The labor market consists of different markets for different types of labor based on work, skill level, and location. The demand for labor depends on the marginal product of labor (MPL), which is the additional output from adding one more worker. In perfectly competitive output markets, demand for labor is MPL x price. In imperfectly competitive markets, it is MPL x marginal revenue. The market wage is determined by the intersection of the labor supply and demand curves. Labor unions can act as monopolies in labor markets and negotiate higher wages for members. However, this can reduce employment levels. Discrimination and immigration can also impact wages and employment opportunities in labor markets.

1. Microeconomics
Module 12: Labor Markets

2. Why It Matters: Labor Markets
• In a market economy like the U.S., income comes from ownership of the means of
production: resources or assets
• One’s income is a function of two things:
• The quantity of each resource one owns
• The value society places on those resources
• For the majority of us, the most important resource we own is our labor

3. What is the Labor Markets?
• The labor market is the term that economists use for all the different markets for
labor
• There is a different market for every different type of labor, depending on:
• Work
• skill level
• geographical location
• The labor market is influenced by supply and demand
• If a firm wants to maximize profits, it will pay more for a worker than the value of his
or her marginal productivity to the firm, this is called the first rule of labor markets

4. Labor Markets
• If marginal product is the additional output a
firm can produce by adding one more worker
to the production process, marginal product
depends on the capital and technology with
which workers have to work
• Demand for Labor = 𝑀𝑃𝐿 x P =
Value of the Marginal Product of Labor
• The value of the marginal product of labor
is the marginal product of an additional
worker multiplied by the price of the firm’s
output

5. Demand for Labor in Perfectly Competitive Output
Markets
• The question for any firm is how much
labor to hire
• A perfectly competitive labor market is
one where firms can hire all the labor they
wish at the going market wage
• Employers who need secretaries can probably
hire as many as they need if they pay the
going wage rate
• Graphically, this means that firms face a
horizontal supply curve for labor

6. Demand for Labor in Imperfectly Competitive Output
Markets
• if an employer does not sell its output in a perfectly competitive industry, it faces a
downward sloping demand curve for output
• In order to sell additional output the firm must lower its price
• This is true if the firm is a monopoly, but it’s also true if the firm is an oligopoly or
monopolistically competitive
• This means that a worker’s marginal product is valued by the marginal revenue, not
the price
• The demand for labor is the marginal product times the marginal revenue, which we
call the marginal revenue product
• 𝑇ℎ𝑒 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝐿𝑎𝑏𝑜𝑟 = 𝑀𝑃𝐿 𝑥 𝑀𝑅 = 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

7. What Determines the Going Market Wage Rate?
• The labor market has demand and
supply curves like other markets
• The demand for labor curve is a
downward sloping function of the wage
rate
• The market demand for labor is the
horizontal sum of all firms’ demands for
labor
• The supply for labor curve is an upward
sloping function of the wage rate

8. Balance Between Workers and Employers
• To give workers more power, the U.S. government has passed a number of laws to
create a more equal balance of power between workers and employers, the laws
include the following:
• Setting a minimum hourly wages
• Setting a maximum hours of work (before overtime)
• Prohibiting child labor
• Regulating health and safety conditions in the workplace
• Preventing discrimination on the basis of race, ethnicity, gender, sexual orientation, and age
• Requiring employers to provide family leave
• Requiring employers to give advance notice of layoffs
• Covering workers with unemployment insurance
• Setting a limit on the number of immigrant workers

9. Prominent U.S. Workplace Protection Laws
• Social Security Act of 1935: establishes unemployment insurance
• Fair Labor Standards Act of 1938: establishes a minimum wage, limits on child labor, and
rules requiring payment of overtime pay for those in jobs that are paid by the hour and
exceed 40 hours
• Civil Rights Act of 1964: Title VII of the Act prohibits discrimination in employment on the
basis of race, gender, national origin, religion, or sexual orientation
• Occupational Health and Safety Act of 1970: creates the Occupational Safety and Health
Administration which protects workers from physical harm in the workplace
• Employee Retirement and Income Security Act of 1974: regulates employee pension
rules and benefits

10. Prominent U.S. Workplace Protection Laws cont.
• Pregnancy Discrimination Act of 1978: prohibits discrimination against women in the
workplace who are planning to get pregnant or who are returning to work after pregnancy
• Americans with Disabilities Act of 1990: prohibits discrimination against those with
disabilities and requires reasonable accommodations
• Family and Medical Leave Act of 1993: allows employees to take up to 12 weeks of
unpaid leave per year for family reasons, including birth and family illnesses
• Lilly Ledbetter Fair Pay Act of 2009: restores protection for pay discrimination claims on
the basis of sex, race, national origin, age, religion, or disability

11. Labor Market Power by Employers
• A competitive labor market is one where there are many potential employers for a given
type of worker, say a secretary or an accountant
• If there was only one employer in a labor market, that employer has no direct competition in
hiring
• If they offer lower wages than would exist in a competitive market, employees would have few options
• Since the employer is exploiting its market power, we call the firm a monopsony
• However, because they face the market supply curve for labor, if they want to hire more workers, they
must raise the wage they pay
• This creates a quandary, which we can understand by introducing a new concept: the
marginal cost of labor
• The marginal cost of labor is the cost to the firm of hiring one more worker

