Labor, capital, natural resources and other inputs used to produce goods and services
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What determines the equilibrium wage rate?
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interaction between firms' demand for labor and supply of labor
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personnel economics
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how firms can use economic analysis to design employee compensation plans
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Derived Demand
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The demand for a factor of production; it depends on the demand for the good the factor produces
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What is the two primary factors for demand for labor?
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1. The additional products that can be produced if one more worker is hired.
2. The additional revenue recieved from selling the additional products.
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Marginal Product of Labor
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The additional output a firm produces as a result of hiring one more worker.
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Law of Diminishing Returns
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The principle that, at some point, adding more of a variable input (such as labor) to the same amount of a fixed input (such as capital) will cause the marginal product of the variable input to decline
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Marginal Revenue Product of Labor (MRP)
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The change in a firm's revenue as a result of hiring one more worker.
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What is the formula for MRP?
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multiply the additional output produced by the product price
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What do firms compare when deciding how many workers to hire?
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the additional revenue it earns from hiring another worker is compared to the increase in its costs from paying the worker
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What is the formula for additional profit (for hiring one more worker)?
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marginal revenue product of labor - the wage of the additional worker
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When should a firm continue to hire more workers?
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As long as the marginal revenue product of labor is greater than the wage -- as long as profits are increasing
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When have firms maximized its profits by hiring the optimal number of workers?
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when the marginal revenue product of labor is equal to the wage
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When should firms hire fewer workers?
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when the marginal revenue product of labor is less than the wage -- when profits are falling
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How is the market demand curve for labor determined?
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by adding up the quantity of labor demands by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers.
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Name the one variable that is not held constant in constructing the demand curve for labor
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wages
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What does an increase or decrease in the wage cause?
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causes an increase or a decrease in the quantity of labor demanded
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How is the increase or decrease in the wage reflected on the demand curve for labor?
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a movement along the demand curve
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What is the result if any variable other than the wage changes?
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the result is an increase or a decrease in the demand for labor
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List the five most important variables that cuase the labor demand curve to shift.
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1. Increases in human capital.
2. Changes in technology.
3. Changes in the price of the product.
4. Changes in the quantity of other inputs.
5. Changes in the number of firms in the market.
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Human Capital
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The accumulated knowledge and skills that workers acquire from formal training and education or from life experiences.
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How does the demand curve for labor shift, when human capital is able to produce more output per day?
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the labor demand curve shifts to the right
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How does changes in technology shift the labor demand curve?
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the labor demand curve shifts to the right
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How does the demand curve shift when higher prices increases the marginal revenue product?
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shifts the labor demand curve to the right
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How does the demand curve shift when lower prices change the price of the product?
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A lower price shifts the labor demand curve to the left.
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How does the labor demand curve shift when productivity increases?
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the labor demand curve shifts to the right
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How does the labor demand curve shift when new firms enter the market?
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the labor demand curve shifts to the right
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Why is the labor supply curve upward slopping?
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As wage increases, the opportunity cost of lesiure increases, causing individuals to supply a greater quantity of labor.
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Substitution effect
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An increase in price makes a good more expensive relative to other goods.
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Income effect
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The change in the quantity demanded of a good that results from changes in consumer purchasing power as the price changes.
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Explain how the substitution effect relates to an increase in wage.
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An increase in wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure.
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As wage increases, the opportunity cost of leisure ______________________.
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increaes
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What two effects occur when wages increase?
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1. Substitution effect (more work, less leisure)
2. Income effect (more income, more leisure, less work)
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How does the substitution effect affect the quantity supplied of labor?
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The substitution effect increases the quantity supplied of labor.
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How does the income effect affect the quantity supplied of labor?
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The income effect decreases the quantity supplied of labor.
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Which effect has the greatest influence on quantity supplied of labor?
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substitution effect at low or modest wages
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When does the upward slopping curve of of the labor supply curve begin to curve backward?
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When the income effect become greater than the substitution effect as relatively high wages
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Explain the difference between the effects of substitution and income on the quantity of labor.
