BELTEI International University

The Future of Global Leaders

WEEK 5
Subject: Principles of Economics
Year 1, Semester 1 (NP+IP)
Unit 5: Labor Markets
Lesson 5: Labor Markets

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 Learning Outcomes
By the end of the lesson, students will be able
to:
1. What Is labor market?
How is it important?
2. Why does it change over the time?
3. How to control it for not changing?

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 Introduction
• A janitor in the United States earns about $10 an hour; a typical janitor in
India earns less than $1 an hour. Why is there such a difference? Why does
one person earn so much more than the other? After all, janitors in both
countries do man of the same things: They clean windows and floors,
scrub toilets, remove trash, and so forth. If you think the differences in
wages have to do with supply and demand, you are on the right track.
Wages are determined in the market for labor just like other prices are
determined.

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 Introduction
• In this chapter, we look more deeply at the factors underlying
the demand for labor and the supply of labor. A deeper
understanding explains how wages are determined at a
fundamental level, why most Americans earn so much by
global standards, why education raises wages, whether and
how much labor unions help workers, and how discrimination
still shapes labor markets today.

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 5.1| The Demand for Labor and
the Marginal Product of Labor

• A firm is willing to hire a worker

when the worker increases the Examples:
firm’s revenues more than the
firm’s costs. Economists call the 1. Cost of S/D
increase in revenue created by
hiring an additional worker the
marginal product of labor (MPL).
2.Compensation
• The increase in costs created by
hiring an additional worker is, for a 3.Health benefits
competitive firm, simply the
worker’s wage. 4.Health care

5.Healthy environment

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 5.3| Labor Market Issues
• Why Do Janitors in the • Examples:

United States Earn More

Than Janitors in India
Even When They Do the
Same Job?

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 Human Capital
• Americans are fortunate to work in a Examples
productive economy. But high wages
are not just the result of fortunes of 1. Teachers
birth.
2. Trainers
• Wages within America differ greatly
from worker to worker so let’s look at 3. Lecturers
some of the reasons why.
4. Employers
• Some workers have higher wages than
others because they have more human 5. Manager
capital. Physical capital is tools like
computers, bulldozers, and 3D printers.
• Human capital is tools of the mind, the
stuff in people’s heads that makes them
productive

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 Human Capital
• Of course, investing in human • Examples:
capital usually costs money; it costs
not just what a doctor spends on
medical school tuition but what he
or she could have earned during
those eight years in medical school,
namely opportunity cost. But, in
general, investments in human
capital bring a good return in the
United States. In recent years,
college graduates have made
almost twice as much as high school
graduates.

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 Compensating Differentials
• The supply of labor depends Examples:
on the real wage, but the real • Right now being a fisherman is the
wage of a job includes not most dangerous job in the United
just the monetary pay but States, more dangerous than being a
police officer or a firefighter.
also how much fun the job is.
• There are a lot of accidents out on
Some people work for nice the water.
bosses; others work for
tyrants. Some jobs are
dangerous; others are very
safe. Some jobs are
interesting; others are a bore

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Compensating Differentials

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 5.4| How Bad Is Labor Market Discrimination, or Can Lakisha Catch a Break?

• Why Discrimination Isn’t Always Easy to Examples:

Identify
1. Two economists had a neat idea. They
• As you may know, those are names closely
sent around two sets of identical
associated with African Americans. Names
résumés. On one set of résumés, the
can tell you a lot about who a person is. In
recent years, more than 40% of the black names were quite traditional and did not

girls born in California were given names
that, in those same years, not one of the
roughly 100,000 white newly born Californi
a girls was given.* The result was striking:
The resumes with the black names received
many fewer interview requests. The job
applicants with the “whiter” names received
50% more calls.
identify the background of the person
applying.
2. An applicant named “John Smith,” for
instance, could be either white or black.
The second set of résumés had more
unusual names on them—names like
“Lakisha Washington” or “Jamal Jones.”
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 KEY CONCEPTS AND SUMMARY
• It is no accident that workers in some countries earn At least two kinds of discrimination
much more than workers in other countries.
Workers in wealthy, high-wage countries work with
occur in labor markets, statistical
more physical capital, they have more education and discrimination and preference-based
training (human capital), and they work in a more
discrimination. Markets tend to break
efficient and flexible setting. Those are the
fundamental reasons why wages are high. The down discrimination over time,
theory of compensating differentials explains why
because profit-seeking employers are
fun jobs pay less and dangerous jobs pay more. As
wealth increases, workers become more willing to looking to hire the most productive
give up money for safety and so job safety increases workers. Nonetheless, this force is
over time and is higher in wealthier countries than
in poorer countries. Unions can raise some workers’
imperfect and often discrimination
wages, often at the expense of other workers, but persists.
unions are not a fundamental reason why wages are
high in wealthy countries.
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 Key Term / Glossary
• Circular flow diagram a diagram that views the
economy as consisting of households and firms
interacting in a goods and services market and a
labor market
• Command economy an economy where economic
decisions are passed down from government
authority and where resources are owned by the
government
• Division of labor the way in which the work
required to produce a good or service is divided
into tasks performed by different workers
• Economics the study of how humans make choices
under conditions of scarcity
• Economies of scale when the average cost of
producing each individual unit declines as total
output increases
• Exports products (goods and services) made
domestically and sold abroad
• Fiscal policy economic policies that involve
government spending and taxes
• Globalization the trend in which buying and
selling in markets have increasingly crossed
national borders
• Goods and services market a market in which
firms are sellers of what they produce and
households are buyers
• Gross domestic product (GDP) measure of the
size of total production in an economy
• Imports products (goods and services) made
abroad and then sold domestically
• Labor market the market in which households
sell their labor as workers to business firms or
other employers
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 Comprehension Questions

1. In the decades after the Civil War, most streetcar companies in the
South discriminated against one class of citizens: smokers. Customers
who wanted to smoke had to ride in the back of the car. Around 1900,
many governments in the South passed laws mandating segregation by
race instead. As Jennifer Roback documented in the Journal of
Economic History in 1986, many streetcar operators protested against
this new form of segregation. Assuming that these entrepreneurs were
driven by self-interest alone rather than a desire for equality, why
would they do that?

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SELF-CHECK QUESTIONS

Activity 112 and 116

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 Assignment
1. What did you learn from the lesson today?
(Reflection Writing in Journal Book)

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