Chapter Summary

Our goal in this chapter was to examine the economic forces that govern wages and other conditions of employment. The perfectly competitive firm's hiring rule in the short run is to keep hiring until the value of what the last worker produces-the VMPL-is exactly equal to the wage rate. In the long run, the firm's demand curve for labour is more elastic than in the short run, because the firm faces the additional possibility of substituting labour for capital.

To aggregate the individual firm demand curves into an industry demand curve for labour involves more than a simple horizontal summation of the individual firm demand curves. An adjustment has to be made for the fact that increasing industry output brings a lower product price.

The demand curve for labour for a monopolist in the product market is constructed by comparing the wage not with the value of the output the worker produces, but with the amount by which the worker's output will change total revenue-MRPL. Unlike the perfectly competitive firm, monopolists must take into account that an increase in output requires them to sell existing output at a lower price.

We began our approach to the supply side of the labour market by considering the individual worker's decision of how much to work at a given wage rate. The more she works, the more she will earn, but the less time she will have available for other activities. The result is a standard consumer choice problem of the kind we examined in Chapter 3. In the consumer case, a price increase of a product is accompanied by a reduction in the quantity demanded (except in the case of the anomalous Giffen good). In contrast, in the labour supply context, it is not uncommon for people to supply fewer hours of labour when wage rates rise. To generate the market supply curve, we add the individual supply curves horizontally. The market supply and demand curves intersect to determine the industry wage level and total volume of industry employment.

The conventional view of labour unions is that they increase labour's bargaining power vis-ˆ-vis management, thereby increasing labour's share of a fixed economic pie. Recent research, however, suggests that unions may actually improve the productivity of workers, thereby enlarging not only their slice of the economic pie but also management's.

Proponents of minimum wage laws say they are needed to protect workers from being exploited by employers with excessive market power. Whether the legislation actually serves this goal, however, turns out to be a difficult empirical question.

Critics claim that many firms pay members of certain groups-notably visible minorities and females-less than they pay white males with the same productivity. Such charges would pose a fundamental challenge to microeconomic theory, for they imply that firms are passing up opportunities to enhance their profits. We saw several reasons, including discrimination by institutions other than firms, that people in the affected groups appear to earn lower salaries.

An apparent anomaly is the fact that people whose abilities differ only slightly sometimes earn vastly different salaries. The key to resolving the contradiction is to observe that in many contexts, the value of what someone produces depends not only on the absolute level of his or her skills, but on how those skills compare with others'. In arm wrestling, being just a little stronger than your opponent means you win just about every time. In the labour market as well, being just a little better than the competition sometimes means earning vastly more than they do.

The appendix to this chapter examines a number of factors that affect decisions regarding workplace safety.