The Labor Market ECONOMICS Principles and Applications 3

Figure 1 Product and Factor Markets Product Markets Demand for Goods and Services S D Households Supply of Goods and Services Firms S Supply of Resources D Factor Markets Demand for Resources

Table 1 Data for Spotless Car Wash (Perfectly Competitive Product and Labor Markets)

Figure 2 The Profit-Maximizing Employment Level Dollars $200 1. Hiring another worker adds more to revenue. . . 150 3. until profits are maximized at five workers. 100 60 50 MFC = Wage 2. than it adds to cost. . . 1 2 3 MRP 4 5 6 7 8 Number of Workers

Figure 3 The Firm’s Labor Demand Curve Dollars Firm's Labor Demand Curve A W 1 B W 2 MRP n 1 n 2 Number of Workers

Figure 4 The Employment Decision with Several Variable Inputs Dollars W 1 A W 1 B W 2 C MRP 2 MRP 1 n 2 W 2 n 3 Firm' Labor Demand Curve Number of Workers

Figure 5 The Market Demand for Labor Firm A Firm B Hourly Wage $12 10 At any wage rate (such as $10). . . 80 100 if we add the number of workers demanded by Firm A. . . Firm C Hourly Wage ld ld ld 4050 Number of Workers 30 90 and by Firms B, C, and all other firms as well. . .

Figure 5 The Market Demand For Labor Hourly Wage Labor Market we get the market quantity of labor demanded at that wage rate. $12 10 LD N 2 = 80 + 40 + 30 + …. N 1 = 100 + 50 + 90 + … Number of Workers

Figure 6 A Shift in the Labor Demand Curve Typical Firm Hourly Wage $10 Labor Market Hourly Wage A B n 1 n 2 Number of Workers A N 1 B N 2 Number of Workers

Figure 7 Introducing a New Input Hourly Wage More of a Substitutable Input More of a Complementary Input Number of Workers

Table 2 Shifts in the Labor Demand Curve

Figure 8 The Market Labor Supply Curve (a) Hourly Wage $12 10 (b) Hourly Wage D C 1, 000 1, 200 Number of Workers $10 1, 000 1, 800 Number of Workers

Table 3 Labor Force Participation Rates (Percent of those Over 16 Working or Looking for Work)

Table 4 Shifts in the Labor Supply Curve

Figure 9 The Long-Run Labor Supply Curve Hourly Wage 2. When the wage rate rises to $40, employment rises to 60, 000 in the short run. . 1. Initially, the wage is $25 and 30, 000 people supply labor. $40 25 B 3. In the long run, the wage rate of $40 attracts new entrants and employment rises to 90, 000. C A 4. The long-run labor supply curve connects points A and C. 30, 000 60, 000 90, 000 Number of Workers

Figure 10 Labor Market Equilibrium (a) Labor Market Hourly Wage $24 Dollars 3. hires up to where its MRP curve crosses the $20 wage line. LS $20 20 16 (b) Typical Firm W LD 2. Each law firm, taking the market wage of $20 as a given, 2, 000 3, 000 4, 500 Number of Paralegals 10 ld Number of Paralegals 1. The market labor supply and labor demand curves determine the equilibrium wage rate and equilibrium employment.

Figure 11 A Change in Labor Demand (a) (b) Labor Market Dollars Hourly Wage B $40 b $40 C 30 20 Typical Firm A 5, 000 12, 000 Number 8, 000 of Workers c 30 20 W 2 a 50 W 3 W 1 80 120 Number of Workers

Figure 12 The Market for Finance Professors (1995– 2002) Annual Wage B $102, 400 66, 900 A N 1 N 2 Number of New Finance Professors

Figure 13 The Market for College. Educated Labor Median Annual Wage 2001 dollars In 1978, the average wage rate (in 2001 dollars) for collegeeducated labor was $31, 732. B $40, 479 Between 1978 and 2000, the labor supply curve shifted rightward. . . but the rightward shift in the labor demand curve was even greater. A 31, 732 14 31 Millions of Workers As a result, the average wage in 2001 rose to $40, 479.

Figure A. 1 A Monopsonist’s Employment Decision