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Chapter in a Nutshell
This chapter examines how wage rates are determined in competitive labor markets. Suppose that a firm hires workers in a labor market where all of the workers have roughly the same skills. As the firm begins hiring workers, the marginal physical product of labor (the change in output that results from adding one more unit of labor) may increase as more workers are able to take advantage of opportunities for division of labor and specialization. However, beyond some point, additional workers will add smaller and smaller increments to output, reflecting the law of diminishing returns. The marginal physical product of labor eventually decreases because of the law of diminishing returns. The marginal physical product of labor can be converted to revenue by multiplying each worker's marginal physical product by the price of the output. This gives the marginal revenue product of labor -- the addition to total revenue from adding one more unit of labor.
How much labor will the firm hire? The firm continues to hire as long as the marginal revenue product of labor is greater than the wage rate. In a competitive labor market, the firm hiring labor cannot influence the market-determined wage rate. The marginal labor cost -- the addition to total labor cost from hiring one more worker -- is equal to the wage rate. The firm will stop hiring workers when the marginal revenue product of the last worker hired is equal to the wage rate. Thus, the marginal revenue product of labor is the firm's demand curve for labor. Each point on the marginal revenue product curve tells us how many workers the firm would hire given a specific wage rate. The firm's demand curve for labor increases (shifts to the right) when the price of the good being produced increases or when the workers hired have become more productive through, say, an improvement in technology. The industry demand for labor is the sum of the individual firms' demands for labor.
The labor supply curve is upward sloping. The higher the wage rate, the greater the quantities of labor workers are willing to supply. Shifts in the supply curve of labor occur as a result of changes in alternative employment opportunities, changes in population size, and changes in wealth. The intersection of the industry demand for labor and the supply of labor determines the market wage rate.
Why do wage rate differentials exist? Sometimes these differences in wage rates are geographic. For example, in the United States, wages in the North, until fairly recently, tended to be higher than wages for the same jobs in the South. The differential reflected, in part, the fact that northern workers had more capital to work with than did southern workers. However, this differential has all but disappeared as workers moved to the North and capital migrated to the South. Wage differentials will persist if labor and capital cannot move freely. Another reason for persistent wage differentials is noncompeting labor markets. Special talents are required in certain labor markets, so workers without these skills are excluded from competing.
The minimum wage is the source of much debate among economists and politicians. The purpose of the minimum wage is to provide workers who are stuck in low-wage labor markets with a wage rate that provides a decent living. However, the minimum wage acts as a price floor in labor markets and, as such, creates unemployment. Economists hold strong views on the minimum wage issue, but there is no real consensus about whether the gains to employed workers more than offset the losses to unemployed workers.
After studying this chapter, you should be able
to:
· Define the marginal physical product of labor.
· Give examples of the law of diminishing returns.
· Derive the marginal revenue product of labor from the marginal physical product of labor.
· Explain why the marginal revenue product of labor is the demand curve for labor.
· Show why the marginal labor cost for a firm in a competitive labor market is equal to the wage rate.
· Graph the profit-maximizing level of employment for a firm in a competitive labor market.
· Discuss reasons for changes in the demand for labor.
· Draw a labor supply curve and explain its shape.
· Examine the logic behind the backward-bending supply curve of labor.
· Account for wage differentials.
· Evaluate the impact of minimum wage laws.
· Explain the logic behind efficiency wages.
· Understand the argument that competitive wages are ethical.
• The Current Population Survey (CPS) (http://www.bls.census.gov/cps/cpsmain.htm), conducted by the Bureau of the Census, is the primary source of information on the labor force characteristics of the U.S. population. The cps provides estimates for employment, unemployment, earnings, hours of work, and other indicators.
• The U.S. Department of Immigration and Naturalization (INS) (http://www.ins.usdoj.gov/) enforces the immigration laws of the United States.
• The Department of Labor provides information on the minimum wage (http://www.dol.gov/dol/esa/public/minwage/main.htm).
[Return to Start]Jeff Kaufman works as an electrician in Boston. Jeff, originally from Detroit, recently married his wife, Elizabeth, who until the marriage lived in Montreal, Canada. Jeff and Elizabeth have decided to leave Boston and move to Detroit.
Jeff and Elizabeth have hired Economic Consultants to inform them about the labor market for electricians in Detroit, the value of Jeff's labor in Detroit as compared to in Boston, and any immigration issues with Elizabeth that may arise. Prepare a report for Jeff that addresses the following issues:
• U.S. Department of Labor
(http://www.dol/gov/)
The Department of Labor supports a number of initiatives, such as America's
Career InfoNet and America's Job Bank, that provide a wealth
of information about occupations.
• Michigan Jobs Commission
(http://www.mjc.state.mi.us/mjc/)
The Michigan Jobs Commission offers facts, data, and other information regarding employment in Michigan.
