Chapter 11

The Labor Market

11.1 INTRODUCTION

11.2 DEMAND FOR LABOR

11.2.1 Demand for Labor by the Individual Firm

· Production function. Table 11-1, p. 250 presents a numerical example of the relationship from one to seven lab technician days. One technician can produce 50 blood tests; with two technicians the lab can produce 110 tests, etc.

· Revenue derived from worker production. Assuming that the blood test has a fixed price of $3, the first technician brings in $150 in revenues, the first two technicians combined bring in $330, etc. The marginal value product (MVP) is defined as the additional revenue obtained from hiring one more technician. This is shown in the fifth column of Table 11-1. The MVP curve is shown in Figure 11-1, p. 251.

· Labor cost. Assuming that each lab technician earns $80 per week, the marginal cost of the input is $80.

· Firm’s objectives. We assume that the firm has a goal of maximum profits, defined as revenue minus cost. Maximum profits occur when the revenue from adding one additional technician equals the additional cost of hiring him/her.

11.2.2 Market Demand for Labor

11.3 LABOR SUPPLY

11.3.1 Individual Labor Supply

The positive relationship between wages and labor time measures what is called the substitution effect of income for leisure. See Figure 11-3, p. 254.

11.3.2 Health Insurance Benefits and Labor Supply

11.3.3 Market Supply of Labor

11.4 THE COMPETITIVE LABOR MARKET

11.4.1 Assumptions

The basic model is shown graphically in Figure 11-5, p. 257.

11.4.2 Predictions

11.4.2.1 Supply, Demand, and Wage Rate

11.4.2.2 Health and Labor Market Outcomes

11.4.2.3 Occupational Risk and Labor Market Outcomes If we could adjust for all factors affecting supply and demand other than risk, then the inter-occupational differences in wages would just compensate for differences in risk.

11.5 MARKET POWER IN LABOR MARKETS

11.5.1 Buyer’s Market Power

· Supplier costs. Let us suppose that there is a single buyer of nursing services (a monopsonist), a hospital in a small community. For this single buyer, we set out an economic model to predict pricing and output decisions. With respect to the supply side of the labor market, we assume there are a number of nurses available to be hired by the hospital (their supply curve is drawn in Figure 11-6, p. 260). With respect to the demand side the successive marginal value product that the hospital places on nurses is also shown in Figure 11-6.

· Revenues. Assuming that the marginal productivity of additional nurses in terms of the number of patients treated diminishes and that the price received for each extra patient by the hospital is constant at $1, the marginal revenue (equal to price of output times the marginal productivity) is $9 for the first nurse, $8 for the second, etc.

· Behavioral assumption. Finally, we will assume that the hospital wishes to maximize profits.

The hospital will hire additional nurses as long as the marginal cost of doing so is less than the additional revenue. But the MC of nurses is not the nurses’ supply curve to the hospital since the hospital must pay all nurses the same wage, hiring the second nurse means it must pay the first nurse the same higher wage as well. As a result, the MC curve is above the nurses’ supply curve (see Figure 11-6). The hospital will hire three nurses, where its additional revenue equals its MC for hiring nurses. It will pay a wage of $3 because at that wage three nurses will supply their services.