wage labor

Examples of wage labor in the following topics:

• Market-Oriented Theories

  • According to market-oriented theories of inequality, the low wage earned by seasonal agricultural laborers will encourage members of the labor pool to acquire other skills, which in term will raise the wage earned by agricultural laborers.
  • The model is commonly applied to wages, in the market for labor.
  • As populations increase, wages fall for any given unskilled or skilled labor supply.
  • According to market-oriented theories, over time the low wages earned by agricultural laborers will induce more people to learn other skills, thus reducing the pool of agricultural laborers.
  • With less supply and stable demand, the wage for agricultural labor will rise to a sustainable level.

• Marginal Revenue Productivity and Wages

  • In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
  • Just as in any market, the price of labor, the wage rate, is determined by the intersection of supply and demand.
  • In the long run the supply of labor is a simple function of the size of the population, so in order to understand changes in wage rates we focus on the demand for labor.
  • Therefore, firms will continue to add labor (hire workers) until the MRPL equals the wage rate.
  • Thus, workers earn a wage equal to the marginal revenue product of their labor.

• Changes in Equilibrium for Shifts in Market Supply and Market Demand

  • To see how changes in wages affect the supply of labor, suppose wages rise.
  • In general, at low wage levels the substitution effect dominates the income effect and higher wages cause an increase in the supply of labor.
  • At high incomes, however, the negative income effect could offset the positive substitution effect and higher wage levels could actually cause labor to decrease.
  • An increase in the demand for labor will increase both the level of employment and the wage rate.
  • While normally hours of labor supplied will increase with the wage rate, the income effect may produce the opposite effect at high wage levels.

• The Wage Rate

  • The wage rate is determined by the intersection of supply of and demand for labor.
  • Firms are demand labor and workers provide it at a price called the wage rate.
  • In theory, as with other inputs to production, firms will hire workers until the wage rate (marginal cost) equals the marginal revenue product of labor (marginal benefit).
  • A decrease in the supply of labor will typically cause an increase in the wage rate.
  • The wage rate is determined by their intersection.

• Conditions of Equilibrium

  • Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK.
  • The supply of labor is elastic and increases with the wage rate (upward sloping supply); and
  • The point at which the MRPL equals the prevailing wage rate is the labor market equilibrium.
  • The optimal demand for labor is located where the marginal product equals the real wage rate.
  • The curved line represents the falling marginal product of labor, the y-axis is the marginal product/wage rate, and the x-axis is the quantity of labor.

• Labor Union Impacts on Equilibrium

  • Unions are organizations of workers that seek to improve working conditions and raise the equilibrium wage rate.
  • Fundamentally, unions seek higher wages for its member workers (though, here "wages" encompases all types of compensation, not just cash paid to the workers by the employer).
  • If employers (those who demand labor) have an inelastic demand for labor, the increase in wages (the price of labor) will not translate into a drop in employment (quantity of labor supplied).
  • One tool that unions may use to raise wages is to go on strike.
  • Examine the role of unions and collective bargaining in labor-firm relations

• Deriving the Labor Demand Curve

  • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
  • The cost of labor to a firm is called the wage rate.
  • Firms maximize profit when marginal costs equal marginal revenues, and in the labor market this means that firms will hire more employees until the wage rate (marginal cost of labor) equals the MRPL.
  • This both increases the number of employed workers and increases the wage rate.
  • The optimum demand for labor falls where the real wage rate (w/P) is equal to the MPL.

• Impact of Unions on Unemployment

  • If the labor market is competitive, unions will typically raise wages but increase unemployment.
  • Unions are able to raise wages because, when they are powerful, they may turn the labor market into a monopoly market.
  • In the case of the labor market, this means that wages will be higher, but so will unemployment.
  • In this competitive equilibrium, the wage rate would equal the marginal revenue product of labor and the outcome would be efficient.
  • If we assume that the labor market is imperfect and that wages are naturally lower than the marginal revenue product of labor, unions may increase efficiency by raising wage rates closer to the efficient level.

• Compensation Differentials

  • According to the basic theory of the labor market, there ought to be one equilibrium wage rate that applies to all workers across industries and countries.
  • One common source of differences in wage rates is human capital.
  • More skilled and educated workers tend to have higher wages because their marginal product of labor tends to be higher .
  • If a certain part of a country is a particularly attractive area to live in and if labor mobility is perfect, then more and more workers will move to that area, which in turn will increase the supply of labor and depress wages.
  • Not to be confused with a compensation differential, a compensating differential is a term used in labor economics to analyze the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job.

• Efficiency Wage Theory

  • Efficiency wage theory is the idea that firms may permanently hold to a real wage greater than the equilibrium wage.
  • The market-clearing wage is the wage at which supply equals demand; there is no excess supply of labor (unemployment) and no excess demand for labor (labor shortage).
  • This is called efficiency-wage theory.
  • The consequence of the efficiency wage theory is that the market for labor does may not clear and unemployment may be persistently higher than its natural rate.
  • Instead of market forces causing the wage rate to adjust to the point at which supply equals demand, the wage rate will be higher and supply will exceed demand.