Introduction to Labor Economics

Graphs and TablesHandout #1

Figure A-3.1: Demand Curve for Labor

DL

$60

$50

$40

50 100

W

Figure A-3.2a: Input Market-The Scale Effect

W

LL0 =50 L1 = 100

W0 = $50W1 = $40

Input Market

D

Figure A-3.2b: Output Market-The Scale Effect

P

Q

SS’

Q0 Q1

P0

P1

Output Market

D

• Explanation of Figures A-3.2a and A-3.2b– (1) The decrease in wages is a _________in

the cost of production and causes the supply of output to __________.

– (2) This _________in output causes the firm to __________its demand for all inputs.

– This is the scale effect.

Summary Table 1

Two input Markets, Capital and Labor. Look at Labor Market where wage changes

Cause Change in the wage

Effect Movement along demand curve

Language Increase or decrease in the quantity demanded of labor

Note Scale and Substitution Effects work together (in the same direction)

Figure A-3.3: An Increase in Demand for Labor

L

W

D0

D1$30

$60

$70

150 200

(1) An Increase in Demand(2) An Increase in the Quantity Demanded At Each Wage

Figure A-3.4a: Increase in the Demand for Miners

Market for MinersL

W

D0

D1

Figure A-3.4b: Change in Demand for Auto Workers

Market for Auto WorkersL

W

D0

Summary Table 2

Two input Markets, Capital and Labor. Look at Labor Market and see a change in the price of Capital

Cause Change in the price of one of the things held constant such as the price of Capital

Effect Shift Labor demand curve

Language Increase or decrease in the demand for labor

Note Scale and Substitution Effects work in opposite directions

Figure A-3.5: Supply Curve of Labor

W

L

S

$10

$20

50

$30

100

Figure A-3.6: An Increase in the Supply of Labor

W

L

S0S1

$35.00

125 175

(1) Increase in Supply(2) Increase in the Quantity Supplied At Each Wage

$10.00

$0.00

Figure A-3.7: The Market for Labor

W

L

S

D

$35.00

$60.00

$10.00

125

Figure A-3.8a: Excess Supply of Labor

W

L

S

D

ES

$35.00

$45.00

12575 175

ES = LS - LD =

$60.00

$10.00

Figure A-3.8b: Excess Supply of Labor

W

L

S

D

ES

$35.00

$45.00

75 100 125 150 175

New ES = LS - LD =

$60.00

$10.00

$40.00

Figure A-3.9a: Excess Demand for Labor

W

L

S

DED

$35.00

$25.00

125 17575

$60.00

$10.00

ED = LD - LS =

Figure A-3.9b: Excess Demand for Labor

W

L

S

DED

$35.00

$25.00

75 100 125 150 175

$60.00

$10.00

ED = LD - LS =

$30.00

Figure A-3.10: The Market for Steel Workers

W

L

S

D

W0

L0

Figure A-3.11: The Market for Labor as an Efficient Price Rationing Mechanism

W

L

S

D

$35.00

$60.00

$10.00

125

Figure A-3.12a: The Market for Labor: Illustrating Employers’ Gains from Trade for One Unit

W

L

S

D

$35.00

$60.00

$10.00

125

$50.00

50

Employer GainsFor 50th unit

Figure A-3.12b: The Market for Labor: Illustrating Employers’ Gains from Trade from All Units

W

L

S

D

$35.00

$60.00

$10.00

150

Employer Gains for all units hired

Employer Gains = Area ahk = Total

a

h

k

Explanation for Figure A-3.12a and Figure A-3.12b

– 1. In Figure A-3.12a, the difference between the demand price ($50) and the actual price ($35) yields $15 gains from trade (GFT) for the Employer of the 50th unit of labor hired.

– 2. In Figure A-3.12b, we must add together all the GFT from all units of labor hired by all Employers to get the total Employers’ GFT. This yields the triangular area which can be thought of as the total gains from trade (GFT) for Employers for hiring 125 workers.

