LABOR

WA G E S I N P E R F E C T
MARKET
COMPETITION
ADMANA, CRUZ, DUNGO, MENDIOLA, ROQUE, TORRE
4 FACTORS OF PRODUCTION

A working Facilities,
Facilities, Ground or Ability of
Ability of one
one
individual who equipment, and
equipment, and the natural
the natural person to see
puts effort in
puts in other resources resources economic
economic
producing goods that aid in the required in opportunities,
opportunities,
and services
and services production of
production the to put together,
where they
where they goods and
goods production land, labor
land, labor and
and
receive wages for services.
services. . capital.
their efforts.
 mark FOR
FOR THE

PRODUCTION
THE FACTORS
FACTORS OF
OF

S KEEPS THE CIRCULAR FLOW OF ECONOMIC ACTIVITY MOVI

PRODUCT
mar
 PRODUCT MARKET

e t e r e
a r k E
s i d
M NAL G SE caoslnly R
f ora O O D
RV IC

ss u
OORR

FI
i i
cuh a
SU M E
DUC T

h CO N
PRO
FACTOR
mar
 FACTOR MARKET
Market for the factors
used in the production
of a consumer product,
not the good produced
itself.
 EXAMPLE MARKET
MARKET
FOR
FOR
AUTOWORKERS
AUTOWORKERS
MARKET
MARKET
FOR
FOR Market for
AUTOMOBILES
AUTOMOBILES
autoworkers is the
Market for factor market,
automobiles or which is labor, as
vehicles is called the factor of
product market. production.
LABOR
mar
LABOR MARKET

Usually the best examples to

represent the factor market.

It is a market where people offer their

skills to employers in exchange for
salaries and other forms of
compensation.
 Wages
Wages and
and Salaries,
Salaries, Profit,
Profit, Rent,
Rent, Interest
Interest

RESOURCE
MARKET
Labor,
Labor, Land,
Land, Capital,
Capital,
Entrepreneurship
Entrepreneurship

BUSINESSES CIRCULAR FLOW HOUSEHOLD

Buy
Buy resources,
resources, Sell
Sell products
products MODEL Sell
Sell resources,
resources, Buy
Buy products
products

Goods
Goods and
and Services
Services
PRODUCT
MARKET
Consumptions
Consumptions expenditures
expenditures
 LABOR MARKET

equilibr
A balanced situation where the supply of potential employees
is equal to the demand.
 LABOR
LABOR DEMAND
DEMAND CHANGES
CHANGES TO
TO
LABOR
LABOR DEMAND
DEMAND
Shows how
Shows how many
many workers
workers anan Demand for
Demand for labor
labor is
is derived
derived from
from the
the
employer is
employer is willing
willing toto and
and price of
price of the
the good
good being
being produced.
produced.
able to
able to hire
hire at
at aa given
given wage
wage •• Higher
Higher price=
price= increased
increased demand
demand for
for
rate in
rate in aa given
given time
time period.
period. labor
labor
•• Lower
Lower price=
price= decreased
decreased demand
demand for
for
labor
labor
Also called
Also called derived
derived demand
demand
Change in
Change in Productivity
Productivity
•• More
More productive
productive worker=
worker= increased
increased
Price of
Price of labor
labor increases
increases (wage)
(wage) demand for
demand for labor
labor
== quantity
quantity of
of labor
labor decreases
decreases •• Less
Less productive
productive worker=
worker= decreased
decreased
demand for
demand for labor
labor
 LABOR CHANGES
CHANGES TO
TO LABOR
LABOR SUPPLY
SUPPLY
Change in the wage rate in COMPETING
SUPPLY markets, there will be a change in supply of
• Number of workers labor.
• If competing industries offer HIGHER
willing and able to work wages= a decrease in supply of labor
in a particular job or • If competing industries offer LOWER
industry for a given wages= an increase in supply of labor
wage.
Barriers to entry into the market: licenses,
Price of labor increases= permits, certifications, trainings or experience
more people will enter Immigration/ Population Growth
the labor market and More people looking for jobs= supply
compete for high paying increases (driving down the WR and QE.
MARKET CLEARING
Point of
equilibrium

Firms may hire an employee at

the existing wage rate and
people who would like to have
the wage rate would be able to
do so.
warat
ge es
MARKET
MARKET
determinin
g : MARKET WAGES
• The basic principle of Economics is that the price or
value of goods, services and resources like labor is
determined by the behavior of Demand and Supply.
• Several Efficiency wage mechanisms or models are the
following where companies can benefit from higher
wages:

