The labor market consists of workers interested in selling their services and firms interested in hiring them. Firms pay workers wages in exchange for their work, either annually or hourly. Labor quantity is measured by the number of workers or total hours worked. In a perfectly competitive labor market, there are many firms and workers with no single firm influencing wages. Wages are determined by the equilibrium of labor supply and demand. Firms will only hire workers if the value they produce exceeds their wages, and will fire workers if value falls below costs. Both labor supply and demand determine the labor market equilibrium wage and employment level. Workers decide whether and how much to work based on comparing wages to their reservation wage. Higher wages increase labor

1. Unit 3
Labor Markets

2. Labor Demand

3. The Labor Market
Labor Market is a collection of workers interested in selling their services
and firms interested in hiring them.
Firms pay workers an annual salary or an hourly wage in exchange for their
work.
When the amont of time each person works is standard (40
hours/week or 8 hours/day) the quantity of labor is measured by
the number of workers hired.
If the hours worked is not standard (some workers work more than
others) you can measure the number of hours that workers spend
working for the firm. One hour of work by one worker is called
one labor hour.
Workers=employees

4. Perfectly Competitive Labor
Market
There are many firms and workers, and no individual firm can influence
the market wage.
Wage is determined by the equilibrium of supply and demand in the
labor market.
Ex) If a restaurant tried to hire dishwashers in a perfectly competitive
labor market for less than the wage paid at other restaurants, the
workers would head for one of the many other restaurants that pay
more.
*Only by matching the market wage can the restaurant attract the
dishwasher it needs.

5. Who should be hired? Who
should be fired?
A firm will only hire you if the value of what you produce is
more than the amount the firm must pay to hire you.
If the value of what an existing employee produces falls
below the cost of employing him/her then the firm will let
the employee go.
Employers decide how many workers to hire by hiring
more and more until the marginal benefit of another
worker falls to equal the marginal cost.

6. There are 3 lawn
mowers for the workers
to share. First 3
workers have full use of
lawn mowers and are
at full productivity. Next
workers must share the
resource.
Marginal Product of
Labor- The additional
output produced by the
last worker hired.
Value of Marginal
Product of Labor-
Marginal Product of
labor X Price charged
per lawn mowed ($40)

7. Labor Demand Curve
Labor Demand Curve- indicates how much
labor the employer would hire at each
wage.
Firms hire until the wage=the value of the marginal
product of labor
Firm’s desire to hire more workers at a lower wage
results in a downward sloping labor demand
curve.

8. How firms respond to wage
changes
Most workers think of higher wages as a good thing, but
the labor demand curve shows that when the wage
increases, the movement upward along the demand
curve reduces the quantity of workers demanded.
Wage increase in a labor market with elastic labor
demand can cause considerable unemployment. Wage
decrease in a market with inelastic labor demand can
fail to encourage the desired increase in employment.

9. Warm-up: 3/2/16
If you were a ‘Shark’, which product would you have
invested in and why?

10. Labor Supply and
Labor Market
Equilibrium

11. To work or not to work? That is
the question...
Every adult must answer two questions:
Whether or not to work at all?
If yes, how much to work?
Reservation wage--the lowest wage a worker would accept for a job.
Wage is greater than or equal to reservation wage then the worker
accepts the job. If wage is less than reservation wage the worker
would not accept the job.

13. How much to work?
There are many job options available. There are full-time and part-
time jobs, one worker can hold multiple jobs, and many jobs
offer flexible work hours.
Higher wages encourage you to substitute away from spending
time on leisure activities and toward spending more time
working.
Substitution effect: $8 hour babysitting job. To get an hour of
leisure time you must give up $8 you could earn babysitting. If the
wage increased to $12/hour you would give up $12 for every hour of
leisure.
Income effect: When workers earn more, they increase their
consumption of normal goods. Leisure is a normal good, so people

14. The Market Labor Supply Curve
The Market Labor
Supply Curve- shows
the total number of
hours workers would be
willing to supply at each
wage.

15. The Skills of
Workers and the
Quality of Jobs

16. Investing in Human Capital
Human Capital- the skills and
knowledge of workers.
Investments in education
tend to lead to higher
incomes, which justifies
the cost.
The more degrees you earn
in school, the more
money you are likely to
earn later on.

17. Skills & Technology
New technologies help shape the types of human capital most in
demand.
Technology has replaced many jobs in industries that include
farming, banking, retail, sales, manufacturing, etc.
Advances in communication technology (apps, smartphones,
teleconferencing)

18. Compensating Wage Differentials
Earnings are not the only thing that matter to workers.
Working conditions
Hazards
Prestige
Difficulty
Fringe Benefits

20. If you don’t care about quality of jobs,
maybe you’ll care about this...
WOMEN:
1. Physical Therapist
2. Interior Designer
3. Founder/Entrepreneur
4. PR/Communications
5. Teacher
6. College Student
7. Speech Language Pathologist
MEN:
1. Pilot
2. Founder/Entrepreneur
3. Firefighter
4. Doctor
5. TV/Radio Personality
6. Teacher
7. Engineer
The 15
Sexiest
Jobs,
According
to Tinder
What you do for a
living may be the
difference
between a swipe
left and a swipe
right.

21. Why it Matters: Your Value in the
Labor Market Article/Discussion

22. Occupational Outlook Handbook
http://www.bls.gov/ooh/a-z-index.htm
1)Individually
2)Pick a job
3)1 paragraph about the factors
that influence the supply and
demand for labor of that
occupation