Economics

Viktor Ni, NIS 2013

Unit 11.4A: Factor markets

Supply of Labour and Equilibrium

Предложение труда и равновесие

Part 1

Supply of Labour and Equilibrium

The Trade-off between Work and Leisure# Wage per hour Hours

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• Because time is limited, more hours of work mean that workers are enjoying less leisure.

• Imagine you got that raise from $15 to $20 per hour. The opportunity cost of leisure is now greater, but you are also richer than you were before.

• You might decide that with your extra wealth you can now afford to enjoy more leisure.

What Causes the Labor-Supply Curve to Shift?

• Changes in Tastes.– Раньше женщины сидели дома, а не работали,

сейчас ситуация поменялась и увеличение предложения труда.

• Changes in Alternative Opportunities.– If the wage earned by pear pickers suddenly rises, some

apple pickers may choose to switch occupations, and the supply of labor in the market for apple pickers falls.

• Immigration. – When immigrants come to the United States, the supply

of labor in the US increases, and the supply of labor in the immigrants’ home countries falls.

Equilibrium in the Labor Market

Два факта как зарплата определяется на конкурентном рынке:

• The wage adjusts to balance the supply and demand for labor.

• The wage equals the value of the marginal product of labor.

• Any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal.

A Shift in Labor Supply

• Suppose that immigration increases the number of workers willing to pick apples.

A Shift in Labor Supply

Answer:• When labor supply increases from S1 to S2,

perhaps because of an immigration of new workers, the equilibrium wage falls from W1 to W2. At this lower wage, firms hire more labor, so employment rises from L1 to L2.

• The change in the wage reflects a change in the value of the marginal product of labor: With more workers, the added output from an extra worker is smaller.

Game:

Pollev.com

Case 1

Palestinian workers

What happened next?• During most of the 1980s, many thousands of

Palestinians regularly commuted from their homes in the Israeli-occupied West Bank and Gaza Strip to jobs in Israel, primarily in the construction and agriculture industries.

• In 1988, however, political unrest in these occupied areas induced the Israeli government to take steps that, as a by-product, reduced this supply of workers. Curfews were imposed, work permits were checked more thoroughly, and a ban on overnight stays of Palestinians in Israel was enforced more rigorously.

What happened next?

A - 586455 – Supply of Labour shifts leftB - 586465 – Supply of Labour shifts rightC - 663432 – Demand of Labour shifts leftD - 663433 – Demand of Labour shifts right

Answer

• The number of Palestinians with jobs in Israel fell by half, while those who continued to work in Israel enjoyed wage increases of about 50 percent.

• With a reduced number of Palestinian workers in Israel, the value of the marginal product of the remaining workers was much higher.

A

Who can demonstrate the shift?

Case 2

Apple pickers

What happened next?

• Now suppose that an increase in the popularity of apples causes their price to rise.

What happened next?

A - 586455 – Supply of Labour shifts leftB - 586465 – Supply of Labour shifts rightC - 663432 – Demand of Labour shifts leftD - 663433 – Demand of Labour shifts right

Answer

• This price increase does not change the marginal product of labor for any given number of workers, but it does raise the value of the marginal product.

• With a higher price for apples, hiring more apple pickers is now profitable.

D

Who can demonstrate the shift?

A Shift in Labor Demand

• When labor demand increases from D1 to D2, perhaps because of an increase in the price of the firm’s output, the equilibrium wage rises from W1 to W2, and employment rises from L1 to L2.

• Again, the change in the wage reflects a change in the value of the marginal product of labor: With a higher output price, the added output from an extra worker is more valuable.

Case 3

The Economics of the Black Death

The Economics of the Black Death• In 14th century Europe, the bubonic plague ‑

wiped out about one third of the population‑ within a few years. This event, called the Black Death, provides a grisly natural experiment to test the theory of factor markets that we have just developed.

• Consider the effects of the Black Death on those who were lucky enough to survive. What do you think happened to the wages earned by workers and the rents earned by landowners?

What happened next?

A - 586455 – Wage and Rent increaseB - 586465 – Wage and Rent decreaseC - 663432 – Wage increase and Rent decreaseD - 663433 – Wage decrease and Rent increase

Who can demonstrate the shifts?

• To answer this question, let’s examine the effects of a reduced population on the marginal product of labor and the marginal product of land. With a smaller supply of workers, the marginal product of labor rises. (This is diminishing marginal product working in reverse.) Thus, we would expect the Black Death to raise wages.

• Because land and labor are used together in production, a smaller supply of workers also affects the market for land, the other major factor of production in medieval Europe. With fewer workers available to farm the land, an additional unit of land produced less additional output. In other words, the marginal product of land fell. Thus, we would expect the Black Death to lower rents.

C