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Labor Markets and Income Distribution

©2006 South-Western College Publishing

Factors of Production

Factors of production are the inputs used to produce goods and services.

The Market for the Factors of Production

The demand for a factor of production is a derived demand.A firm’s demand for a factor of production is derived from its decision to supply a good in another market.

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In a perfectly competitive market, what determines the

level of wages?The intersection of the demand for labor and the supply of labor

The Demand For Labor

Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.

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What does the demand curve for labor show?The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

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Decrease in Wage Rate

Increase in Quantity of labor an employer will hire

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What does the supply curve for labor show?

The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

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Increase in Wage Rate

Increase in Quantity of labor willing to work

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What Causes the Labor Demand Curve to Shift?

Output Price of the Good the laborers are Producing

Technological Change Supply of Other factors

Machines Workers in other counties

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What is human capital?The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive

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What factors can cause a change in the

supply for labor?• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training

Equilibrium in the Labor Market

The wage adjusts to balance the supply and demand for labor.

The wage equals the value of the value of the marginal product of labor. The value of the marginal product is the

dollar value of the product produced by the least skilled worker.

Equilibrium in the Labor Market

Labor supply and labor demand determine the equilibrium wage.

Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

A Shift in Labor Supply

An increase in the supply of labor : Results in a surplus of labor. Puts downward pressure on wages. Makes it profitable for firms to hire more

workers. Lowers the value of the marginal product. Gives a new equilibrium.

Shifts in Labor Demand

An increase in the demand for labor : Makes it profitable for firms to hire more

workers. Puts upward pressure on wages. Raises the value of the marginal product. Gives a new equilibrium.

Three Determinants of Productivity

Physical Capital When workers work with a larger quantity of

equipment and structures, they produce more.

Human Capital When workers are more educated, they produce

more.

Technological Knowledge When workers have access to more sophisticated

technologies, they produce more.

Productivity and Wage Growth in the United States

Time PeriodGrowth Rate of

ProductivityGrowth Rate of

Wages

1959 - 1997 1.8 1.71959 - 1973 2.9 2.91973 - 1997 1.1 1.0

Productivity and Wage Growth around the World

CountryGrowth Rate

of Productivity

Growth Rate of Real Wages

South Korea 8.5 7.9Hong Kong 5.5 4.9Singapore 5.3 5.0Indonesia 4.0 4.4

Japan 3.6 2.0India 3.1 3.4

United Kingdom 2.4 2.4United States 1.7 0.5

Brazil 0.4 -2.4Mexico -0.2 -3.0

Argentina -0.9 -1.3Iran -1.4 -7.9

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What has happened to the distribution of income recently?

Measured by distribution of family money income, the richest families did become a little richer and the rest of the family groups a little poorer in recent decades

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Exhibit 10-12 Medium Income of Families 2003

Characteristics

All Families

Families headed by male

$52,680

$38,032

$26,550

$46,554

$44,620

$86,921

Families headed by female

Families with head aged 25-34 years

Families headed by high school graduate

Families headed by bachelors degree

Medium Income

What causes earnings to vary so much?

Wages are governed by labor supply and labor demand.

Labor demand reflects the marginal productivity of labor.

What causes earnings to vary so much?

In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services.

Some Determinants of Equilibrium Wages

Compensating differentials Human capital Ability, effort, and chance Signaling The superstar phenomenon

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What is poverty?There are two views of

poverty. One defines poverty in absolute terms, and the other defines poverty in relative terms

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Absolute poverty can be defined as a dollar figure that represents some level of income per year required to purchase some minimum amount of goods and services essential to meeting a person’s or a family’s basic needs

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Relative poverty might be defined as a level of income that places a person or family in the lowest, say, 20 percent of all persons or families receiving incomes

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Who are the poor?The poverty rate was 26

percent for families headed by a female with no husband present and 12 percent for families headed by a male with no female present compared to only 5 percent for married couples

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13% 12%13%14%14% 14%

19951970 1975 1980 1985 1990 20032000

12%11%

Average Annual earnings by Educational Attainment

1978 1998

Men

High school, no college $31,847 $28,742

College graduates $52,761 $62,588

Percent extra for college grads +66 percent +118 percent

Women

High school, no college $14,953 $17,898

College graduates $23,170 $35,431

Percent extra for college grads +55 percent +98 percent

Why has the gap in earnings between skilled and unskilled workers risen in

recent years?

International trade has altered the relative demand for skilled and unskilled labor.

Changes in technology have altered the relative demand for skilled and unskilled labor.

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Who are eligible for antipoverty programs?The groups eligible for such

assistance include disabled persons, elderly persons, and poor families with dependent children

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What are some examples of cash

transfer programs?• Social Security• Unemployment compensation• Temporary assistance to

needy families

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What are in-kind transfers?

Government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing

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What are some examples of in-kind

transfers?• Food stamps• Medicare• Medicaid