AP Economics

Mr. Bernstein

Module 71: The Market for Labor

December 18, 2014

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AP EconomicsMr. Bernstein

The Market for Labor• You are (or will be) a supplier of labor

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AP EconomicsMr. Bernstein

The Market for Labor: Basics• Labor is a Factor market (not Product market)• Workers have a decision between labor and leisure• Labor Supply Curves can be built and compared to

Labor Demand Curves to determine equilibrium• Equilibrium can be found in perfect competition

and imperfect competition markets• Price = Wage• Equilibrium is where worker’s MU from add’l hour

of labor = MU from one hour of leisure

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AP EconomicsMr. Bernstein

Supply of Labor• Substitution EffectHigher wage increasesopportunity cost of leisure…higher price of leisure meansworker substitutes fewerhours of leisure for work

Hours of work (week)

IE>SE, downward sloping

SE>IE, upward sloping

Labor supplyHourly wage

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AP EconomicsMr. Bernstein

Supply of Labor• Income EffectAs income rises, peopleconsume more leisure(leisure is a normal good)…for most people, the supply curve is upwardsloping

Hours of work (week)

IE>SE, downward sloping

SE>IE, upward sloping

Labor supplyHourly wage

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AP EconomicsMr. Bernstein

Shifts in the Supply of Labor• Changes in preferences or social norms• Post-WWII acceptance of women in workplace

• Changes in population• Immigration + birth rate > death rate

• Changes in opportunity• Increasing demand for health care, movement of

manufacturing jobs overseas

• Changes in wealth• Wealth effect (home, investments, etc.) is similar to

income effect, increases consumption of leisure

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AP EconomicsMr. Bernstein

Equilibrium in the Labor Market• Combine the demand

from many firms and individuals

• Demand is downwardsloping

• Supply is upward sloping• Value of W* = Marginal

Product of last unit of labor hired

Market Labor Demand

Market Labor Supply

Wage

W*

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AP EconomicsMr. Bernstein

Imperfect Competition in the Product Market• In Perfect Competition

VMPL = P * MPL = W• Here, MR<P• MRPL = MPL x MR…

and is < VMPL

• MRPL is the firm’sDemand curve MRPL

VMPL

EcQuantity of Labor (workers) Em

Wage

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AP EconomicsMr. Bernstein

Imperfect Competition in the Product Market• Fewer units of laborare used if firm haspricing power (Em) than if they are price takers (Ec)

MRPL

VMPL

EcQuantity of Labor (workers) Em

Wage

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AP EconomicsMr. Bernstein

Imperfect Competition in the Labor Market• A monopsony is a

single buyer of a factor

• MFCL, or MarginalFactor Cost of Labor,rises with the upward sloping LaborSupply curve & is > W

MFCL

Labor Supply

$12

$10

Wage

Quantity of Labor (workers)3

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AP EconomicsMr. Bernstein

Imperfect Competition in the Labor Market• Hire where

MPRL = MFCL• Monopsony pays

W* < MRPL

Remember, whetherPerfect or ImperfectMarkets, firms hirewhere MRPL = MFCL

Wage

Quantity of Labor (workers)

MFCL

Labor Supply

W*

MRPL

E*