SOLUTIONS TO SELF-CHECK QUESTIONS
13.1 Demand and Supply at Work in Labor Markets
- Changes in the wage rate (the price of labor) cause a movement along the demand curve. A change in anything else that affects demand for labor (e.g., changes in output, changes in the production process which use more or less labor, government regulation) causes a shift in the demand curve.
- Changes in the wage rate (the price of labor) cause a movement along the supply curve. A change in anything else that affects supply of labor (e.g., changes in how desirable the job is perceived to be, government policy to promote training in the field) causes a shift in the supply curve.
- Since a living wage is a suggested minimum wage, it acts like a price floor (assuming, of course, that it is followed). If the living wage is binding, it will cause an excess supply of labor at that wage rate.
13.2 The Theory of Labor Markets
- For a firm operating in a perfectly competitive output market, the value of the marginal product is the marginal product of labor multiplied by the firm’s output price.
Labor Marginal Product of Labor Price of Product Value of the Marginal Product 1 10 $4 10 x $4 = $40 2 8 $4 8 x $4 = $32 3 7 $4 7 x $4 = $28 4 5 $4 5 x $4 = $20 5 3 $4 3 x $4 = $12 6 1 $4 1 x $4 = $4 - In a perfectly competitive labor market where the going market wage is $12, a profit-maximizing firm will hire workers up to the point where the market wage equals the marginal revenue product. In this case, the market wage equals the marginal revenue product when the labor is 5 because at that level, the marginal revenue product is $12.
13.3 Wages and Employment in an Imperfectly Competitive Labor Market
- The marginal cost of labor is the cost to the firm of hiring one more worker. To find the marginal cost of labor, one must divide the change in wage by the change in labor.
Labor Wage Marginal Cost of Labor 1 10 10 2 8 8-10/1 =- 2 3 7 7-8/1 = -1 4 5 5-7/1 = -2 5 3 3-5/1 = -2 6 1 1-3/1 = -2 - Because the monopsonist is the sole employer in the labor market, it can offer any wage that it wishes. However, the marginal cost of labor will be greater than the wage for any number of workers more than one because hiring more than one worker requires paying a higher wage rate for both the new worker and all previous hires. A monopsony will hire workers up to the point where its demand for labor equals the marginal cost of additional labor.
13.4 Market Power on the Supply Side of Labor Markets: Unions
- With no union, the equilibrium wage rate would be $18 per hour and there would be 8,000 bus drivers.
- If the union has enough negotiating power to raise the wage by $4 per hour than under the original equilibrium, the new wage would be $22 per hour. At this wage, 4,000 workers would be demanded while 10,000 would be supplied, leading to an excess supply of 6,000 workers.
13.6 Employment Discrimination
- Firms have a profit incentive to sell to everyone, regardless of race, ethnicity, religion