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UMass Amherst ECON 103 - Class 20 Labor demand and equilibrium Fall 2014

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Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Why is there poverty? Why are some workers paid low wages?Slide 20Slide 21Slide 22What’s wrong with this approach?More problemsSlide 25Remember to do Moodle Quiz!Labor Market Equilibrium: The Orthodox ViewThe market demand and supply for LaborThe Big IdeasOrthodox 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 wagesWhat does the orthodox model say to her?Labor demand depends on the Marginal Revenue Product of LaborThree 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 * MPLDownward sloping because MPL is downward sloping.He finds this bafflingDo you?Smart businesses will hire workers wherever MRPL exceeds the wageThey 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 workerWorkers Ounces of Pot Marginal Product1 20 202 35 153 45 104 53 85 59 66 63 47 65 2The 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 ouncesMarginal Revenue Product: MP times price1 20 20 $20002 35 15 $15003 45 10 $10004 53 8 $8005 59 6 $6006 63 4 $4007 65 2 $200Hire workers whenever you can make money from employing themTheir 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 ouncesMarginal Revenue Product: MP times the price1 20 20 $20002 35 15 $15003 45 10 $10004 53 8 $8005 59 6 $6006 63 4 $4007 65 2 $200Would 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.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. 1 2 3 4 5 6 7 8 9 10 11 $-00 $500 $1,000 $1,500 $2,000 $2,500 Marginal Revenue ProductWorkersValues of additional weed per workerYou hire workers when the value of their product at least covers the wageHigh 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 caveWhat a waste of good product.What happens to labor demand when the product price risesRaise 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 demand1 2 3 4 5 6 7 8 9 10 11 $-00 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 Marginal Revenue Product at different pricesP=100P=50P=200WorkersValues of additional weed per workerTo raise wages and demand for labor you need to make workers produce more valueThey could produce more valuable stuff – like pot.Or they could increase their productivity: by getting more machinery or better technology. Like grow lightsWhy 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 demandWhat 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.Manny we will always miss you!Good old days?What’s wrong with this approach?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.Really smart and talented people built an atom bomb because they were helped by other really smart and talented people like these women.More problemsOrthodox 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


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