Labor Market Supply and Demand 1. How are wages determined? 2. Why is your salary higher than mine?
Hourly Wages of Production Workers for Selected Nations Hourly Pay in U.S. Dollars, 2005 Source: U.S. Bureau of Labor Statistics, 2006 Denmark Germany Switzerland Sweden United Kingdom France United States Australia Japan Canada Italy Korea Taiwan Mexico 0 5 10 15 20 25 30 35 35.47 33.00 30.50 30.40 25.66 24.63 23.65 29.42 21.90 23.82 21.05 13.56 6.38 2.63
Hourly Earnings By Industry, 2006 Industry Group Hourly Wage Mining $24.13 Finance, Insurance, Real Estate 24.06 Public Administration 23.44 Transportation, Warehousing, Information, and Utilities 21.60 Manufacturing 20.67 Construction 18.29 Services 18.10 Retail Trade 13.56
Private Manufacturing Worker’s Hourly Earnings By State, 2006 State Hourly Wage Connecticut $26.54 New Jersey 25.77 Massachusetts 25.04 New York 20.65 Pennsylvania 20.62 Ohio 19.20 Florida 18.15 Arkansas 16.42 Mississippi 14.65
What is a Market? Labor MARKETS FIRMS WORKERS determine Wages and Employment level Market is a mechanism that brings together buyers and sellers BUYERS SELLERS
Individual’s Labor Supply Work hrs per week Wage Rate 40 0
Choose between work and leisure .
Work = time spent on a paying job
Leisure = unpaid activities
Higher wage higher opportunity cost of leisure work more, substitute work for leisure.
Higher wage higher income work less, enjoy more leisure.
Income effect dominates at very high wage rates
20 30 $20 $40 S L $100 backward bending labor supply curve $150 = number of hours you choose to work
Total Work Hrs In the Labor Market Wage Rate 0 $20 $40 S L $60 Market Labor Supply at higher w: 1. Individuals are willing to work more 2. More individuals enter labor market … foregoing household production and leisure "reservation wage“= wage high enough to make you enter labor force Market labor supply curve S L = horizontal summation of S L curves for all individuals in a labor market. Always upward sloping
Demand for labor is a derived demand .
The demand for hamburgers leads to the demand for hamburger workers.
Lower wage rate – firms want to hire more workers
Total Work Hrs In the Labor Market Wage Rate 0 $20 $40 D L $60 Labor Demand by all Firms Downward sloping
Wage and Employment Determined Quantity of Labor Hours or Workers Wage rate
at wage W low : excess demand for labor (shortage) Q 2 - Q 1
at wage W high :excess supply of labor Q 2 - Q 1 (surplus, unemployment)
Equilibrium wage rate W 0 and level of employment Q 0 are at intersection of labor supply and demand.
S D Q 0 W 0 W low Q 2 Q 1 W high COMPETITIVE LABOR MARKET
COMPETITIVE LABOR MARKET
Large number of firms trying to hire an identical type of labor
Numerous qualified people independently offering their services
Neither firms nor workers have control over the market wage
Perfect, costless information and labor mobility
Changes in Labor Supply Quantity of Labor Hours Wage rate S 1 D Q 0 W 1 W 3 Q 2 Q 1 W 2 S 2 S 3 Other wage rates Wages in other occupations rise - labor supply falls Nonwage income Nonwage income rises - labor supply falls Preferences for work versus leisure Preferences for work increase - labor supply increases Nonwage aspects of job Nonwage aspects of a job improve - labor supply increases Number of workers Increase in number of qualified workers increases labor supply
Quantity of Labor Hours Wage rate S D 1 Q 0 W 1 D 2 Q 1 W 2 Changes in Labor Demand D 3 W 3
Higher demand for product - increase in labor demand
Increase in productivity – increase or decrease in labor demand
Prices of other resources
Increase in the price of a substitute input (e.g.: machines) will increase labor demand.
Increase in the price of a complement input (e.g.: fabric) will decrease labor demand.
Example: Unions and Wages Quantity of Labor Hours Wage rate
Unions increase wages/employment of their members by increasing demand for union labor ( D 0 to D 1 )
Increase product demand
Lobby for tariffs on foreign goods
Influence prices of related inputs
Lobby for minimum wage hikes
raises price of substitutable nonunion labor
Requirements for domestic content for autos sold in U.S.
S D 0 Q 0 W 0 D 1 Q 1 W 1
Quantity of Labor Hours Wage rate
Unions increase wages of their members by decreasing supply of available labor (S 0 to S 1 )
wage rate rises to W 1 employment falls to Q 1
Reduce the number of competitors
Lobby for laws that reduce immigration, child labor, length of the workweek.
Limit entry into occupation through long apprenticeships
S 0 D 0 Q 0 W 0 S 1 Q 1 W 1 Unions and Wages
Union Membership, % of Labor Force
Union Wage Advantage
o D for wives S of wives S 2 P Q 1 Q 2 P 1 P 2 Application to Theories of Marriage: Competitive Marriage Market (men’s view) Quantity of wives Price for a wife= Housework + favors + dowry, etc Decrease in S of wives (modern China) improves women’s bargaining position
Theories of Marriage: Competitive Marriage Market (men’s view) o D for wives Quantity of wives S of wives Price Q 1 Q 2 P 1 P 2 D 2 Increase in D for wives (polygyny legalized ?) improves women’s bargaining position
Theories of Marriage: Competitive Marriage Market (men’s view) o D 2 Quantity of wives S of wives Price Q 2 Q 1 P 2 P 1 D for wives Decrease in D for wives (war kills men?) worsens women’s bargaining position