The Demand For Labor. The Demand for Labor. The Demand For Labor. The Demand For Labor. Why study labor demand and supply?

Transcription

1 The Demand For abor The Demand for abor This lecture develops the model of labor demand The Demand For abor This lecture develops the model of labor demand The next lecture develops labor supply The Demand For abor This lecture develops the model of labor demand The next lecture develops labor supply A third and fourth lecture apply the model to some specific issues. We are all interested in labor markets We are particularly interested in one aspect, human capital 1

2 The theory says important things about the markets for particular commodities. The theory says important things about the markets for particular commodities. We think of many commodities as factors of production. An automobile is not a commodity per se, but a factor of production for transportation services. The theory says important things about the markets for particular commodities. Firms orry a great deal about this topic. Factor markets are important in The theory says important things about the markets for particular commodities. Firms orry a great deal about this topic. Many important political topics turn on an understanding of factor markets. o 2 1 The Basics of Factor Demand o 2 1 Production isoquants describe the relation beteen inputs and outputs 1 o 2 1 o 2 1 To ey Propositions 1 abor has a positive marginal product. abor has a diminishing marginal physical product 2

3 MPP and VMP Curves MPP and VMP Curves * MPP MPP * The Short Run Demand For abor The VMP curve is the short run labor demand curve. The Short Run Demand For abor The VMP curve is the short run labor demand curve. When the age rate is, o demanded o The Short Run Demand For abor The VMP curve is the short run labor demand curve. When the age rate is, o demanded When the age rate is 1, 1 demanded 1 o 1 o ong Run abor Demand o 3

4 1 ong Run abor Demand 1 ong Run abor Demand Expansion ine 1 1 o o 1 o 1 o 1 ong Run abor Demand Expansion ine o 1 While e ould normally expect an increase in output to lead to a increased demand for both factors, that need not be the case. et s see hat happens hen ages change. Initially the firm is employing * orkers. 1 o * No, the age rate falls to. If the firm kept producing the same amount of output, e ould substitute labor for capital. But there is more to the story. What happens to? * ** * ** * 4

5 It probably moves to the right. (Note that this is a fall in ). Substitution Effect Scale Effect * ** * ** * ** * ** The To Effects Change in uantity of abor Demanded = Substitution Effect + Scale Effect From Firm Demand to Market Demand In general, e expect the substitution effect ill dominate even if the scale effect is negative. D 1 q 1 From Firm Demand to Market Demand From Firm Demand to Market Demand D 1 D 2 D m = D 1 +D 2 D 2 D 1 q 1 q 2 q 1 q 2 q m =q 1 +q 2 5

6 Applications Short Run abor Demand Applications Short Run abor Demand A change in age rates A change in the price of the product Applications Short Run abor Demand A change in age rates A change in the price of the product ong Run abor Demand Applications Short Run abor Demand A change in age rates A change in the price of the product ong Run abor Demand A change in age rates A change in the price of the product A Change in the Wage - Short Run abor Demand When the age rate is, o o A Change in the Wage - Short Run abor Demand When the age rate is, o When the age rate is 1, 1 1 o 1 6

7 A Change in the Wage - Short Run abor Demand When the age rate is, o demanded When the age rate is 1, 1 In short, the loer the age rate the greater the quantity of labor 1 o 1 Short Run abor Demand When the age rate is 1, Short Run abor Demand When the age rate is 1, 1 If the price rises to P*, the VMP curve shifts up and to the right. 1 VMP= MPP x P* 1 Short Run abor Demand When the age rate is 1, 1 If the price rises to P*, the VMP curve shifts to the right. The quantity of labor demanded increases to 1 * 1 VMP= MPP x P* 1 1 * A change in the Wage -ong Run abor Demand Change in uantity of abor Demanded = Substitution Effect + Scale Effect A change in the Wage -ong Run abor Demand Change in uantity of abor Demanded = Substitution Effect + Scale Effect A fall in the age rate means increased quantity demand via the substitution effect. 7

8 A change in the Wage -ong Run abor Demand Change in uantity of abor Demanded = Substitution Effect + Scale Effect A fall in the age rate means increased quantity demand via the substitution effect. While theoretically possible that the scale effect could reverse this, it is not likely. ong Run abor Demand * ong Run abor Demand ong Run abor Demand P* P P * * * ong Run abor Demand There is no substitution effect, but the scale effect is probably positive, so that the higher price probably leads to an increased demand. P* P End 2003 Charles W. Upton * * 8