Labor Market Equilibrium The Orthodox View The market demand and supply for Labor The Big Ideas Orthodox labor economices Companies hire where the value of workers product the Marginal Revenue Product exceeds the wage Employment rises with higher productivity prices and lower wages it falls with lower productivity prices and higher wages Work and wages What does the orthodox model say to her Labor demand depends on the Marginal Revenue Product of Labor Three big things The MRPL is the value of output produced by one more worker It is the price of output times the marginal product of labor MRPL P MPL Downward sloping because MPL is downward sloping He finds this baffling Do you Smart businesses will hire workers wherever MRPL exceeds the wage They won t hire where MRPL is less than the wage They hire up to the point where MRPL wage or wage P MPL This means the labor demand curve is the MRPL The Marginal Product is the change in total product with one more worker Workers Ounces of Pot Marginal Product 1 20 20 2 35 15 3 45 10 4 53 8 5 59 6 6 63 4 7 65 2 The Marginal product is the difference in output with one more worker The Marginal Revenue Product is the value of the Marginal Product MRP Marginal Product times the price of output If Pot sells for 100 ounce then multiply the marginal product ounces by 100 Workers Ounces of Pot Marginal Product change in ounces Marginal Revenue Product MP times price 1 20 20 2000 2 35 15 1500 3 45 10 1000 4 53 8 800 5 59 6 600 6 63 4 400 7 65 2 200 Hire workers whenever you can make money from employing them Their productivity is no more than their pay If workers are paid 1000 then hire 3 at 400 hire 6 This becomes a theory of output If workers are paid 1000 produce 45 ounces at 4000 produce 63 Workers Ounces of Pot Marginal Product Change in ounces Marginal Revenue Product MP times the price 1 20 20 2000 2 35 15 1500 3 45 10 1000 4 53 8 800 5 59 6 600 6 63 4 400 7 65 2 200 Would you hire her Why is labor demand downward sloping Raise your hands a Because workers like to work together in groups b Because it is easier to hire low wage workers c Because the marginal product of labor falls with more workers so employers will only hire additional workers at lower wages d I don t have the foggiest idea you lost me on the 2nd slide Here is a labor demand curve for growing pot Values of additional weed per worker Marginal Revenue Product 2 500 2 000 1 500 1 000 500 00 1 2 3 4 5 Workers 6 7 8 9 10 11 Based on the downward sloping MPL in the earlier slides and an output price of 100 ounce The marginal revenue you get from hiring an additional worker is 100 times the MPL You hire workers when the value of their product at least covers the wage High productivity or high output prices hire more Low productivity or low output prices hire less So if you want a job be productive raise the price of output or accept lower wages This works for her Here is a lot of pot 10 tons seized in Southern California more in a Tennessee cave What a waste of good product What happens to labor demand when the product price rises Raise your hands 1 Demand for labor falls because workers want higher wages 2 Demand for labor falls because consumer demand falls with higher prices 3 Demand for labor rises because businesses can make a profit even on less productive labor 4 I have no idea Effect of higher product prices on labor demand Values of additional weed per worker Marginal Revenue Product at different prices 4 500 4 000 3 500 P 100 3 000 P 50 P 200 2 500 2 000 1 500 1 000 500 00 1 2 3 4 5 Workers 6 7 8 9 10 11 To raise wages and demand for labor you need to make workers produce more value They could produce more valuable stuff like pot Or they could increase their productivity by getting more machinery or better technology Like grow lights Why is there poverty Why are some workers paid low wages Orthodox theory They are paid low wages because they are unproductive Lack skills They lack intrinsic ability And or they have not been trained Lack complementary capital Lack of human capital Alternative theory They are unproductive because they are underpaid Higher pay would lead them to work harder At higher pay they would quit less and accumulate new skills Higher productivity is like higher product prices raises labor demand What raises labor productivity 1 Better technology 2 More and better machinery 3 Better training for workers 4 Better workers genetics All raise the marginal product of labor allowing higher wages Companies will pay more for more productive workers and will hire more of them at any price Duh Good old days Manny we will always miss you What s wrong with this approach Really smart and talented people built an atom bomb because they were helped by other really smart and talented people like these women It treats workers as individuals But they are members of a team Your productivity is not just about you but what everyone else on your team does More problems Orthodox approach separates productivity from wage it assumes that productivity determines wages But what if people work harder because they are paid more Or work less if they are paid less Take away points Companies will hire workers where the value of what they produce the MRP exceeds the wage They hire more workers if productivity is high product prices high or wages low Remember to do Moodle Quiz Bring your answers to TA section 1 14 19 06 43 43 AM