Discrimination




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Is Passing “Comparable Worth” Legislation a Good Wayto Close the Gap between Men’s and Women’s Pay?

Solved Problem 16-4

In panel (a), without comparable-worth legislation, the equilibrium wage for electricians is $800, and the equilibrium quantity of electricians hired is L1. Setting the wage for electricians below equilibrium at $650 reduces the quantity of labor supplied in this occupation from L1 to L2 but increases the quantity of labor demanded by employers from L1 to L3. The result is a shortage of electricians equal to L3 – L2, as shown by the bracket in the graph.



In panel (b), without comparable-worth legislation, the equilibrium wage for dental assistants is $500, and the equilibrium quantity of dental assistants hired is L1. Setting the wage for dental assistants above equilibrium at $650 increases the quantity of labor supplied in this occupation from L1 to L3 but reduces the quantity of labor demanded by employers from L1 to L2. The result is a surplus of dental assistants equal to L3 – L2, as shown by the bracket in the graph.

YOUR TURN: For more practice, do related problems 4.15 and 4.16 at the end of this chapter.


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When two people are paid different wages, discrimination may be the explanation. But differences in productivity or preferences may also be an explanation.

The Difficulty of Measuring Discrimination


Discrimination




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FIGURE 16-8

Discrimination and Wages


Discrimination

Panel (b) shows that this increases the supply of pilots to “B” airlines and lowers the wage paid by these airlines from $1,100 to $900. All the women pilots will end up being employed at the nondiscriminating airlines and will be paid a lower wage than the men who are employed by the discriminating airlines.



Initially, neither “A” airlines nor “B” airlines discriminates, and as a result, men and women pilots receive the same wage of $1,100 per week at both groups of airlines. “A” airlines then discriminates by firing all their women pilots. Panel (a) shows that this reduces the supply of pilots to “A” airlines and raises the wage paid by these airlines from $1,100 to $1,300.


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1. Worker discrimination.

2. Customer discrimination.

3. Negative feedback loops.

Employers who discriminate pay an economic penalty. Yet before the Civil Rights Act of 1964 many firms continued to discriminate. The three important factors that allowed these companies to operate were:

Does It Pay to Discriminate?


Discrimination




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FIGURE 16-9The United States is Less Unionized Than Most Other High-Income Countries

Labor Unions


The percentage of the labor force belonging to unions is lower in the United States than in most other high-income countries.



Labor union An organization of employees that has the legal right to bargain with employers about wages and working conditions.


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TABLE 16-4

Union Workers Earn More Than Nonunion Workers

AVERAGE WEEKLY EARNINGS

UNION WORKERS $886

NONUNION WORKERS 691

Labor Unions




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Personnel Economics

Personnel economics The application of economic analysis to human resources issues.

Should Workers’ Pay Depend on How Much They Work or on How Much They Produce?

FIGURE 16-10

Paying Car Salespeople by Salary or by Commission



This figure compares the compensation a car salesperson receives if she is on a straight salary of $800 per week or if she receives a commission of $200 for each car she sells. With a straight salary, she receives $800 per week, no matter how many cars she sells. This outcome is shown by the horizontal line in the figure.

If she receives a commission of $200 per car, her compensation will increase with every car she sells. This outcome is shown by the upward-sloping line.

If she sells fewer than 4 cars per week, she would be better off with the $800 salary. If she sells more than 4 cars per week, she would be better off with the $200-per-car commission.


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Raising Pay, Productivity, and Profits at Safelite AutoGlass

A piece-rate system at Safelite AutoGlass led to increased worker wages and firm profits.

Makingthe

Connection




The experience of Safelite AutoGlass provides a clear example of workers reacting favorably to the opportunity to increase output in exchange for higher compensation.


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• Difficulty in measuring output.

• Concerns about quality.

• Worker dislike of risk.

Other Considerations in Setting Compensation Systems

Firms may choose a salary system for several good reasons:

Personnel Economics Discuss the role personnel economics can play in helping firms deal with human resources issues.



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FIGURE 16-11

Equilibrium in the Market for Capital

The Markets for Capital andNatural Resources

The Market for Capital

The rental price of capital is determined by equilibrium in the market for capital.

In equilibrium, the rental price of capital is equal to the marginal revenue product of capital.




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Economic rent (or pure rent) The price of a factor of production that is in fixed supply.

The Market for Natural Resources





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FIGURE 16-12

Equilibrium in the Market for Natural Resources

The Market for Natural Resources


In panel (a), the supply curve of a natural resource is upward sloping. The price of the natural resource is determined by the interaction of demand and supply.

In panel (b), the supply curve of the natural resource is a vertical line, indicating that the quantity supplied does not respond to changes in price. In this case, the price of the natural resource is determined only by demand. The price of a factor of production with a vertical supply curve is called an economic rent, or a pure rent.




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Monopsony The sole buyer of a factor of production.

Monopsony





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n Marginal productivity theory of income distribution The theory that the distribution of income is determined by the marginal productivity of the factors of production that individuals own.

The Marginal Productivity Theory of Income Distribution





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Basketball Coaches’ Salaries:A March to Madness?

>>AN INSIDE LOOK

The market for NCAA Division 1-A college basketball coaches.


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Compensating differentialsDerived demand Economic discrimination Economic rent (or pure rent) Factors of production Human capital Labor union

Marginal product of laborMarginal productivity theory of

income distribution Marginal revenue product

of labor (MRP) Monopsony Personnel economics

KEY TERMS

1 of 42 copyright © 2010 pearson education, inc. publishing as prentice hall · economics · r....

Documents

labor markets

supply of labor

quantity of labor

factors of production

factors of production

prentice hall economics

glenn hubbard

anthony patrick obrien