Labor Market Flashcards
Why does the supply of labor curve slope upward?
- Higher wages make working more attractive compared to leisure
- People substitute away from leisure to working
When will the supply of labor curve shift?
When anything changes the number of workers available in the market
What is the demand for labor based on?
The value of the worker to the firm
What is the marginal product of labor?
MPL is how much output increases by when you hire another unit of labor
What are the two determinants for demand for labor
- Marginal product of labour (MPL)
- The price that the output can be sold for (P)
How is the value of the marginal product of labor calculated?
VMPL = MPL X P (price of output)
When will someone not be hired (demand for labor)?
When their number for VMPL - WAGE is negative
- the value they bring is less than their wage
How can labor be made more productive?
education / training or capital investment
What happens if labor can be made more productive?
they become more valuable to the firm = demand for labor increases
- A greater quantity of labor is hired at a higher wage
(this is the best way to improve standard of living / productivity)
What does it mean if wages increase?
Workers are more productive
Define Nominal Wage
how much a worker is paid in $
Define Real Wage
What the worker can buy with their nominal wage
- if nominal wages are constant, but prices are increasing, real wage is falling
What are wages equal to?
The price of labour
What is binding minimum wage?
minimum wage above the equilibrium
What is employee surplus?
Given to the workers
On the supply side, below wage and above the supply curve
What is employer surplus?
Given to the firms
On the demand side, below demand curve and above wages
In increasing nominal wages what is the supply curve equal to?
The supply of labour from households
In increasing nominal wages what is the demand curve equal to?
The demand for labour from firms
What are the x and y axis on increasing nominal wages graph?
y = wages and x = quantity of labour
Why is there a shift from Q to Qs with added minimum wage?
because the opportunity cost of not working is now higher
- missing out on higher wages, the supply of labour increases
What happens with a shift from Q to Qd with added minimum wage?
because the price of labour has increased, firms demand less labour
What is the unemployment calculation?
Qs - Qd
The distance between the two
What is unique about employee surplus with added minimum wage?
It does next extend past Qd
Who is better off with added minimum wage?
employer is worse off (loss of surplus)
Overall employees gain, those who still have a job receive a higher wage, some employees will work less (some winners, some losers, overall the group gains)
