Good Case Study On Aspects Of The Labor Market
In a truly competitive market, manufacturers and providers of other goods and services are price-takers. That is, there is no incentive rationale why a provider should “price below the marketplace” or even to price above others. Similarly, in a competitive market, the price of the good is “determined by the market supply and the market demand” for it (Baye, 2010). Since competitive markets are considered here, there is also a correlation between what consumers are willing to pay (also known as “price makers”) and how much labor is needed by a producer to meet the needs for this demand equating into a financial measure, and “how many workers will be hired” to meet this demand by creating the supply (Pearson learning Solutions (PLS), n.d.).
More precisely, where the price makers and the price takers meet in terms of demand and supply, respectively, is also where there is “an assignment of resources” that makes economic sense. Often, labor is very much a part of this equation as the marginal benefit of the demand and the marginal cost of production of the good is where “allocative efficiency results”. It only makes sense to hire just enough workers to meet the needs of supply, as over-allocation of labor is not efficient. Only when there is stasis of marginal benefit meeting marginal cost is when application of labor efficient (McConnell, Brue, Flynn, 2009). At this point (literally) is where a “firm will pick the quantity of labor” needed to meet such efficiency (PLS, n.d.).
Two Factors Increasing Labor Market Demand
A factor which causes a change in demand for labor is when the profit-making firm decides how much labor to bring to bear to produce a good without diminishing the profit. It takes into consideration the Profit = Total Revenue less Total Cost equation. If the demand for their product increases, then there will be a greater demand for labor to produce the product (Colander, 2013). Ideally, the demand for labor, or the demand for the input of labor, will always meet the marginal cost of producing the good. So, as demand for a product increases, it also shifts the labor demand curve to the right, thus allowing for more labor to produce the product up to where the new marginal cost is met. As discussed briefly below, changes in previous discriminatory practices has allowed for an increase in “improved resource allocation”. This means that, for instance, that women and minorities have entered into higher productivity of work, such as “computer software, business consulting, and pharmaceuticals,” as demand for these types of products and services has increased (McConnell, Brue, Flynn, 2009).
New technologies lead to a greater demand for labor, also known as the marginal product of labor. To meet this demand, human capital is enhanced through education and training. The human capital is from outside training, like obtaining a college degree, and it is also derived from training within the company. Worker productivity has been estimated to climb upwards of 15% from such training on and off the job. The investment in human capital advances not only the quantity of worker production, but also the quality (McConnell, Brue, Flynn, 2009).
Market Price Increase and Labor Demand
If price makers, or consumers of a product or service, assign more marginal benefit, then the price will likely rise, with all else remaining the same (PLS, n.d.). As prices rise, then there is more incentive to hire more workers or to pay workers more in order to produce the same good. The firm will still be meeting an efficiency level of non-over allocation, yet more allocation of resources goes to labor (McConnell, Brue, Flynn, 2009).
Changes in consumer tastes or rising incomes can affect the change in marginal benefit leading to a higher price for the same quantity supplied. This assumes that there are enough firms producing the product and all are operating as “profit-maximizing entrepreneurial firms” (McConnell, Brue, Flynn, 2009). In this case, the elasticity of the demand for labor is nearly perfect in a competitive firm where the price of the product is rising, but demand and supply are remaining the same, or certainly where the marginal benefit is equal to the marginal cost (Colander, 2013). With an increase in the price of the product or service, though, wages, an input, can be increased in the short and long run, thus leading to a greater supply of labor (PLS, n.d.).
Licensure Lifting and Wages
A logical response to higher prices is a greater opportunity for wage increase, assuming that the supply of labor is not in excess of demand. One way to assure this is through greater barriers to entry, and often this is in the form of governmental licensing (PLS, n.d.). The main purpose of such licensing is “to limit competition for their services” from others in the labor market they feel “less qualified”. The ‘they’ usually refers to people currently in the profession (doctors, lawyers, plumbers, barbers, etc.) who tend to stack the governmental licensing boards and often urge lawmakers to pass even more strident requirements of, say, education, examinations, levels of work experience. This is known as “the craft union model,” and it tends to keep wages (and prices of goods) high by limiting the supply of labor (McConnell and Brue, 2008).
If licensure requirements of this craft union model are lessened or even eliminated, there may be negative externalities to consumers (e.g., incompetent lawyers; poor plumbers). As hinted at in the Pierson tutorial, this may be a straw man argument as there may be other ways to protect consumers than having the government institute licensure requirements (Pierson, n.d.). In the case of the government eliminating licensure for plumbers, wages would drop as more entrants would enter the labor market, thus shifting the supply of labor to the left. Whether a negative externality of poor plumbers would ultimately hurt consumers would have to be seen.
Should Government Intervene in the Labor Market?
When considering externalities, both positive and negative, government intervention can affect the labor market. One of the major ways that government has intertwined its role with the labor market was in the passage of major legislation. Even considering laws from the last 20-years or so, the role of the federal government is substantively behind a more equal protection of American workers. It has further “enmeshed market processes with an institutional framework” (Belman and Beltzer, n.d.)
For instance, The Americans With Disabilities Act provides more relief from and barriers to “discrimination and ensures equal opportunity for persons with disabilities in employment . . .” (United States Department of Justice, 2010). The Civil Rights Act of 1991 sought to overturn a number of U.S. Supreme Court cases which had granted employers more latitude with firing of personnel by now allowing aggrieved parties “compensatory and punitive damages in intentional employment discrimination cases” as well as instituting jury trials, something previously denied (Equal Employment Opportunity Division, n.d.).
Baye, Michael R. (2010). Managerial Economics and Business Strategy, 7th Ed. New York, NY: McGraw-Hill/Irwin.
Belman, Dale and Michael H. Beltzer. (n.d.) The Regulation of Labor Markets: Balancing the Benefits and Costs of Competition. Retrieved https://www.msu.edu/~drdale/Publications/Govt%20Regulation%20&%20the%20Minimum%20Wage/Government%20Regulation%20of%20the%20Employment%20Relationshiop.PDF
Colander, David C. (2013). Microeconomics, 9th Ed. New York, NY: McGraw-Hill/Irwin.
Equal Employment Opportunity Commission. 1999. Website. Retrieved http://www.eeoc.gov/eeoc/history/35th/thelaw/index.html
McConnell, Campbell R. and Stanley L. Brue. (2008). Microeconomics: Principles, Problems, and Policies. New York, NY: McGraw-Hill/Irwin.
McConnell, Campbell R., Stanley L. Brue, and Sean M. Flynn. (2009). Macroeconomics: Principles, Problems, and Policies. New York, NY: McGraw-Hill/Irwin.
Pearson Learning Solutions. (n.d.) The Labor Market. Retrieved http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=12387%20Interactive%20Tutorial
United States Department of Justice: Civil Rights Division. 2010. “Information and Technical Assistance on the Americans with Disability Act.” ADA.gov Website. Retrieved http://www.ada.gov/2010_regs.htm
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