12. Labor Market Power by Employees
• A labor union seeks to change the balance of power between employers and workers by
requiring employers to deal with workers collectively
• A labor union operates like a monopoly in a labor market
• Collective bargaining- negotiations between unions and firms
• The subject of labor unions can be controversial
• Supporters of labor unions view them as the workers’ primary line of defense against efforts by profit-
seeking firms to hold down wages and benefits
• Critics of labor unions view them as having a tendency to grab as much as they can in the short term

13. Facts about Union Membership and Pay
• According to the U.S. Bureau of Labor and Statistics, about 10.7% of all U.S. workers
belong to unions
• 11.2% of U.S. male workers belong to unions; 10.2% of female workers do
• 10.5% of white workers, 13% of black workers, and 8.8 % of Hispanic workers belong to
unions
• 11.8% of full-time workers and 5.7% of part-time workers are union members
• 5.11% of workers ages 16–24 belong to unions, as do 13.9% of workers ages 45-54
• Some of the Largest American Unions are:
• National Education Association (NEA)
• Service Employees International Union (SEIU)
• American Federations of Teachers (AFT)

14. Percentage of Wage and Salary Workers Who Are
Union Members

15. Higher Wages for Union Workers
• Because a union is the sole supplier of
labor, it can act like a monopoly and ask
for whatever wage rate it can obtain for its
workers
• If employers need workers, they have to
meet the union’s wage demand
• This labor market situation resembles
what a monopoly firm does in selling a
product, but in this case a union is a
monopoly selling labor to firms

16. Higher Wages for Union Workers cont.
• From the union point of view, workers who receive higher wages are better off
• A sensible union must recognize that when it pushes up the wage, it also reduces the
firms’ incentive to hire
• From the firm’s point of view, the key question is whether union workers’ higher wages
are matched by higher productivity
• If so, then the firm can afford to pay the higher union wages and, the demand curve for
“unionized” labor could actually shift to the right
• Union workers might have higher productivity than nonunion workers because:
• Higher wages may elicit higher productivity
• Union workers tend to stay longer at given job, reduces the employer’s costs for training and hiring

17. The Decline in U.S. Union Membership
• The proportion of U.S. workers belonging to unions has declined dramatically since
the early 1950s
• Economists have offered a number of possible explanations:
• The shift from manufacturing to service industries
• The force globalization and increased competition from foreign producers
• A reduced desire for unions because of the workplace protection laws now in place
• U.S. legal environment that makes it relatively more difficult for unions to organize workers and
expand their membership

18. The Growth Service Jobs

19. Employment Discrimination
• Discrimination involves acting on the belief that members of a certain group are
inferior solely because of a factor such as race, gender, or religion
• There are many types of discrimination but the focus here will be on discrimination in
labor markets
• This arises if workers with the same skill levels—as measured by education,
experience, and expertise—receive different pay receive different pay or have
different job opportunities because of their race or gender

20. Earnings Gaps by Race and Gender
• A possible signal of labor market
discrimination is when an employer pays
one group less than another
• Research by the economists Francine
Blau and Laurence Kahn shows that the gap
between the earnings of women and men did
not move much in the 1970s, but has declined
since the 1980s
• According to the U.S. Census, the gap between
the earnings of blacks and whites diminished in
the 1970s, but has not changed in 50 years

21. Competitive Markets and Discrimination
• In a competitive market, if the business owners care more about the color of money
than about the color of skin, they will have an incentive to make buying, selling,
hiring, and promotion decisions strictly based on economic factors
• Discriminatory impulses can emerge at a number of levels: among managers,
among workers, and among customers
• If the business owners care more about the color of money than about the color of skin, they
will have an incentive to make buying, selling, hiring, and promotion decisions strictly based on
economic factors
• If a business is located in an area with a large minority population and refuses to sell to
minorities, it will cut into its own profits
• If some businesses run by bigoted employers refuse to pay women and/or minorities a wage
based on their productivity, then other profit-seeking employers can hire these workers

22. An Increasingly Diverse Workforce

23. Immigration
• A surge of immigration can affect the economy in a number of different ways
• About one-third of immigrants over the age of 25 lack a high school diploma
• As a result, many of the recent immigrants end up in jobs like restaurant and hotel work, lawn care, and
janitorial work
• This kind of immigration represents a shift to the right in the supply of unskilled labor for a number of
jobs, which will lead to lower wages for these jobs
• The middle- and upper-income households that purchase the services of these unskilled workers will
benefit from these lower wages
• However, low-skilled U.S. workers who must compete with low-skilled immigrants for jobs will tend to
suffer from immigration

24. Quick Review
• What are labor markets? Why is the value of the marginal product of labor the demand for
labor?
• What is the demand for labor in perfectly competitive output markets? How do you graph it?
• What is the demand for labor in imperfectly competitive output markets? How do you graph
it?
• How does supply and demand interact to determine the market wage rate?
• How are wages and employment determined in labor markets where employers have
market power (monopsonies)?
• What is the role and impact of labor unions?
• How does the existence of a labor union affect wages and employment in a labor market?

25. More Quick Review
• What are the earning gaps based on race and gender?
• What is the impact of discrimination in a competitive market?
• What are the economic implications of immigration?