KRUGMAN'SMICROECONOMICS for AP*

The Market for Labor

Margaret Ray and David Anderson

Micro:

Econ:

35

71

Module

What you will learnin this Module:• The way in which a worker’s

decision about time preference gives rise to labor supply.

• How to find equilibrium in the perfectly competitive labor market.

• How equilibrium in the labor market is determined if either the product, or the factor, market is not perfectly competitive.

The Supply of labor

• Work versus leisure

• Wages and labor supply

The Supply of labor• Substitution

effect

• Income effect

Hours of work (week)

IE>SE, downward sloping

SE>IE, upward sloping

Labor supplyHourly wage

So as the wage rises, the So as the wage rises, the substitution effect says “work substitution effect says “work more” while the income effect more” while the income effect says “work less”. If the says “work less”. If the individual’s labor supply individual’s labor supply curve is upward sloping, it curve is upward sloping, it must be the case that the must be the case that the substitution effect is stronger substitution effect is stronger than the income effect.than the income effect.If the income effect is If the income effect is stronger, particularly at very stronger, particularly at very high wages, the labor supply high wages, the labor supply curve is downward sloping, or curve is downward sloping, or “backward bending”.“backward bending”.

Shifts of the Labor Supply Curve

•Changes in preferences and social norms

•Changes in population

•Changes in opportunities

•Changes in wealth

Equilibrium in the Labor Market• Up to this point we

have assumed that both the product and labor markets are perfectly competitive

• There are differences when either the product market or labor market is not perfectly competitive

Quantity of Labor (workers)

Market Labor Demand

Market Labor SupplyWage

W*

E*

Imperfect Competition in the Product Market• Recall that MR < P with

imperfect competition. That means the value of the marginal product = MP x MR.

• With imperfect competition the value of the marginal product is called marginal revenue product (MRP).

MRP = MP x MR

Quantity of Labor (workers)

Wage

W*

Em

MRPL

VMPL

Ec

Imperfect Competition in the Labor Market

• A monoposony is a single buyer of a factor of production.

• With imperfect competition in a factor market, MFC > W

Quantity of Labor (workers)

Wage

3

MFCL

Labor Supply

$12

$10

Equilibrium with Imperfect Competition

• Monopsony power allows firms to pay a wage below MRP

Quantity of Labor (workers)

Wage

E*

MFCL

Labor Supply

W*

MRPL

MRP

Figure 71.1 The Individual Labor Supply CurveRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 71.2 Equilibrium in the Labor MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 71.1 Marginal Revenue Product of Labor with Imperfect Competition in the Product MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 71.3 Firm Labor Demand with Imperfect CompetitionRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 71.4 Firm Labor Supply in a Perfectly Competitive Labor MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 71.2 Marginal Factor Cost of Labor with Imperfect Competition in the Labor MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 71.5 Supply of Labor and Marginal Factor Cost in an Imperfectly Competitive MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 71.6 Equilibrium in the Labor Market with Imperfect CompetitionRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers