32.1 The Demand of Labor

• The firm will pick the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.

• It can hire as many workers as it wants at the marginal wage, so the marginal cost of labor equals the hourly wage.

• The marginal product of labor is ****the change in output from one additional unit of labor.

• The marginal-revenue product of labor (MRP) is the extra revenue generated from one additional unit of labor; MPR is equal to the price of output times the marginal product of labor.

  • The marginal benefit of labor equals the marginal-revenue product of labor.

• The MRP curve is also the firm’s short-run demand curve for labor.

  • A short-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the short-run when the firm can’t change its production facility.

• If you pick a wage, the MRP curve tells you exactly how much labor the firm will demand at that wage.

• An increase in the price of the output will increase the MRP of workers, shifting the entire demand curve for labor to the right:

  • At each wage, the firm will hire more workers.

• The long-run demand curve for labor is a curve showing the relationship between the wage and the quantity of labor demanded over the long run when the number of firms in the market can change and firms can modify their production facilities.

• The output effect is the change in the quantity of labor demanded resulting from a change in the quantity of output produced.

• The input-substitution effect is the change in the quantity of labor demanded resulting from an increase in the price of labor relative to the price of other inputs.

• The input-substitution effect decreases the labor input per unit of output while the output effect decreases total output.

• There is less flexibility in the short run because firms cannot enter or leave the market and they cannot modify their production facilities.

32.2 The Supply of Labor

• A substitution effect for leisure demand is the change in leisure time resulting from a change in the wage (the price for leisure) relative to the price of other goods.

• An income effect for leisure demand is the change in leisure time resulting from a change in real income caused by a change in the wage.

• A market supply curve for labor is a curve showing the relationship between the wage and the quantity of labor supplied.

32.3 Labor Market Equilibrium

• An increase in demand increases the equilibrium price and quantity, whereas a decrease in demand for medical care increases.

• An increase in supply decreases the equilibrium price but increases the equilibrium quantity, whereas a decrease in supply increases the equilibrium price but decreases the equilibrium quantity.

• The minimum wage decreases the quantity of labor restaurants use by 1,000 hours per day.

• Workers who keep their jobs gain at the expense of other workers at the expense of diners.

• The learning effect is the increase in a person’s wage resulting from the learning of skills required for certain occupations.

• The signaling effect is the information about a person’s work skills conveyed by contemplating college.

• A labor union is a group of workers organized to increase job security, improve working conditions, and increase wages and fringe benefits.

• Featherbedding is the work rules that increase the amount of labor required to produce a given quantity of output; may actually decrease the demand for labor.

32.4 The Distribution of Income

• Market income is defined as all earnings received from labor and capital markets.

  • It includes wages and salaries, as well as earnings from bonds, stocks, and real estate.

• The three key reasons for income inequality in a market-based economy are:

  • The differences in labor.

  • Luck and misfortune.

  • The discrimination.

32.5 Public Policy and the Distribution of Income

• Government policies affect the distribution of income through taxes and transfer policies.

• The U.S. government defines a poor household as one with a total income less than the amount required to satisfy the “minimum needs” of the household.

  • The poverty rates for both blacks and Hispanics are more than twice the poverty for whites.

  • The poverty rate for female-headed households is about five times the proverb rate for households headed by a married couple.

  • The poverty rate is relatively low for the aged and relatively high for children.

• Poverty rates are lower for more-educated workers.

• The means-tested program is a government spending program that provides assistance to those whose income falls below a certain level.

• Two features of assistance programs that affect work incentives:

  • The base cash program where the larger the amount provided as a base-the payment to someone who earns no market income the lower the incentive to work to supplement the base income.

  • The benefit reduction rate is when a recipient earns market income, the welfare payment decreases by a rate that varies from state to state.