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Page 1
Econ 120
Dr. Gaulke
Chapter 17: Labor Market and Income Distribution
Labor Demand
The demand for labor is called “derived demand” because
Remember by the marginal principle hire workers as long as MB≥MC
o
MB of labor = MRPL = MPL*P_output
o
MB of labor is the additional revenue an additional worker brings into the firm
Short Run Demand curve for labor shows the relationship between wage and the quantity of
labor demanded in the short run when firms cannot change its production facility (you have
some fixed input)
o
The firm’s demand curve is
o
Graph:
o
Demand shifts if
Long run Demand Curve
o
In the long run firms can enter or exit the market and can change all inputs including the
production facility
o
No diminishing returns in the long run
o
However, labor demand is still negative sloped.
Why?
Output Effect:
Input-substitution Effect:
Ex. Mining in the USA versus in less developed countries


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o
Note: Demand for labor is less elastic in the short run because of less flexibility due to
fixed inputs
Labor Supply
You face a tradeoff between work and leisure.
What is the price of leisure?
An increase in the wage could increase or decrease your hours worked.
Why?
o
Substitution Effect:
o
Income Effect:
A change in the wage can affect labor supply in multiple ways
o
Hours
o
Occupation
o
Migration
o
Elasticity = percent change in labor supply/percent change in wage
Labor Market Equilibrium: Where labor supply equals labor demand
Graphs:


Page 3
Why do wages differ across occupations?
o
Few people with required skills
o
H
o
U
o
Artificial barriers to entry: example of licensing we talked about in chapter 6
Why do college graduates earn more than non-college grads?
o
Learning effect
o
Signaling effect


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