Chapter 11 Labor Markets Key Concepts Summary Practice

In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor 2

Wages Market Supply and Demand S Quantity of Labor D 3

What does the demand curve for labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus 4

Production Function 50 40 30 20 Total Output 60 Total Output 10 Quantity of Labor 1 2 3 4 5 6 5

What is marginal revenue product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource 6

10 8 6 4 2 Marginal Product Curve Marginal Product 12 Law of Diminishing Returns Quantity of Labor 1 2 3 4 5 6 7

What is the demand curve for labor equal to? It is equal to the marginal revenue product of labor 8

$350 Demand Curve for Labor MR P $280 $210 =d em $140 an d $70 1 2 3 4 5 Q 9

Increase in Quantity of labor an employer will hire Decrease in Wage Rate 10

How do we measure MRP in perfect competition? A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product 11

What is derived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce 12

What does the supply curve for labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus 13

$280 $210 $140 $70 Wage Rate per day $350 Supply Curve of Labor S Quantity of Labor 10 20 30 40 50 14

Increase in Quantity of labor willing to work Increase in Wage Rate 15

What is human capital? The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive 16

$280 $210 $140 $70 Wage Rate per day $350 Competitive Labor Market S E D Quantity of Labor 10 20 30 40 50 17

$280 $210 $140 $70 Competitive Labor Market Wage Rate per day $350 E S D Quantity of Labor 1 2 3 4 5 18

Does the perfectly competitive model apply to workers in unions? No 19

What are examples of unions? • Teamsters • United Auto Workers • National Education Assoc. • American Federation of Government Employees 20

How do unions attempt to raise wages? • Increase demand for labor • Decrease supply for labor • Power 21

What is featherbedding? Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker 22

What else can unions do to increase the demand for labor? Decrease competition from other nations 23

$280 $210 $140 $70 Wage Rate per day $350 Unions cause an increase in the demand for labor E 2 S E 1 Quantity of Labor 10 20 30 D 1 40 D 2 50 24

Increase in wages and employment Increase in the demand for labor Union featherbeds 25

$350 $280 $210 $140 Wage Rate per day $420 Unions cause a decrease in the supply for labor E 2 S 2 E 1 D 1 Quantity of Labor 10 20 30 S 1 40 50 26

How else can unions raise wages? Collective bargaining 27

What is collective bargaining? The process of negotiations between the union and management over wages and working conditions 28

$280 $210 $140 $70 Wage Rate per day $350 Collective Bargaining causes a Wage Rate increase S Unemployment D Quantity of Labor 10 20 30 40 50 29

What factors can cause a change in the demand for labor? • Unions • Prices of substitute goods • Demand for final products • Marginal product of labor 30

What factors can cause a change in the supply for labor? • Unions • Demographic trends • Expectations of future income • Changes in immigrations laws • Education and training 31

What has happened to union membership since WWII? Union power has declined 32

How does union membership in the U. S. compare to other countries? Union membership is far below that of other industrialized countries 33

What is a monopsony? A labor market in which a single firm hires labor 34

87% 75% 40% 32% 15% 24% 29% U. S. Japan Canada U. K. Germany Italy Denmark Sweden 35

What is marginal factor cost (MFC)? The additional total cost resulting from a one-unit increase in the quantity of labor 36

What conclusion can be drawn from a monopsonistic market? Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W 37

A Monopsonist determines its Wage Rate $15 $12 $9 $6 Dollars per hour $18 E MFC S F D (MRP) Quantity of Labor 1 2 3 4 5 38

How are wages compared between the two markets? A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market 39

Key Concepts 40

Key Concepts • In a perfectly competitive market, what determines the level of wages? • What is marginal revenue product? • What is the demand curve for labor equal to? • How do we measure mrp in perfect competition? • What does the supply curve for labor show? 41

Key Concepts cont. • • How do unions attempt to raise wages? What is featherbedding? What is collective bargaining? What factors can cause a change in the demand for labor? • What factors can cause a change in the supply for labor? 42

Key Concepts cont. • What has happened to union membership since WWII? • How does union membership in the u. S. Compare to other countries? • What is a monopsony? • What is marginal factor cost (mfc)? • How are wages compared between the two markets? 43