Figure A-3.12c: The Market for Labor: Illustrating a Worker’s Gains from Trade

W

L

S

D

$35.00

$60.00

$10.00

12550

$20.00

Gains from Trade for the 50th worker

Figure A-3.12d: The Market for Labor: Illustrating Workers’ Gains from Trade

W

L

S

D

$35.00

$60.00

$10.00

125

Worker Gains from Trade for all 125 workers

Total Gains from Trade for Workers = Area hkg

k h

g

Explanation for Figure A-3.12c and Figure A-3.12d

• 1. In Figure A-3.12c, the difference between the actual price ($35) and the supply price ($20) yields $15 Rent for the 50th worker. Think of this as the gains from trade by the 50th Worker.

• 2. In Figure A-3.12d, we must add together all the Workers’ GFT from all units of labor hired to get the total Workers’ GFT. This yields the triangular area which can be thought of as the entire gains to trade for the 125 Workers hired.

Figure A-3.13a: The Market for Labor—Maximizing Gains from Trade

W

L

S

D

$35.00

$60.00

$10.00

125

a

g

Area ahg = Area ahk + Area khg = Total Gains from Trade

hk

Figure A-3.13b: The Market for Labor-Illustrating Welfare Losses (WL)

W

L

S

D

$35.00

$60.00

$10.00

100 125

$30.00

$40.00$50.00

D’

a

bc

ef

g

h

WL = Area bhf

k

Explanation of the Welfare Loss

1. Maximizing Gains from Trade with No TaxWorkers’ Gains from Trade = Area khgEmployers’ Gains from Trade = Area akhTotal Gains from Trade = Area ahg2. Gains from Trade with TaxWorkers’ Gains from Trade with Tax = Area abcEmployers’ Gains from Trade with Tax = Area efgTaxRev = Area cbfeTotal Gains from Trade with Tax + TaxRev = Area abfg WL = Area bhf

Figure A-3.13c: The Market for Labor-Illustrating Welfare Losses (WL)

W

L

S

D

w0

L1 L0

w1

w2

D’

a

b

f

g

h

Explanation of Graph

• 1. Initial Conditions• WL = Area bhf

• Workers’ Gains from Trade After Tax = Area w1fg

• Employers’ Gains from Trade After Tax = Area abw2

• 2. After the Decrease in Taxes/Regulations• New WL = • Workers’ Gains from Trade After Decr Tax =• Employers’ Gains from Trade After Decr Tax =

Figure A-3.14a: Towns in Nineteenth Century Britain

W

L L

WS

D

S

D

W1

L1

W0

L0

Towns where infant mortality is higher or corporal punishment is used in factories

Towns where infant mortality is lower or corporal punishment is not used in factories

Figure A-3.14b: Towns in Nineteenth Century Britain

W

L L

WS

D

S

D

W1

L1’ L1

W0

L0 L0’

Towns where infant mortality is higher or corporal punishment is used in factories

Towns where infant mortality is lower or corporal punishment is not used in factories

S’

S’W1’

W0’

NOTE: W1’ - W0’ > W1 - W0

Figure A-3.19: The Volunteer Army

W

L

W

L

D

S

S

D

$20K

3M

$15K

50M

MILITARY MARKET CIVILIAN MARKET

Figure A-3.20: The Draft

W

L

W

L D

S

S

D

$20K

$15K

48M 50M

MILITARY MARKET CIVILIAN MARKET

$5K

1M 3M 5M

S’

$18K 1

3

5

42

Explanation of Areas in Figure A-3.20

• 1. Areas 1 + 2 + 3 + 4 = Gains to Government• 2. Areas 1 + 2 + 3 + 4 + 5 = Losses to Soldiers• 3. Area 5 = Net Loss = WL• 4. Area 1 =• 5. Area 2 =• 6. Area 3 =• 7. Areas 4 +5 =