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Chapter 10 Labor Markets and Income Distribution

• Key Concepts• Summary• Practice Quiz

©2004 Thomson/South-Western

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40

10

1 2 4

Production Function

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20

5

50

63

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To

tal O

utp

ut

Quantity of Labor

Total Output

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What does the demand curve for labor show?The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

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$350

$280

$210

$140

1 2 3 4

AB

CD

Computech’s Demand Curve for Labor

P

Q

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A $350 1

B $280 2

C $210 3

D $140 4

Point Wage Quantity demanded

Demand for Labor per Day

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What is the demand curve for labor equal to?It is equal to the marginal revenue product of labor

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What is marginal revenue product?

The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

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8

2

1 2 4

Marginal Product Curve

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4

5

10

63

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Mar

gin

al P

rod

uct

Quantity of Labor

Law of Diminishing

Returns

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$280

$210

$140

$70

1 2 3 4

Demand Curve for Labor

MRP = demand

$350

5Q

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How do we measure MRP in perfect competition?

A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product

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What isderived demand?

The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

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What does the supply curve for labor show?

The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

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$350

$280

$210

$140

10 20 30 40

Computech’s Supply Curve for Labor

P

Q

B

A

SNew wage rate

Initial wage rate

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In a perfectly competitive market, what determines the

level of wages?The intersection of the demand for labor and the supply of labor

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D

S

Market Supply and DemandW

ages

Quantity of Labor

$210

3

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Does the perfectly competitive model apply

to workers in unions?

No

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What are examples of unions?

• Teamsters• United Auto Workers• National Education Assoc.• American Federation of Government Employees

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How do unions attempt to raise wages?

• Increase demand for labor• Decrease supply for labor• Power

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What factors can cause a change in the

demand for labor?• Unions• Prices of substitute goods• Demand for final products• Marginal product of labor

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$280

$210

$140

$70

10 20 30 40

Unions cause an increase in the demand for labor$350

50

S

D2

E1

D1

E2

Quantity of Labor

Wag

e R

ate

per

day

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What factors can cause a change in the

supply for labor?• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training

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$350

$280

$210

$140

10 20 30 40

Unions cause a decrease in the supply for labor$420

50

S2

D1

E1

E2

Quantity of Labor

Wag

e R

ate

per

day

S1

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How else can unions raise wages?

Collective bargaining

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What iscollective bargaining?

The process of negotiations between the union and management over wages and working conditions

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$280

$210

$140

$70

10 20 30 40

Collective Bargaining causes a Wage Rate increase$350

50

D

UnemploymentW

age

Rat

e p

er d

ayS

Quantity of Labor

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What factors can cause a change in the

supply for labor?• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training

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What has happened to union membership

since WWII?Union power has declined

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How does union membership in the

U.S. compare to other countries?

Union membership is far below that of other industrialized countries

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14%24%

29%32% 32%

40%

U.S. Japan Canada U.K. Germany Italy SwedenDenmark

87%

75%

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What has happened to real median

income in the U.S.?Since 1993 it has risen

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What is poverty?

There are two views

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What is poverty in absolute terms?

A dollar figure that represents some level of income per year required to purchase essential goods and services

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What is poverty in relative terms?

A level of income that places a family in, lets say, the lowest 20% of households

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What is the poverty line?

A level of income below which a person or a family is considered poor

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How does the government help

the poor? By in-kind transfers

cash assistance

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What is an in-kind transfer?

Government payments in the form of goods and services, rather than cash

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What are some examples of in-kind transfers? Food stamps Medicaid Housing

assistance

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What are some examples of cash assistance?

Social Security Unemployment compensation Temporary assistance to

needy countries

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Key Concepts

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Key Concepts• In a perfectly competitive market, what determine

s the level of wages?• What is marginal revenue product?• What is the demand curve for labor equal to?• How do we measure mrp in perfect competition?• What does the supply curve for labor show?

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Key Concepts cont.• How do unions attempt to raise wages?• What is collective bargaining?• What factors can cause a change in the

demand for labor?• What factors can cause a change in

the supply for labor?

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Key Concepts cont.• What has happened to union membership

since WWII?• How does union membership in the U.S.

Compare to other countries?• What is poverty?• How does the government help the poor?

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Summary

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Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).

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The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.

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$280

$210

$140

$70

1 2 3 4

Demand Curve for Labor

MRP = demand

$350

5Q

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Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.

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The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.

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$280

$210

$140

$70

10 20 30 40

Supply Curve of Labor$350

50

S

Quantity of Labor

Wag

e R

ate

per

day

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Collective bargaining is the process through which a union and management negotiate a labor contract.

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Poverty is absolute terms is a dollar figure that represents some level of income per year required to purchase essential goods and services

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Poverty is relative terms is a level of income that places a family in, lets say, the lowest 20% of households

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END