1. 1 ????? 19(Chapter 19) ???????????????????????? The Economics of Labor Markets

2. 2 Review MB of labor to competitive firm: P x MPL MC of Labor = W Hire until W = P x MPL Wages equal Consumers� value of worker�s contribution

3. 3 Demand and Supply of Labor

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5. 5 How to raise wages Increase Physical Capital Per Worker Increase Human Capital Per Worker both increase MPL

6. 6 Example Black Plague wipes out 1/3rd of the workforce but left capital unharmed Real wages doubled

7. 7 How to raise wages Increase productivity of all inputs by research and development better management techniques better marketing

8. 8 Minimum Wages Price Floor rises wages of those who keep job hurts some a lot more because they lose their job

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13. 13 Minimum Wage creates a labor shortage General Result: every 10% increase in the wage decreases employment between 1% and 3%

14. 14 Labor Supply Recall that a higher wage has two effects on labor supply A substitution effect that makes people want to work more hours An income effect that makes people want to work fewer hours

15. 15 Empirical Studies Single People Income Effect same but opposite effect as Substitution Effect Higher Wage has little effect on labor supply!

16. 16 Married Males Married Males: Income Effect Stronger! Higher Wage ==> Work Less Hours Note: talking about market wage in all jobs going up!

17. 17 Married Females Married Females: Substitution Effect Stronger Higher Wage ==> Work More Hours!

18. 18 Results also apply to lifetime work Higher wages cause married males to start work later and retire earlier

19. 19 Pure Income Effect About the same for everyone Give most people more income (say by winning a lottery), all will cut back work by about the same % 100% increase in income ==> 16% fewer hours worked

20. 20 Labor Unions In competitive markets, same effect as minimum wage Every 10% increase in wage, about 3% lose jobs Raise wages about 10 to 30% But lower wages of nonunion workers

21. 21 Monopsony Unions usually organize monopolies or oligopolies Employers are often monopsonies Result: unions can raise wage over some range without reducing employment

22. 22 Unions want to organize industries where demand for labor is inelastic can raise wages without reducing employment too much

23. 23 What Is Ideal Industry? Demand for Output inelastic Hard to substitute other inputs for labor Labor is a small fraction of total cost this one is key: unions tend to be in capital-intensive industries

24. 24 Small Fraction of Cost Let Share = labor�s share of total cost % D P = Share x % D W 10% increase in W if Share = 0.25, P up 2.5% if Share = 0.80, P up 8%