Summary 44

Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP). 45

The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor. 46

$350 Demand Curve for Labor MR P $280 $210 $140 =d em an d $70 1 2 3 4 5 Q 47

Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product. 48

The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor. 49

$280 $210 $140 $70 Wage Rate per day $350 Supply Curve of Labor S Quantity of Labor 10 20 30 40 50 50

Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences in human capital. 51

Collective bargaining is the process through which a union and management negotiate a labor contract. 52

Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor. 53

The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP. Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers. 54

A Monopsonist determines its Wage Rate $18 $12 $9 $6 Dollars per hour $15 MFC E S F D (MRP) Quantity of Labor 1 2 3 4 5 55

Chapter 11 Quiz © 2002 South-Western College Publishing 56

1. Marginal revenue product measures the increase in a. output resulting from one more unit of labor. b. TR resulting from one ore unit of output. c. revenue per unit from one more unit of output. d. total revenue resulting from one more unit of labor. D. MRP is the increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource. 57

2. Troll Corporation sells dolls for $10. 00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101 st worker only when the wage is a. $100 or less per day. b. more than $100 per day. c. $5. 10 or less per day. d. none of the above. A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 58 500) = $100.

3. Derived demand for labor depends on the a. cost of factors of production used in the product. b. market supply curve of labor. c. consumer demand for the final goods produced by labor. d. firm’s total revenue less economic profit. C. If consumers do not purchase goods, there is no MRP and no workers are hired. 59

4. If demand for a product falls, the demand curve for labor used to produce the product will shift a. leftward. b. rightward. c. upward. d. downward. A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases. 60

5. The owner of a restaurant will hire waiters if the a. additional labor’s pay is close to the minimum wage. b. marginal product is at the maximum. c. additional work of the employees adds more to total revenue than to costs. d. waiters do not belong to a union. C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters. 61

6. In a perfectly competitive market, the demand curve for labor a. slopes upward. b. slopes downward because of diminishing marginal productivity. c. is perfectly elastic at the equilibrium wage rate. d. all of the above. B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases. 62

7. A union can influence the equilibrium wage rate by a. featherbedding. b. requiring longer apprenticeships. c. favoring trade restrictions on foreign products. d. all of the above. D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor. 63

8. In which of the following market structures is the firm not a price taker in the factor market? a. Oligopoly. b. Monopsony. c. Monopoly. d. Perfect competition. B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer. 64

9. The extra cost of obtaining each additional unit of a factor of production is called the marginal a. physical product. b. revenue product. c. factor cost. d. implicit cost. C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers. 65

10. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must a. increase the price of its product to sell more. b. lower the price of its product to sell more. c. increase the wage rate to hire more labor. d. lower the wage rate to hire more labor. C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate 66 along the labor supply curve.

11. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product. b. marginal revenue product. c. total revenue product. d. any of the above. B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers. 67

$8 $6 $4 $2 Dollars per hour $10 Marginal Factor Cost (MFC) and Marginal Revenue Product (MRP) Surplus Shortage MFC D (MRP) Quantity of Labor 1 2 3 4 5 68

12. Big. Biz, a local monopolist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, Big. Biz would have to raise the wage rate to $6. 25 per hour. What is Big. Biz’s marginal factor cost? a. $6. 25 per hour. b. $12. 50 per hour. c. $18. 75 per hour. d. $20. 00 per hour. C. Its total cost would increase by $18. 75 to hire that additional worker (25 x 50 + 6. 25). 69

13. Suppose a firm can hire 100 workers at $8. 00 per hour, but must pay $8. 05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101 st worker is approximately equal to a. $8. 00. b. $8. 05. c. $13. 05. d. $13. 00. C. The firm’s total cost would increase $13. 05 to hire the 101 st worker (. 05 x 100 + 8. 05). 70

14. A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be a. less than $10. b. equal to $10. c. greater than $10. d. equal to $5. A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market. 71

A Monopsonist determines its Wage Rate $18 $12 $9 $6 Dollars per hour $15 MFC E S F D (MRP) Quantity of Labor 1 2 3 4 5 72

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