DLBig PildiansLittle PildiansDDLabor ManualPurpose of the ModuleThe Basic ModelDemand for LaborFigure 1 Increase in Labor DemandFigure 2 Increase in Labor SupplyWage (W) SLThe Discrimination ModelFigure 3 Labor Market DiscriminationWage S Wage SFighting DiscriminationEqual PayEqual HiringRunning the ModuleDisturbing the Labor MarketDiscriminationThe Mathematical ModelLabor ManualPurpose of the ModuleThis module is concerned with the operations of a particular resource, or factor, market, amarket for labor. In order to permit exploration of the workings of such markets withoutgetting too involved in the entire moral, political, and ethical complexities that makeevents in labor markets of unusual interest, the market you will be examining exists in thecountry of Pildia. People in that country have a great love for bread, cake, and otherbaked goods, so that the first part of the module concerns the market for bakers. In thatfirst part, you will explore the consequences of shifts in the supply and demand for laborin a particular market. The Pildians are divided into two ethnic groups, the Big Pildians (the dominant group)and the Little Pildians. While they are present in equal numbers they are not equal inpower or wealth, and the Bigs often discriminate against the Littles. In the second partwe move from the market for bakers to the Pildian national market for all of its labor (notjust bakers). In that part you will examine how different degrees of discrimination affectthe wages and employment of workers in the labor market, those who were discriminatedagainst and those who were not. Finally, you can try to reduce the burden ofdiscrimination on its victims and on the nation of Pildia as a whole. By the time youhave finished this module you should have a better idea of how a labor market works,how it is affected by discriminatory practices, and how well or poorly some anti-discrimination tools work on this problem.The Basic ModelIn markets for labor, the demand for labor comes from businesses which do not hireworkers because the boss likes having workers around, but because workers add toproduction, and the extra products, when sold, get extra revenue for the firm. The morerevenue a worker brings in, compared to the cost of hiring the worker, the more profitableit is for the firm to hire the worker. If hiring an extra worker-hour adds $10 to the firm’srevenue, a firm that cares about nothing but profit will hire that worker-hour as long as itcosts no more than $10 to hire it. Hiring extra workers means getting less extra productfrom the added workers due to the law of diminishing marginal returns. If it is barely worthwhile for the firm to hire a worker-hour for $10 an hour, the firm willnot hire another worker-hour unless the cost, or wage, is lower. This is a reason for thedownward slope of the firm’s demand for labor. For convenience in this module, the unitshired are hours rather than workers, so it doesn’t matter whether the firm hires morepeople, or more hours per person but the same number of people. In the real worldpractices such as having to pay time-and-a-half for overtime mean it does matter whetherthe firm hires more people or just more hours. There is a difference between the demand by the individual firm and the market demandfor labor. As in consumer demand, the market demand for labor is the sum of individual1demands for labor by the individual firms. The individual firm in a competitive labormarket can determine the extra revenue from an extra worker assuming that the extraproduction does not affect the market price of the product (since the firm is so small). Theoverall market demand, however, reflects the fact that the more of the product isproduced, the lower of the price of the product. The lower the price of the product, theless worthwhile it is to hire another worker-hour. This is an additional reason why themarket demand for labor is downward sloping.The supply of labor comes from workers who decide that, at a given wage, they arewilling to work in this market instead of going to the beach, or working in anothermarket, or going to school, or doing whatever their opportunities offer. The higher thewage, the larger the opportunity cost of doing other things, and the more labor they offerin this market. The market supply of labor is the sum of the labor that all the workers inthe market are willing to offer at each given wage.This module assumes the labor market is a competitive one, with a large number of smallbakeries all hiring people with the same skills, and a large number of people with thoseskills who are interested in working in this field occupation. As a result, the market canbe described in terms of the usual supply and demand model. The differences lie in thereasons for “buying” and “selling”, or hiring and accepting a job. “Buyers” are firms whowant to hire workers if managers think the workers will make profits for the firm.“Sellers” are individuals who want a job in this industry. In this module the industry is agroup of bakeries that make bread.Demand for LaborIn a competitive market, demand for labor depends on the value of the marginal productof labor, which is the extra output from an extra hour of labor multiplied by the marketprice of the product. Demand depends on the price of the product and on anything thatinfluences the amount of extra output that the next hour of labor will produce. In thismodule there are three things that you can use to affect the demand for labor in thePildian baking industry: the price of bread, the price of ovens used in the industry, andthe price of the flour that is a complement to labor in producing bread. For simplicity, inthe first part of the module the demand for labor by the industry is presented in a linearform. In reality the product price would multiply the marginal product, which in turnwould depend on the other factors in non-linear ways. The number of hours (per week)the industry wants to hire is, that is the demand for labor (DL) is:DL = a1 + (a2 x Wage) + (a3 x Oven Price) + (a4 x Bread) + (a5 x Price of Flour) orDL = a1 + a2 Wage + a3 Oven Price + a4 PBread + a5 PFlourwhere a1 = 5.9051; a2 = -0.1; a3 = 0.002; a4 = 2; a5 = -0.04 orThe higher the wage, the lower the number of hours hired so a2 is negative.