1Intermediate Macro ZhaoUIUC Econ303Section II: Labor marketChapter 4: Firm’s problem, demand for laborA (representative) firm•with production function •and a fixed level of capital•can vary the labor input in the production In general2Intermediate Macro ZhaoUIUC Econ303is a profit maximizer•(value-added) price of output, P and labor input, W •Profit measured in units of goodfor a firmfor aggregate economy Va lu e- ad de d Labor costwage relative to price of its productreal wage, inflation adjusted wage,purchasing power of monetary wageNominal vs. Real Wage (Median worker)3Intermediate Macro ZhaoUIUC Econ303and makes decisions at the margin. •The optimal choice of N is the one that maximizes profits.•This is done by comparing benefits and cost at the margin.–Marginal cost of one more worker (in units of goods) is .–Marginal benefits of one more worker is .feasibleDecision at the margin (page 91)4Intermediate Macro ZhaoUIUC Econ303Decision at the margin (page 92)The optimal choice equates the margins•A profit maximizing firm hires labor to the point where•For any wage, we can use this condition to figure out the quantity of labor demanded by a firm. •ExampleThe optimal choice is where Quantity demanded on the labor marketQuantity supplied on the goods market5Intermediate Macro ZhaoUIUC Econ303How many workers? (page 93)Demand for labor•is a schedule that shows the relationship between quantity demanded for labor and wages. •Demand curve is the marginal product curve!•Downward sloping demand curve comes from diminishing marginal product of labor.Labor demand curveMarginal product curve6Intermediate Macro ZhaoUIUC Econ303A perfect elastic labor demand curve (page 94)An increase of labor demand refers to a right shift of entire curveAnything that increases marginal product of labor increases labor demand.If wage stays the same, firm is willing to hire more workers.If firm hires the same amount of workers, it is willing to pay a higher wage.7Intermediate Macro ZhaoUIUC Econ303What could lead to an increase of amount of labor hired (employment)?(An increase of quantity of labor demanded)No change of MPL with a decrease of wage rateMovement along the demand curveAn increase of MPL while wage stays the same. Movement of the demand curveProductivity increase and employment (page 95)8Intermediate Macro ZhaoUIUC Econ303An increase of labor demand an increase of employmentTechnology progress and higher wages9Intermediate Macro ZhaoUIUC Econ303Tensions when productivity and investment stagnatehigh wage,low employmenthigh employment,low wagehigh wage,high employment10Intermediate Macro ZhaoUIUC Econ303Percentage of job in various
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