Chapter 9 - Wage determination and superstar salaries. After completing this unit, you should be able to: Explain how buyers in the labor market make hiring and salary decisions, demonstrate the importance of the value of the marginal product of labor and the marginal cost of labor, explain why there are pay differences across occupations.
Trang 1Introduction to Economics: Social Issues and Economic Thinking
Trang 2Ø Explain how buyers in the labor
market make hiring and salary
decisions
Ø Demonstrate the importance of
the value of the marginal
product of labor and the
marginal cost of labor
Ø Explain why there are pay differences across
occupations
Ø Explain why individual salary comparisons are not valid for determining how much society values different occupations
Copyright © 2013 John Wiley & Sons, Inc. 2
After studying this chapter, you should be
able to:
Trang 3Ø In 2001 Alex Rodriguez signed a 10-year
contract for $252 million with the Texas Rangers team.
In 2011
Ø Tiger Woods ’s earnings were $75 million
Ø Oprah Winfrey ’s earnings were $290 million
Ø Average annual earnings for registered nurses, elementary school teachers, and fire fighters
Pay differences across occupations
Trang 4Ø In the labor market, the demand and supply of labor determines worker earnings and the
quantity of labor hired
Ø Wages and other labor earnings are simply
prices that are determined by the market
interactions between buyers and sellers of labor.
Copyright © 2013 John Wiley
& Sons, Inc.
4
The labor market
Trang 5Ø The buyers of labor are business firms
Ø Restaurants, accounting firms, banks, school districts, hospitals, and all the other producers
of goods and services in the economy
Ø For superstars: movie studios, sports teams, and those hiring superstars for marketing or endorsement purposes.
THE BUYERS OF LABOR
Trang 6The Marginal Cost of Labor is the increase in costs that businesses incur from hiring the worker.
Including: wages, costs of advertising, screening and interviewing job candidates, training, related taxes
and employee benefits
Copyright © 2013 John Wiley
& Sons, Inc.
6
The Marginal Cost of Labor
Trang 7The Marginal Benefit of hiring an additional worker
depends on the output that you gain by hiring the
worker
Described by production function:
that can be produced with different amounts of
inputs
level of input use
The Marginal Benefit of Hiring Labor
Trang 8Copyright © 2013 John Wiley
& Sons, Inc.
8
An example of production function
Trang 9The Marginal Product of Labor (MPL) is the additional output gained from hiring an additional worker, ceteris paribus.
Marginal Product of Labor
Trang 10Copyright © 2013 John Wiley
& Sons, Inc.
10
Marginal Product of Labor
Trang 11Marginal Product of Labor
Trang 12Law of Diminishing Marginal Product
Holding other inputs constant, as additional units of
an input are added to a production process, at some point increases in total production occur at a
decreasing rate
Copyright © 2013 John Wiley
& Sons, Inc.
12
Law of diminishing marginal
product
Trang 13The Value of the Marginal Product of Labor (VMPL) is the increase in total revenue earned when the firm hires an additional worker VMPL is equal to the MPL
multiplied by the price of the output being produced
VMP L = MP L x P output
The value of the marginal product of labor
Trang 14Copyright © 2013 John Wiley
& Sons, Inc.
14
The value of the marginal product of
labor
Trang 15The value of the marginal product of
labor
Trang 16Ø Anything that affects labor productivity
Ø Motivation
Ø Human Capital (The acquired skills and
knowledge that makes workers more productive)
Ø Access to capital equipment and
technology
Ø Price of output
Copyright © 2013 John Wiley
& Sons, Inc.
16
Trang 17Optimal Number of Workers to Hire
In determining the optimal number of workers to hire
in order to maximize Java ’s profits, we compare the marginal benefits and marginal costs of hiring each additional worker
The Firm ’s Profit Maximizing Hiring
Decision
Trang 18Marginal benefits and marginal costs of hiring workers
at Java
Copyright © 2013 John Wiley
& Sons, Inc.
18
The Firm ’s Profit Maximizing Hiring
Decision
Trang 19Java’s profits are maximized when hiring 4th worker
The Firm ’s Profit Maximizing Hiring
Decision
Trang 20Ø A firm will earn profit whenever it can pay a worker less than his or her value of marginal product of
Copyright © 2013 John Wiley
& Sons, Inc.
20
Maximum Wage to Pay a Given Worker
Trang 21Firm ’s Demand Curve for Labor
Trang 22Copyright © 2013 John Wiley
& Sons, Inc.
22
Summary of the Profit-Maximizing Hiring
Decision
Trang 23Ø The supply of labor comes from workers who sell their time and
effort to employers
individuals, like athletes Cristiano Ronaldo and Tiger Woods,
actress Cameron Diaz, and you.
choices about how much to work, who to work for, and how much to invest in their human capital
individuals make their labor
Copyright © 2013 John Wiley
& Sons, Inc.
23
The sellers of labor
Trang 24Copyright © 2013 John Wiley
& Sons, Inc.
24
LABOR MARKET EQUILIBRIUM
Trang 25Shifts in the Demand and Supply of
Labor
Trang 26Ø Lisa Leslie, Kobe Bryant both top players in their sport
earned $29 million from the
Lakers, while Lisa Leslie earned only $100,000 from the Sparks
(the maximum in the WNBA at
that time).
Copyright © 2013 John Wiley
& Sons, Inc.
26
THE SUPERSTAR LABOR MARKET
Trang 27Wage reflects marginal value, not total value of labor
Marginal Value vs Total Value of
Labor
Trang 28Copyright © 2013 John Wiley
& Sons, Inc.
28
1) Professional U.S soccer players earn
much less than professional U.S baseball players Using economic reasoning,
explain why.
2) From an economic perspective, are
professional sports players worth their multimillion-dollar salaries? Explain why or why not.
Trang 29Key Concepts
• Production function
• Total product
• Marginal product of labor
• Law of diminishing marginal product
• Value of the marginal product of labor
• Human capital
• Profit