Labor Demand. Anastasiya Shamshur

Transkript

1 Labor Demand Anastasiya Shamshur

2 Outline Labor Supply Labor Demand always DERIVED: demand for labor is derived from the demand for a rm's output, not the rm's desire fore hire employees. Equilibrium in Labor Market

3 Labor Demand Model: Firms Firm's role in: Labor Market consumes labor Capital Market consumes capital Product (output) Market supplies its output

4 Short-Run Labor Demand Capital is FIXED! Production function: Q = f (L, K) More output with more inputs! Prot: π = pq wl r K Optimal number of workers? p MP L }{{} = w and VMP L is declining

5 Conditions for the MP L to Represent Labor Demand The employer is trying to maximize prot. The period is the short-run. The wage is the only cost of labor to the employer. All workers are the same quality. The labor market is competitive. The product market is also competitive.

6 Criticism of the Theory of Labor Demand Limits to Human Cognition Non-maximizing Behavior Fixed Capital/Labor Proportions Increasing Returns to Labor Independence between the Wage and Worker Productivity

7 Elasticity of the Demand for Labor

8 Categorizing Elasticity Elastic - Very sensitive ε > 1 Unit Elastic - Somewhat sensitive ε = 1 Inelastic - Not very sensitive ε < 1 Perfectly Elastic - SUPER sensitive ε = Perfectly Inelastic - Not at all sensitive ε = 0

9 Long-Run Demand for Labor The rm's capital stock is NOT xed Isoquants are downward sloping Higher isoquants indicate higher levels of output Isoquants do not intersect Isoquants are conves to origin

10 Derive the Isoquant Production function is given by Q = KL, Q = 10. Solve for K. 10 = KL K = 10 L L K

11 Isocosts Isocost line: equally costly combinations of L and K. C = wl + rk C 1 > C 0 Slope of isocost: K = C r + w r L

12 Cost Minimization Problem: min wl + rk L,K s.t. f (L, K) = q Solution: the slope of isoquant= =the slope of isocost w r = MP L MP K

13 Labor Demand? Q = f (L, K) = L 1/4 + K 1/4 π = pq wl rk = p(l 1/4 + K 1/4 ) wl rk MP L = 1 4 L 3/4 MP K = 1 4 K 3/4 Using p MP L = w and p MP K = r ( p ) 4/3 1 p 1 4 L 3/4 = w= L = 4w 2 p 1 4 K 3/4 = r = K = ( p 4r ) 4/3

14 Eect of Lower Real Wage w?

15 Changes in cost of inputs: w Two simultaneous changes: in capital labor ratio in production size

16 Substitution and Scale Eect

17 Long-Run Labor Demand

18 Elasticity of Substitution σ is determined by the production function!

19 Elasticity of Substitution The elasticity of substitution indicates how easily rms can change their input mix as relative input prices change. σ = % (K/L) (K/L) or σ = % (w/r) (w/r) w/r K/L Note: for prot maximization w r = MRTS σ = % (K/L) % (MRTS) or σ = (K/L) (MRTS) MRTS K/L σ 0: higher values of σ indicate that the rm can more easily substitute inputs as the relative input prices change.

20 The Long-Run Vs. Short-Run Demand Curve

21 The Determinants of the Elasticity of Labor Demand Demand for the Final Product The Share of Labor in the Total Cost Substitutability of Other Factor Inputs The Elasticity of Supply of Other Factor Inputs

22 Overview of Labor Market Equilibrium

23 Policy Application: Minimum wage

24 Policy Application: Minimum wage If the labor demand elasticity with respect to wages is low,the employment eects of min wages are low. Extreme cases: If labor demand is perfectly inelastic? If labor demand is perfectly elastic? Reality? somewhere between extreme cases

25 Homework Midterm: March 30 Required: Borjas, 5e: Ch 3 HW#2 due to BEFORE the class!!! Additional: Ehrenberg and Smith, Ch 3-4.