Lecture 14(i)

Announcements

Final Exam: Fri, Dec. 17, 6:30-8:30pm

·  If have exam conflict, there is a makeup final on Wed. Dec 22.

·  To take makeup, you MUST REGISTER with by NOON, Thursday, DEC 9.

Additional Information about the Final at Final OneStop Page (bottom of Moodle)

and

http://www.econ.umn.edu/~holmes/class/2010f1101/final_one_stop.html

Lecture

1. Demand for factors of production (derived demand for labor)

2. Real wages and productivity

3. Differences in wages: compensating differentials

4. Differences in wages:

return to human capital


Demand For Factors of Production (With a Focus on Labor)

So far:

·  studied consumer demand (beer and pizza)

·  firm supply

·  Now look at demand for factors of production

Derived demand (firms don’t want labor for own sake, want it to make a profit).

Technology of firm

Output prices

Input prices,

Put together and get labor demand


Technology given by

Production function

How output depends upon inputs.

Lawn Business:

2 workers for full day (8 hours)

1 truck

2 mowers

1 edger

Suppose with this combination of inputs, output is 10 lawns mowed

Add more inputs, have more output.

Suppose add another worker and can now mow 13 lawns.

Marginal Product of labor (MP) from 2 to 3 workers is

13 – 10 = 3 lawns.

How much labor should the firm hire?

·  Will depend upon the price of lawns.

o  Suppose price equal $40 per lawn.

o  Value of the marginal product equals P×MP = $40×3 = $120.

o  Should you hire the third worker?

·  Will also depend upon the wage.

If wage > $120 a day,

then wage > Value of MP

Bad idea

If wage < $120 day,

then wage < Value of MP,

Good idea.

General Rule: pick labor where

wage = Value of MP


Example: Back to Econland. Suppose the Marginal Product of Labor for S1 looks like this:

Note: We have diminishing marginal product, MP is downward sloping.


Suppose Widget Price is $2. What is S1’s derived demand for labor?

(What is the Value of the MP?)

What happens when wage changes?

Movement______

What happens when output price changes?______

(Let’s go back and see what happens if P=$4 for S1)


Add in labor supply to obtain equilibrium wage and quantity of labor


What has happened to Average Real Wages over time in the United States? (Real Wages means wages adjusted for inflation.)

Before looking at the table, let’s define average Labor Productivity as Total Output in a year divided by Total Hours Worked

Now look at the growth in average wages and the growth in average labor productivity


Table 2 in Chapter 19

Productivity and Wage Growth

Time Period / Growth Rate of Labor Productivity / Growth Rate of Real Wages
1959-2006 / 2.1% / 2.0
1959-1973 / 2.8 / 2.8
1973-1995 / 1.4 / 1.2
1995-2006 / 2.6 / 2.5


Clear pattern here that wage growth is associated with productivity growth.

What is the source of labor productivity growth?

Main source: technological change.

That is what is going on with average wages. Next, let’s discuss differences in wages across workers.


First factor

Compensating Wage Differentials

People with the same skills tend to get different pay if they work at jobs with different characteristics. More dangerous, unpleasant jobs tend to get higher pay.

These guys probably get a little extra


For the economics professor job, you get higher pay teaching in a business school than an equal quality regular economics department, particularly for entry-level jobs (new Ph.D.s)

We have new Ph.Ds in our program turning town higher pay in a business school to take a job in a regular economics department. Why?

·  Opportunity to teach Ph.D. students in a regular department very valuable for one’s research career (and later earnings)

·  Most economists hate teaching MBA students!

Second factor:

Workers differ in the amount of human capital they have acquired (that is skills/education)

Workers with more human capital tend to get higher wages.


Skill Premium: Pay difference between skilled and unskilled labor

(In table, this is the % extra for college grads)

Table 1 in Chapter 19

($1,000 at 2005 prices)

1980 / 2005
Men
High school / 41 / 40
College / 59 / 75
Skill premium / 44% / 87%
Women
High school / 25 / 29
College / 33 / 49
Skill Premium / 35% / 72%

Supply and Demand

For Skill and Unskilled