| Coase Theorem | A theorem by Nobel Laureate Ronald Coase which states that as long as the relevant parties can bargain easily (i.e., the transaction costs of bargaining are small), the allocation of resources is independent of the allocation of property rights.
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| Cobweb Model | A labor market characterized by labor supply adjustments which lag behind changes in demand because of the lengthy training periods required. The path of wages and employment in such models traces out a cobweb pattern when plotted on a supply and demand diagram.
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| Deadweight Loss |
excess burden, deadweight loss measures the values of gains forgone because the tax forces employers to cut employment below the efficient level.
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| Efficient Allocation | The state achieved when the value of goods and services produced is as large as possible given the amount of labor available. This state occurs when the value of marginal product of a given type of labor is the same in all its potential uses and is equal to its opportunity cost (the price of this type of labor).
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| Gains from Trade |
the sum of the producer surplus and worker surplus, or the area of P+Q.
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| Invisible Hand Theorem | A theorem advanced by Adam Smith that, if markets are competitive and if firms and workers are free to enter and leave these markets, the equilibrium allocation of workers to firms is efficient.
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| Mandated Benefits |
worker benefits that are ensured by the government.
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| Marginal Revenue Product | The change in total revenue which results from changing labor input by one unit.
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| Monopoly | A labor market in which there is only one seller of the output. Although a monopoly can affect the price of the output it sells, it is a price taker in the labor market. Because a monopoly restricts output to keep the price of the output high, it requires less labor than a competitive firm that cannot affect the output price. There is some evidence that some monopolist (such as public utilities) may pay more than the competitive wage because they have less incentive to hold down costs and can use an Aabove market@ wage to attract relatively capable workers.
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| Monopsony | A labor market in which there is only one buyer of labor. In contrast to a competitive firm which can hire as much as labor as it wants at the going price, a monopsonist must pay higher wages in order to attract additional workers.
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| Oligopoly | A labor market in which there are only a few sellers of the output (e.g., the airline industry). An oligopolist, like a monopoly, can influence the price through its production decision. Thus, although an oligopolist may be a price taker in the labor market, it hires fewer workers than a competitive firm because it has an incentive to restrict output in order to keep the output price high.
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| Producer Surplus |
the profits accruing to firms.
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| Rational Expectation | The view that economic expectations are formed using all information currently available.
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| Wage Convergence | The hypothesis that wage differentials between comparable workers in different localities narrow over time.
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| Worker Surplus |
the gains accruing to workers. The difference between what the worker receives and the value of the worker’s time outside of the labor market.
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