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LABOR MARKET AND UNEMPLOYMENT Labor Market Factors of production are the inputs used to produce goods and

services. Labor, land, and capital are the three most important factors of production. The Demand for Labor Governed by the forces of supply and demand. Labor demand is a derived demand

Production function describes the relationship between the quantity of the inputs used in production and the quantity of output from production. Marginal product of labor increase in the amount of output from an additional unit of labor. Diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases

The Versatility of Supply and Demand The basic tools of supply and demand apply to goods and to labor services. Panel (a) shows how the supply and demand for apples determine the price of apples. Panel (b) shows how the supply and demand for apple pickers determine the wage of apple pickers. The Competitive Profit-Maximizing Firm Two assumptions firm is competitive firm is profit maximizing The Production Function and the Marginal Product of Labor Firm must consider how the size of its workforce affects the amount of output produced.

The Value of the Marginal Product and the Demand for Labor Profit is total revenue minus total cost, the profit from an additional worker is the workers contribution to revenue minus the workers wage. Value of the marginal product of any input is the marginal product of that input multiplied by the market price of the output. A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. The value-of-marginal-product curve is the labordemand curve for a competitive, profit-maximizing firm. What Causes the Labor-Demand Curve to Shift? The Output Price Output price changes, the value of the marginal product changes, and the labor-demand curve shifts.

Technological Change Technological advance typically raises the marginal product of labor, which in turn increases the demand for labor and shifts the labor-demand curve to the right.

It is also possible for technological change to reduce labor demand. The invention of a cheap industrial robot, for instance, could conceivably reduce the marginal product of labor, shifting the labor-demand curve to the left. The Supply of Other Factors The quantity available of one factor of production can affect the marginal product of other factors. The Supply of Labor The Trade-off between Work and Leisure

Equilibrium in a Labor Market Like all prices, the price of labor (the wage) depends on supply and demand. Because the demand curve reflects the value of the marginal product of labor, in equilibrium workers receive the value of their marginal contribution to the production of goods and services. Any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal. Shifts in Labor Supply

people face trade-offs the cost of something is what you give up to get it The labor-supply curve reflects how workers decisions about the labor-leisure trade-off respond to a change in that opportunity cost. An upward-sloping labor supply curve means that an increase in the wage induces workers to increase the quantity of labor they supply. Because time is limited, more hours of work mean that workers are enjoying less leisure. That is, workers respond to the increase in the opportunity cost of leisure by taking less of it. What Causes the Labor-Supply Curve to Shift? Changes in Tastes The attitude towards work. Changes in Alternative Opportunities The supply of labor in any one labor market depends on the opportunities available in other labor markets. Immigration When immigrants come to the other country, for instance, the supply of labor in such country increases, and the supply of labor in the immigrants home countries falls. Equilibrium in the Labor Market Determinants of Wages The wage adjusts to balance the supply and demand for labor. The wage equals the value of the marginal product of labor.

A Shift in Labor Supply When labor supply increases from S1 to S2, perhaps because of an immigration of new workers, the equilibrium wage falls from W1 to W2. At this lower wage, firms hire more labor, so employment rises from L1 to L2. The change in the wage reflects a change in the value of the marginal product of labor: With more workers, the added output from an extra worker is smaller. Shifts in Labor Demand

Equilibrium in the Markets for Land and Capital Purchase price of land or capital is the price a person pays to own that factor of production indefinitely. Rental price is the price a person pays to use that factor for a limited period of time.

When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded` compared to the equilibrium level. There is a surplus of labor. Because there are more workers willing to work than there are jobs, some workers are unemployed.

The Markets for Land and Capital

Supply and demand determine the compensation paid to the owners of land, as shown in panel (a), and the compensation paid to the owners of capital, as shown in panel (b). The demand for each factor, in turn, depends on the value of the marginal product of that factor.

Unemployment The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force. Natural rate of unemployment refers to the amount of unemployment that the economy normally experiences. Two categories of unemployment Long-run problem Short-run problem Kinds of Unemployment Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate, and it is closely associated with the short-run ups and downs of economic activity. Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. How Is Unemployment Measured? Labor force as the sum of the employed and the unemployed: Labor force = Number of employed + Number of unemployed. Unemployment rate as the percentage of the labor force that is unemployed: Unemployment rate = No. of unemployed / Labor Force x 100 Reason for unemployment 1. Job Search 2. Minimum-Wage Laws

Unemployment from a Wage above the Equilibrium Level In this labor market, the wage at which supply and demand balance is WE. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal LE. By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum wage law, the quantity of labor supplied rises to LS, and the quantity of labor demanded falls to LD. The resulting surplus of labor, LS LD, represents unemployment. ` Union is a worker association that bargains with employers over wages, benefits, and working conditions The Economics of Unions A union is a type of cartel. Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power. Collective bargaining. the process by which unions and firms agree on the terms of employment Strike the organized withdrawal of labor from a firm by a union. Are Unions Good or Bad for the Economy? When unions raise wages above the level that would prevail in competitive markets, they reduce the quantity of labor demanded, cause some workers to be unemployed, and reduce the wages in the rest of the economy. Necessary antidote to the market power of the firms that hire workers. Unions are important for helping firms respond efficiently to workers concerns.


The Theory of Efficiency Wages Efficiency wages above-equilibrium wages paid by firms to increase worker productivity. Therefore, it may be profitable for firms to keep wages high even in the presence of a surplus of labor. Types of Efficiency Wage Theory 1. Worker Health Better paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive. A firm may find it more profitable to pay high wages and have healthy, productive workers than to pay lower wages and have less healthy, less productive workers. 2. Worker Turnover The more a firm pays its workers, the less often its workers will choose to leave. Thus, firms can reduce turnover among its workers by paying them a high wage. 3. Worker Quality When a firm pays a high wage, it attracts a better pool of workers to apply for its jobs and thereby increases the quality of its workforce. If the firm responded to a surplus of labor by reducing the wage, the most competent applicantswho are more likely to have better alternative opportunities than less competent applicantsmay choose not to apply. 4. Worker Effort High wages make workers more eager to keep their jobs and, thereby, give workers an incentive to put forward their best effort.

Reported by: Jhoanna Mary E. Pescasio MBA Student Ariel M. Plantilla, DBA Professorial Lecturer