Labor Markets

Value of Work
Labor is different than other gds & services
You have to be present to sell labor
Conditions matter

Selling people is illegal

You sell time & energy (rent the labor)

Assume
Price of shoes is $50
Adding a worker to the work force adds 5 shoes per
hour
What is the maximum wage you will pay?

Demand for Labor

The added worker adds their Marginal Product to
output
MPL = Q / L
This Q adds Q x MR to revenue
Thus the value of the worker is
MR x MPL (= Marginal Revenue Product)
If the output market is competitive
MR = P => MRP = Value of MP = P x MPL

Hire as long as MRP Wage

For Competitive Output Markets MR = P, so we use
Value of Marginal Product (VMP) = P x MPL

Demand for Labor

Wkrs Q MP VMP@$20 -More labor => more Q
0
0 30
-MP = Q/L
$600
1
30
-Diminishing MP
25
$500
2
55
-Competitive market
21
$420
(P=$20)
3
76
$360
-DL Max wage, given L
4
94 18
$280
What is worker worth?
5 108 14
VMP worth of last L
= max payment

Demand for Labor

Assuming P = 200 Q
Wkrs Q
0
0
1
30
2
55
3
76
4
94
5 108

MP Cum Q
30
25
21
18
14

30
55
76
94
108

P
$170
$145
$124
$106
$92

TRev MR MRPL
$5100
$7975
$9424
$9964
$9936

$170 $5100
$115 $2875
$69 $1449
$30 $540
-$2 -$24

Competitive Labor Market

Wage

SL

W1

DL = MRPL

L1

Labor

Labor Market Shift Factors

Demand (level)
Labor Demand is Derived
Product Demand
changes
Productivity changes
Supply (hence price) of
Other factors
Demand Elasticity
Elasticity of Product
Demand
Ease of input substitution
Labors share of cost

Supply
Based on Personal Choice and
Regulation
Changes in Tastes
Changes in alternative
activities
Number of Potential Workers
Immigration
Non-monetary aspects of
employment
Alternative wages
Non-wage income

Ex: 10% of cost, w up 10% raises cost by 1%

Earnings Differentials
Human Capital
With more skills, MPL rises
Education, work habits, experience, etc.

Unions
Affect alternatives available to employer
Restrict supply of labor
Force wages in non-union sector down
Union

Non-Union
W

S
D
L

S
D
L

Compensating Wage Differentials89

Non-wage considerations
Schedule (teachers)
Flexibility (Nurses)
Conditions (Roofers, Florida)
Opportunities for promotion (UPS,
apprenticeships

Discrimination
Employer
Arbitrary preference by employer for one group
Affects profit differentials will decay with competition

Employees
Again affects profits will erode

Customers
Affects future supply and demand

Socialization
Male/Female roles
Aggression/non-aggression

Differentials will accumulate

For individuals over their life
Inter-generational

Responses to Discrimination

Equal Pay Act (1963)

Civil rights Act (1964)
Ex Order 11246 affirmative Action (1965)
Age (1967)& Disability Acts (1990)
Lilly Ledbetter Act (2009)
Current Federal Legislation in process for
anti-discrimination of LGBT workers

Differentials
Winner-take-all Markets
Replication through technology
Payoffs from winning

Trends
Increased differentials
Mobility across group still there

Inequality a moral problem?

Fair?
Equal outcome vs
Equal access vs
Equal opportunity

Incentives?

Income Redistribution

Welfare
In-kind transfers

Food Stamps, School Lunches, Medicaid, Public Housing

Soup Kitchens, Food Banks, Thrift Shops

Personal Responsibility Act (1996)

5 year limit to AFDC (Aid to Families with Dependent Children)
States responsible

Means Tested
Negative Income Tax (NIT)
Retains some incentive, while evening distribution

Poverty threshold (level)

Amount for family of four below which they are poor

Earned Income Tax Credit

Similar to NIT, except in form of credit toward Federal taxes

Medicaid Expansion under Affordable Care Act

Food Stamps Program changes

Minimum Wage

Consumer Surplus
Producer Surplus
Dead Weight Loss
W

Unemployment

SL
Wmin

W1

DL

LDmin

L1

LSmin

12

10

1960

1970

1980

1990

Real Minimum Wage

2000

2010

2020

Nominal Minimum Wage