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Labor markets Labor markets the market for workers Quantity quantity demanded of labor L Price wage they are paid What is the profit maximizing amount of labor for a firm to hire As labor becomes more expensive the firm will hire less workers There is an inverse relationship between the wage and the quantity demanded of labor Downward sloping labor demand curve The marginal product of labor the additional output gained from hiring one more worker A new tool Profit maximization is at the quantity where MR MC the value of the marginal product of labor VMPL Price Marginal product of labor The firm will hire workers until the VMPL wage Just another phrasing of Marginal benefit Marginal cost What Can Shift Labor Demand 1 A change in the output price price of final product Output price increases demand for labor increases Output price decreases demand for labor decreases Why The VMPL changes with output price If the demand for the firm s product increases and its price increases each additional worker s production is more valuable to the firm 2 Technological change 3 The supply of other factors labor augmenting Technology gets better labor demand increases Technology gets worse labor demand decreases If the supply of other factors increases demand for labor increases If the supply of other factors decreases demand for labor decreases Labor Augmenting Goods Example Computers are a labor augmenting piece of equipment Computers make labor more productive help them do their job If the supply of computers increases Price of computers falls Firms can afford to buy more computers Firms demands more labor to use the computers Labor Supply LS Trade off between labor working and leisure not working Two ways to look at labor supply 1 Personal level How many hours we want to work at a given wage 2 Market level How many people want to work at a given wage Our Personal Labor Supply work less when wage goes up work more when wage goes down Most research supports that the substitution effect is stronger until income is very high work more when wage goes up work less when wage goes down Two effects at work when the wage changes Substitution effect Income effect Backward bending supply of labor What determines the shape of our labor supply curve How much you like to work Characteristics of the job Other sources of income Labor Supply The Market Level How many people are willing to work at the current wage As the wage increases more people are willing to work Direct relationship between the wage and the quantity supplied of labor Upward sloping supply of labor What Can Shift Labor Supply 1 Changes in tastes how much you like working shifts in cultural norms etc 2 Changes in alternative opportunities wages opportunities in other markets Increased taste for work supply of labor increases Decreased taste for work supply of labor decreases Better alternatives in other markets decreased supply of labor Worse alternatives in other markets increased supply of labor Immigration people come supply of labor increases Emigration people leave supply of labor decreases 3 Immigration Labor Market Equilibrium Similar to the market for goods and services Quantity demanded of labor quantity supplied of labor Firms won t hire less than this amount because they still are willing to pay more than the wage for more workers Firms won t hire more than this amount because they value these workers at less than the current wage Why Are People Paid Different Amounts Answer 1 Skills and Education Job training and education increase human capital Does education increase your earnings Human capital the knowledge and skills we have The more human capital we have the more productive we are the more we earn Most likely but hard to disentangle from innate ability Education could just be a signal of your innate ability Answer 2 Characteristics of the Job Compensating wage differentials aspects of a job Risk How dangerous or safe a job is Risky jobs pay more Dirty vs clean jobs Dirty jobs paid a premium Hours worked Night shift premium holidays etc when people are compensated for non monetary Discrimination offering different opportunities to individuals who differ only by race ethnic group sex age or other personal characteristics Civil Rights Act of 1964 Outlawed discrimination based on race color religion sex or national origin Traditional view Becker 1955 discrimination can only exist in a non competitive market How is discrimination measured The Blinder Oaxaca decomposition Firms that discriminate will be pushed out of business by those who don t discriminate If there are still differences in pay after accounting for skills education etc the rest is attributed to discrimination Discrimination in Labor Markets Racial discrimination Racial minorities seem to be paid less even after controlling for differences in skills and education Gender gap differences in male and female earnings What explanations have people put forward to explain the gender gap other than Equal Pay Act of 1963 requires men and women to be equally paid for equal work discrimination Women take more time out of labor force family care Women like less competitive jobs jobs that require less assertiveness Women have less access to human capital Pushed into certain jobs less education or training opportunities Why Are Wages Sometimes Set Above the Equilibrium Level Answer 1 Minimum Wage A price floor for labor markets Minimum wage a legal minimum wage that can be set Minimum Wage The Traditional View Raising the minimum wage will raise unemployment in two ways The Federal minimum wage is 7 25 Most business are required to pay at least this amount to their employees per hour of work There is also a state minimum wage States must pay at least the federal minimum wage Minimum Wage An Alternative View Found that there was a minimal change in employment at fast food restaurants Traditional view would be that these low skill jobs are the first to go Workers are more expensive so firms will have to let people go More people are willing to work at a higher wage and enter the labor force People are counted as unemployed only when they are searching for work Elasticity of demand for labor If the demand for labor is more elastic then wage changes will have a large impact on employment If the demand for labor is more inelastic then wage changes will have a small impact on employment What could explain how much a minimum wage increase affects unemployment Answer 2 Unions Union a


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NU ECON 1116 - Labor markets

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