Economics

The Labor Market

Dept. of Economics @ NCKU

Weng, Ming-Hung
Why are they paid differently?
 Outline
Demand for labors
Supply for labors
Wage differences
 The factor markets*
Who are the buyers in the labor market?
1. Firms/organizations; 2. Households
Why would firms hire labors?
 Factor markets
Assumptions: Shucking oysters

1. Perfect competition in
the output market
($100 per kg)

2. Perfect competition in
the labor market ($w)
 Optimal Hiring
Firms hire labors to maximize their profit:
The optimal level of output is to produce where
() = ()

The optimal level of labor hours is to hire where

() = ()
() =
() =
Value of marginal product of labor ()
 VMPL when $100 per kg
VMPL of
Total # of
Value of the 3rd
Output labor MPL
MPL labor hour?
(kg) hours
1. 1050
3 1 3 300 2. 500
7 2 4 400 3. 350
4. 300
10.5 3 3.5 ?
13.5 4 3
16 5 2.5
 VMPL when $100 per kg
Output How many
# of Margina
(kg) Value of
labor l labor hours
per MPL
hour
hours Product will be hired
if w=375
3 1 3 300 per hour?
7 2 4 400 = 2

10.5 3 3.5 350

MR<MC=375
13.5 4 3 300
for the 3rd
16 5 2.5 250 labor hour
 VMPL when $100 per kg
Output How many
# of Margina
(kg) Value of labor hours
labor l
per MPL will be hired
hours Product
hour if w=260
3 1 3 300 per hour?
7 2 4 400 1. 1
2. 2;
10.5 3 3.5 350 3. 3;
13.5 4 3 300 4. 4;
5. 5;
16 5 2.5 250
6. >=6
 Labor demand
As wage rate is lower, more labor
hours will be hired.
Labor demand has a negative slope!!!
Similar to demands for commodities

= = ()

Factors Shifting the labor demand curve
Price of the good the firm produces
Technology/Productivity change
Complementary (MPL)
Substitutional
 VMPL when $120 per kg
Total VMPL VMPL How many
#h MPL
Kgs (100) (120) labor hours
3 1 3 300 360 will be hired
if w=260
7 2 4 400 480 per hour?

10.5 3 3.5 350 420 1. 1

13.5 4 3 300 360 2. 2;
3. 3;
16 5 2.5 250 300 4. 4;
18 6 2 200 240 5. 5;
6. >=6
 Labor demand
labor demand
= ()
increases (moves
up/right) in
response to an
increase in output
price, .

= ()

 Technology improvement
VMPL How many
Kg/h #h MPL MPL labor hours
(100)
will be hired
3 1 3 3.5 350
if w=375
7 2 4 4.5 450 per hour?
1. 1
10.5 3 3.5 4 400
2. 2;
13.5 4 3 3.5 350 3. 3;

16 5 2.5 3 300 4. 4;
18 6 2 2.5 250 5. 5;
6. >=6
 Labor demand
labor demand
= ()
increases (moves
up/right) in
response to a
complementary
tech improvement.

= ()

 The Supply of labor

Why do people work?

Why dont they work

all the time?

2015 Pearson Education, Ltd.

 To work or not to work,

+
Days
+ or
hours
Labor hours Happy hours


 To work or not to work,
Benefit Cost
of an of an
additional additional
hour or hour or
labor? labor?
?
 To work or not to work,

Benefit Cost

 To work or not to work,
Your increasing
marginal cost from
additional labor
supply
120
2 hours of labors
200
160 will one supply if
130
100 110 wage rate is $120
per hour.

 To work or not to work,
How many labor
hours will one
supply if wage
rate is $170 per
hour
1. 1
200 2. 2
160
130 3. 3
100 110
4. 4
5. 5


 Labor supply

As wages rate goes

higher, more labor
hours will be supplied.
Labor supply has a
positive slope due to
increasing MC for
labors!!!


 Income effect on labor*
When youre much richer, or if your
income goes up significantly, you will
spend more time in
1. having fun
2. work
 Income effect (LR) on labor supply

250

300
260 Only hours of
220 200
150 180 160 labors will one
130
100 110 supply if wage rate
is per hour.


Across the market
 Shifts of the labor supply curve
1. Population changes
2. Opportunity costs for work
3. Changes in worker preferences and tastes
(LOHAS, Lifestyles of Health and Sustainability )
4. Labor regulations (Work Week Rule of Labor
Standards Act)
 Equilibrium in Labor markets

(100 individuals)

(100 )


 Shifts of the labor demand curve
1. Output price ( )
2. Technology ( ) used in production
1. Complementary ( )
2. Substitutional ( )
 Shifts of the labor demand curve
How will equilibrium
wage rate, , adjust
in response to in
output price
1. Increase
2. Decrease
3. Remain the same

 Shifts of the labor demand curve

( = 120)

( = 100)


 Shifts of the labor demand curve
Why wouldnt wage
rate increase in
response to an
increase in output
price???
 Shifts of the labor demand curve
Why would unemployment
rise after technological
improvement these
decades?

If labor and technology are

substitutes, tech. advances
cause replacement of
workers, leftward shift in
labor demand, causing
lower wage and hiring.
 Shifts of the labor supply curve
1. Population changes
2. Opportunity costs for work
3. Changes in worker preferences and tastes
(LOHAS,
Lifestyles of Health and Sustainability )
4. Labor regulations (Work Week Rule of Labor
Standards Act)
 Shifts of the labor supply curve
LOHAS
(Lifestyles of Health and
Sustainability) will
cause a __ wage rate

and ___ working days

1. higher; more
2. higher; fewer
3. lower; more
4. lower; fewer


 Shifts of the labor supply curve

Why are they paid differently?
 wages differences
Why are wages paid differently?

1. Differences in human capital or market values

(Extended demand for factors)
2. Imperfect competition
3. Differences in compensating wages (supply side)
4. The nature and extent of discrimination in the
job market
 Does it
payoff to
study hard?

Signaling in
the labor
market
compensating wages
 compensating wages
Which of the following is NOT an example of
compensating wages
1. Window washer
2. Worker on Alaska pipeline
3. Garbage collector
4. economist
Wage inequality
 discrimination
2016 Average Hourly Wage in Taiwan ($NTD)
300 307.8
250
264.6

200
150
100 86%
50
0
Male Female