Work vs. Leisure
In the labor market, the roles of firms and households are reversed
- Labor is supplies by households and demanded by firms
Assume that an individual is capable of working as little or as many hours as possible
Individual Labor Supply Curve
the relationship between the wage rate and the number of labor supplied by the worker
If the substitution effect dominates, the curve slopes upward
If the income effect dominates, the quantity of labor supplies goes down
Backward-Bending Labor Supply Curve
Is a backward-bending labor supply curve possible?
At high wage rates, yes!
At the end of the 19th century, the average work week was 70 hours and few people retired at age 65
Today the typical workweek is between 35-40 hours as people substitute income for leisure
Shift of the Labor Supply Curve
Changes in Preferences and Social Norms
- In the US since the 1960s a large number of women entered the workforce
Changes in Population
Changes in Opportunities
- In the 1960s, as opportunities for women increased, the supply of teachers decreased, raising the equilibrium wage of all reaming teachers
Changes in Wealth
In 1979, 71% of the American teenagers (16-19) were in the summer workforce. In 1989, it dropped to 63%. By 2009 the drop was down to 33%
As household wealth increases, teenagers tend to consume more leisure (ie. additional study, games)
Determining the Optimal Input Mix
Substitutes and Complements in Factor Markets
Capital and Labor can be substitutes in banking
You can substitute ATM machines for tellers
Office workers and computers can be complements
Optimal Input Mix is where MPL/Wage = MPK/Rental Rate
If MPL/Wage > MPK/Rental Rate, then hire the human worker
If MPK/Rental Rate > MPL/Wage, then the machines win! use more capital
Situation is very similar to the Utility Maximization rule of MUA/PA=MUB/PB, except in the context of factor market rather than consumer behavior
Capital vs. Labor
What is the MPL of the 4th worker?
- 140 - 120 = 20
What is the MPL per dollar of the 5th worker if the wage rate per hour is $5
- (155 - 140) / 5 = 3
How many workers would the business hire if it hired every worker for whom the marginal product per dollar is greater than or equal to 1 expo maker per dollar?
- 6 workers, 160 expo markers
If the marginal product per dollar spent on labor is 1 expo marker per dollar, the marginal product of the last capital hired is 100 expo markers per dollar and the rental rate is $50 per day, is the firm minimizing its cost?
No, employ more capital and less labor
Theories of Income Distribution
Marginal Productivity and Wage Inequality
- Across different jobs, wages are often higher or lower depending on a jobs "pleasant" factor
Differences in talent
- Lebron James is paid higher than most basketball players because he has a higher level of ability than they do
Quantity of human capital
- Those who invest in education tend to have higher wages than those that do not
- Unions, or organizations that try to raise wages and working conditions, tend to increase the equilibrium price of labor via "collective bargaining"
Type of incentive scheme used by workers to encourage hard work and reduce turnover
Employers will pay above the equilibrium wage or a premium above the "normal" wage rate in order to encourage staying with a company
Racial or Gender discrimination is NOT a natural consequence of market competition
In fact, companies can benefit by exploiting discrimination
Branch Rickey, in signing Jackie Robinson to play for Dodgers, got a huge bargain economically because no other African-American baseball players were playing in the major leagues
Factor Market Example
Assume Park's Place Pencils employs a fixed number of employees and rents a machine for a variable number of hours from a perfectly competitive market.
Using correctly labeled side-by-side graphs of the factor market of machines and the Park's Place Pencils, find the equilibrium rental price of machines in the factor market, and Park's Place equilibrium rental quantity of machines
Assume that the popularity of pencils increases, increasing the demand for pencils
What will happen to each of the following?
Marginal product curve for machine-hours
stays the same
MRP = P * MPL
P↑, MRP↑, MPL -
Marginal revenue product curve for machine-hours
Increases because price increases
MRP = P * MPL
J. Daniel Park, CEO of Park's Place Pencils is employing the cost-minimizing combination of inputs. The marginal product of labor is 60 pencils per worker hour and the wage rate is $15 per hour. The marginal product of the machine is 100 widgets per machine-hour. What is the hourly rental price of a machine