ECON 102.004 – Principles of Microeconomics

1. ECON 102.004 – Principles of Microeconomics S&W, Chapter 8 Labor Markets Instructor: Mehmet S. Tosun, Ph.D. Department of Economics University of Nevada, Reno

2. Lecture Outline • Labor supply decision • Income and substitution effects • Labor force participation • Demand for Labor

3. The Labor Supply Decision (a) • Do workers decide on how much to work? • Many do not • However, some workers do: • Part‑time workers • Workers who work overtime • Workers who moonlight • Salaried workers

4. The Labor Supply Decision (b) • The method workers use to decide on the goods they buy is the same as the method they use to allocate their scarce time to leisure or labor • Buying more of good X means a consumer can afford less of good Y. • There is also a trade‑off between work and leisure. • More work means less leisure but more consumption.

5. Trade‑offs for the Labor Supply Decision • More money or more time off • A job now but give up college or go to school and be poorer for a while but earn more money later.

10. The Real Wage (b) • When the real wage increases, the budget constraint gets steeper. • When the real wage changes, a worker may change the amount she works. • There are two effects at work: the substitution effect and the income effect.

11. Substitution and Income Effects (a) • When the real wage rises, • Leisure is more expensive (opportunity cost of leisure rises). • The worker is richer. • The substitution effect of a rise in the real wage • Leisure more expensive, so the worker “buys” less leisure and works more. • The labor supply increases. • The income effect of a rise in the real wage • The worker is richer and buys more normal goods: CDs, restaurant meals, and leisure. • Workers work less and the labor supply falls.

14. Labor Participation (b) • For most men, the decision is not whether to work but how much. • Formerly it was presumed that women would drop out of the labor force to have children and that they would not reenter the labor force after the children were grown. • Today women's labor force participation rate is over 50%.

15. Women’s Labor Force Participation • Women’s labor force participation rate has risen dramatically over the last 40 years. • In addition there has been an increase in the demand for women's labor as discrimination has been barred by federal law and attitudes have changed. • Women's employment and wage situation can be explained partly by a shift of the labor supply curve and partly by a movement along the labor supply curve.

17. Labor Demand • The demand for labor is a derived demand • It depends on the demand for output workers produce • Firms hire workers only if they are profitable. • The last worker hired makes just enough output so that when it is sold, it equals his or her wage.

18. The Marginal Product of Labor (a) • Marginal product of labor (MPL) • The output one additional worker produces (holding all other inputs, such as capital, constant) • The law of diminishing marginal returns • The MPL is a decreasing function • As more labor is hired, successive units are less productive because they use less capital.

19. The Marginal Product of Labor (b) • Value of the marginal product (VMP) • The revenue the additional worker earns for the firm • The VMP is the value of the additional worker's marginal product: VMP = p*MPL. • The value of the marginal product curve is the firm's demand curve for labor. • The VMP is downward sloping (like all demand curves) because of diminishing marginal returns to labor. • Firms hire labor until • VMP = wage, or • p*MPL = w

20. The Marginal Product of Labor (c)