How are wages determined in competitive labor markets

1. How are wages determined in competitive labor markets The factor market questions on the AP test will place the heaviest emphasis on labor markets because labor accounts for almost 70% of payments to factors of production

2. 1. What two factors affect the demand for labor?

3. 1. What two factors affect the demand for labor? • Product Price produced by labor • Derived demand from the product market demand for the good • Think Marginal Revenue • Productivity of labor • Marginal Product

4. 2. How does marginal revenue product affect the demand for labor?

5. 2. How does marginal revenue product affect the demand for labor? • A firm hires labor until the wage equals the marginal revenue product • (mrc = mrp) • A single firm can’t control the wage, because it is only one among many firms, in the competitive labor market • Just as it can’t control price in the product market • MRP is the demand curve for labor • Times the # of firms in the market • A firm will hire workers as long as the worker contributes more to total revenue than total costs

6. 3. Why is the demand curve for labor downward sloping?

7. 3. Why is the demand curve for labor downward sloping? • Because at a moment in time, all things being equal (ceteris Paribas), the marginal revenue of a product is constant, and • Because MRP = MR * MP, and • Because the MRP curve for a firm is the demand curve for labor for the firm • Ergo- Only the law of diminishing marginal returns explains why the labor curve is downward sloping

8. 4. What determines the market supply of labor?

9. 4. What determines the market supply of labor? • The number of people willing and able to work at various wages • The opportunity cost of not working • Leisure • Home with the kids • Education (human capital formation)

10. 5. Why is the market supply curve for labor upward sloping?

11. 5. Why is the market supply curve for labor upward sloping? • More people are willing or able to work if they are paid more • The opportunity cost of not working has risen • They may have been able but unwilling • They may have been willing but unable

12. A Market for Labor $5.50 5.00 • 6. What is the equilibrium wage in this labor market? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

13. A Market for Labor $5.50 5.00 • 6. What is the equilibrium wage in this labor market? $3.00 S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

14. A Market for Labor $5.50 5.00 • 7. How many workers will be hired in this labor market? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

15. A Market for Labor $5.50 5.00 • 7. How many workers will be hired in this labor market? 500 workers S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

16. A Market for Labor $5.50 5.00 • 8. If a minimum-wage law raises the minimum wage to $4.00 an hour, what quantity of labor will be supplied? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

17. A Market for Labor $5.50 5.00 • 8. If a minimum-wage law raises the minimum wage to $4.00 an hour, what quantity of labor will be supplied? 800 workers S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

18. A Market for Labor $5.50 5.00 • 9. At a minimum wage of $4.00 an hour, what quantity of labor will be demanded? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

19. A Market for Labor $5.50 5.00 • 9. At a minimum wage of $4.00 an hour, what quantity of labor will be demanded? 300 workers S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

20. A Market for Labor $5.50 5.00 • 10. How many workers would be laid off or lose their jobs because of the $4.00 minimum wage? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

21. A Market for Labor $5.50 5.00 • 10. How many workers would be laid off or lose their jobs because of the $4.00 minimum wage? 200 workers S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

22. A Market for Labor $5.50 5.00 • 11. How many more workers are seeking a job because of this minimum wage? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

23. A Market for Labor $5.50 5.00 • 11. How many more workers are seeking a job because of this minimum wage? 300 workers S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

24. A Market for Labor $5.50 5.00 • 12. If demand for labor were more inelastic, would more or fewer workers lose their jobs because of the $4.00 minimum wage? S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

25. A Market for Labor $5.50 5.00 • 12. If demand for labor were more inelastic, would more or fewer workers lose their jobs because of the $4.00 minimum wage? fewer S 4.50 4.00 3.50 3.00 Wage Rates 2.50 2.00 1.50 D 1.00 .50 100 200 300 400 500 600 700 800 900 1,000 Quantity of Labor

26. 13. Would skilled or unskilled workers be more likely to lose their jobs because of a minimum-wage law?

27. 13. Would skilled or unskilled workers be more likely to lose their jobs because of a minimum-wage law? • unskilled

28. 14. Who benefits from the minimum wage?

29. 14. Who benefits from the minimum wage? • Skilled workers and the unskilled workers who have not been laid off

30. 15. Who is hurt by the minimum wage?

31. 15. Who is hurt by the minimum wage? • Unskilled workers who lose their jobs • Those with the least skills • The youngest workers • Those susceptible to discrimination by employers • Ethnic Minorities • The disabled • Older higher paid workers

32. 16. Do you favor a higher minimum wage? Why or why not?

33. Yes No 16. Do you favor a higher minimum wage? Why or why not? This is why my tech kids like micro rather than macro; there’s fewer of these social policy decisions! lol