• The Detroit News
(http://www.detnews.com/)
The Detroit News provides job listings for the Detroit area.
• The Salary Calculator
(http://www.homefair.com/homefair/cmr/salcalc.html)
The Salary Calculator enables you to compare the cost of living in hundreds of U.S. and international
cities.
• America's Labor Market Information System
(ALMIS)
(http://udesc.state.ut.us/almis/)
ALMIS, sponsored by the Department of Labor, offers national and state-specific labor market information.
• U.S. Department of Immigration and Naturalization
(INS)
(http://www.ins.usdoj.gov/)
The INS provides information of the laws and regulations that affect immigration.
Added Perspective: More on the Net
• The federal government has instituted a number of programs to help educate unskilled workers. The Department of Labor, Employment and Training Administration (ETA) (http://www.doleta.gov/), sponsors programs for and provides educational assistance to workers. Also, President Clinton created the National Information Infrastructure (NII) task force (http://nii.nist.gov/) to address, in part, the impact of technology on wages and jobs.
• In addition to its German facilities, Audi (http://www.audi.com/) has production facilities in Brazil, China, Hungary, Indonesia, Malaysia, the Philippines, and South Africa. German investment is also strong in the United States. Organizations such as the German American Business Association (http://www.gaba.org/) have arisen to help foster German investment in the United States.
[Return to Start]Test your understanding of the chapter's concepts with the interactive quiz. The quiz contains twenty multiple-choice questions, like those found on a typical exam. Questions include detailed feedback for each answer, so that you may know instantly why you have answered correctly or incorrectly. In addition, you may email yourself and/or your instructor the results of the quiz, with a listing of correct and incorrect answers. Finally, check your results versus other students around the world -- previous scores to quizzes are displayed online.
How to Take the Quiz
Start the quiz, type in your name (required),
your email address (optional), and the email address of your instructor (optional). Answer the questions
(as many or as few as you like, but you need to answer at least one question). Then hit the submit button
and see your results. At the results page, click on the link in the "description" column to
see feedback on your answers. Scroll down the page to see quiz results from students around the world.
Test your understanding of the chapter's concepts with the interactive quiz. The quiz contains twenty multiple-choice questions, like those found on a typical exam. Questions include detailed feedback for each answer, so that you may know instantly why you have answered correctly or incorrectly. In addition, you may email yourself and/or your instructor the results of the quiz, with a listing of correct and incorrect answers. Finally, check your results versus other students around the world -- previous scores to quizzes are displayed online.
How to Take the Quiz
Start the quiz, type in your name (required),
your email address (optional), and the email address of your instructor (optional). Answer the questions
(as many or as few as you like, but you need to answer at least one question). Then hit the submit button
and see your results. At the results page, click on the link in the "description" column to
see feedback on your answers. Scroll down the page to see quiz results from students around the world.
Price of Cheap Gas: Laid-Off Workers
Let's review the derivation of marginal revenue product of labor (MRPL).
The equation is MRPL = MPPL multiplied by the price of the good. Let's specify the laborer and the good. Applied to the oil industry, it reads: MRPow (oil workers) = MPPow multiplied by the price of oil. What happens, then, to the MRPow curve when the price of oil falls? Look at Exhibit 4, Chapter 15. The MRPow curve shifts to the left when the price of oil falls so that - assuming the supply curve of oil workers remains unchanged - the number of oil workers demanded falls.
That's precisely what we read in a USA Today front-page February 18th news story. It reports that cheap gasoline prices are costing the oil industry jobs: 11,500 in January alone. "That's the largest one-month decline since 1986, when the domestic oil industry virtually collapsed," said Chris Kelly, a spokesman for the American Petroleum Institute. Add those 11,500 job losses to the number of jobs lost to recent slumping oil prices and the jobless number sky rockets to 42,000.
Why falling oil prices? Crude oil prices have dropped 30 percent from a year ago, hurt by falling demand and overproduction. Mild winters in industrialized nations and the financial crisis in the emerging markets of Asia, Africa, and Latin America have cut demand. Meanwhile, on the supply side, oil-producing nations have been unable to stem the global glut of oil.
The consequences are striking and predictable: Wednesday, BP Amoco announced cuts of 3,000 jobs, which brings their job cuts to 10,000 since the BP Amoco merger. Chevron, too, announced job cuts, and for the same reason. The Department of Energy, in an effort to aid the ailing oil industry, decided to increase the amount of oil it will store in its emergency reserves. Experts predict that oil prices, at $11.59 a barrel on Wednesday, will remain depressed through 1999. That's bad news for oil workers.
Source: Larry Copeland, USA Today, February 18, 1999
Updated 2/23/99
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