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The substitution effect of a wage increase casues a worker to supply a larger quantity of labor. The income effect of a wage increase casues a worker to supply a smaller quantity of labor.
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How do you find the Market Supply Curve of Labor?
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add up the quantity of labor supplied by each worker at each wage
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List the three most important variables that cause the market supply curve of labor to shift.
How does the supply curve of labor shift when the population increases?
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to the right
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When does equilibrium in the labor market occur?
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when the demand curve for labor and the supply curve for labor intersect
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How will increases in labor demand affect equilibrium wage?
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It will cause it to rise.
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How will increases in labor demand affect equilibrium level of employment?
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It will cause it to rise.
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How will the labor demand curve shift if productivity of workers increases?
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It will shift to the right.
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If labor demand increases but labor supply remains unchanged, how will equilibrium wage respond?
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equilibrium wage will increase
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If labor supply increases, but labor demand remains unchanged, how will equilibrium wage respond?
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equilibrium wage will decrease
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If labor supply increases, but labor demand remains unchanged, what impact will this have on the number of workers employed?
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it will increase the number of workers employed
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If labor demand increases but labor supply remains unchanged, what impact will this have on the number of workers employed?
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it will increase the number of workers employed
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How will increases in labor supply impact equilibrium wage?
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Increases in labor supply will cause the equilibrium wage to fall.
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How will increases in labor supply affect the equilibrium level of employment?
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Increases in labor supply will cause the equilibrium level of employment to rise.
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How will the labor supply curve shift as the population increases?
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shifts to the right
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What is the definition of robots?
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a type of capital that performs sophisticated physical activities that previously only people performed
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Explain: the "lump-of-labor" fallacy
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there is only a fixed amount of work to be performed in the economy so the more work perfromed by machines, the less work that will be available to people (remember, this is a fallacy)
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What are the two arguements regarding robots in the workplace?
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optimistic: new technologies (robots) will result in higher productivity and higher wages
pessimistic: workers will lose their current jobs to robots and other new technology
salespeople, office workers, carpenters, plumbers and factory workers
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Give examples of lower-skilled workers.
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food workers, health care aides, janitors
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Are robots complementary to highly-skilled workers or do they substitute highly-skilled workers?
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complementary
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Why is the labor supply curve of highly-skilled occupations relatively inelastic?
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because highly-skilled workers have skills, specialized training and advanced degrees - whihc means that it takes time before rising wages significantly increase the quantity of labor supplied
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Are robots complementary to middle-skilled workers or do they dubstitute middle-skilled workers?
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substitutes
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How does the demand curve shift when robots and new technology substitute workers?
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shifts to the left
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What is the impact to equilibrium wage when robots substitute workers?
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decreases equilibrium wage
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What is the impact to equilibrium quantity of workers employed when robtos substitute workers?
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decreases
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What impact does robots have on lower-skilled workers?
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little effect
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What two components raise wages for workers?
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1. the more productive workers are
2. when worker's output can be sold at a higher price
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What models are used to analyze why wages differ?
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demand and supply models
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What is the most important factor in explaining differences in wages?
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differences in marginal revenue products
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List all four factors of labor markets that explain differences in wages.
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**differences in marginal revenue products
**compensating differentials
**discrimination
**labor unions
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Define: Compensating Differentials
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Higher wages that compensate workers for unpleaseant aspects of a job
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Describe the price of risk.
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A worker decides on his or her willingness to assume risk in a job and decides how much higher the wage must be to compnesate for assuming more risk
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Explain: cognitive dissonance
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People prefer to think of themselves as intelligent and rational and tend to reject eveidence that seems to contradict this image
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Define: Economic Discrimination
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The practice of paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender.
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What two Acts made it illegal in the United States to exclude groups from certain jobs or paying one group more than another?
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Equal Pay Act of 1963 and Civil Rights Act of 1964
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List the three main factors of wage gap.
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1. Differences in education.
2. Differences in experience.
3. Differing preferences for jobs.
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Civil Rights Act of 1964
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outlawed hiring discrimination on the basis of race and sex
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Even if an employer doesn't discriminate in the hiring process, there is still three important factors that these non-discriminating firms must overcome. List them.