Reduces
Reduces worker
worker resignation
resignation and
and
Improve
Improve workers
workers labor Attract
Attract more
more applicants
applicants for
for
labor turnover
turnover cost
cost
morale
morale and
and effort
effort the
the job
job
 wa
EQUILIBRIUM ge
s
Labor wage differ depending on the
competence and difficulty of work.
Easy and Safe works tend to have average wage and
more attractive to the applicants rather than to difficult
and risky works requires higher wages in order to
perform that particular work.
Compensating Differential is the difference in wages
arises to compensate the nonmonetary aspect of the
different jobs.
 in t it i ve
EQUILIBRIUM WAGES mpe b MARKET
co la
or

Firms
Firms andand Workers
Workers are are In
In Analyzing
Analyzing Labor
Labor Quantity
Quantity of of
free
free to
to enter
enter and
and exit
exit A
A competitive
competitive Market
Market through
through Labor
Labor cancan bebe
the
the market
market in in perfect
perfect equilibrium
equilibrium Supply
Supply andand Demand,
Demand, measure
measure as as
competitive
competitive labor
labor leads
leads to
to an
an horizontal
horizontal x-axis
x-axis will
will Employment
Employment
market
market making
making the the efficient
efficient be
be the
the quantity
quantity hours
hours labeled
labeled as as
equilibrium
equilibrium allocation
allocation allocation
allocation of of demand
demand of of Labor
Labor LL while
while Price
Price ofof
of
of workers
workers to to firms
firms resources.
resources. while
while vertical
vertical y-axis
y-axis Labor
Labor isis labeled
labeled
efficiently.
efficiently. will
will be
be the
the wage.
wage. as
as W.W.
WAGE Labor Surplus
Supply •• The
The point
point of
of
Curve
S (w) Intersection
Intersection at
at
the
the equilibrium
equilibrium
Full of
of E*and
E*and W*W*
W Employmen gives
gives the
the
* t competitive
competitive
wage
wage and
and
Demand Curve competitive
competitive
Labor Shortage
employment
employment
E Quantity of
* Labor (Qᶫ)
 Product
Produc
FACTORS
an
n
FACTORS THAT
Wag
Wag
THAT EXPLAIN
EXPLAIN
ivity d es
tivity

WHY
WHY DO DO WORKERS
WORKERS EARN
EARN DIFFERENT
DIFFERENT EQUILIBRIUM
EQUILIBRIUM WAGES?
WAGES?
THE
SUPERSTAR
PHENOMENA
 The phenomena suggest that only
individuals who are highly sought after or
admired by a large crowd earn huge
amounts of money can make them very
important in the world
 UNEMPLOYMENT
• Unemployment is a by-product of micro-level
decisions of the workers of a firm
• A good employment rate of an economy
signals a healthy economic activity going on
in a country.
• When people are employed, living conditions
are raised, as well as output productivity.
Unemployment rate is measured by:
EFFICIENCY-WAGE THEORY
•• Developed
Developed by
by economists
economists Carl
Carl Shapiro
Shapiro and
and
Joseph Stiglitz
Joseph Stiglitz

•• ItIt explains
explains that
that itit would
would be
be
beneficial for
beneficial for firms
firms to to pay
pay
workers above
workers above thethe equilibrium
equilibrium
wage rate
wage rate to
to encourage
encourage workers
workers
to work
to work more
more efficiently.
efficiently.
 Rea
sons

GIVE
GIVE ITS
ITS WORKER
WORKER A
A A
A HAPPY
HAPPY HEALTHY
HEALTHY WORKER
WORKER
GOOD
GOOD DEAL
DEAL IS
IS MORE
MORE PRODUCTIVE
PRODUCTIVE

This results to a This results in increased

reduced worker quality of the worker in
turnover terms of nutrition.
ECONOMICS OF DISCRIMINATION
Discrimination
Discrimination occurs
occurs when
when the
the marketplace
marketplace
offers
offers different
different opportunities
opportunities to
to similar
similar
individuals
individuals who
who differ
differ only
only by
by race,
race, ethnic,
ethnic,
group,
group, sex,
sex, age,
age, or
or other
other personal
personal characteristics.
characteristics.

Gary
Gary S.
S. Becker,
Becker, an
an economist
economist suggested
suggested that
that
discrimination
discrimination occurs
occurs because
because of
of people’s
people’s
preferences
preferences or
or attitudes. 
attitudes. 
D=MRP
D=MRP showsshows marginal
revenue product of
revenue
workers. However,
workers. However,
because
because ofof discrimination
discrimination
and
and employers
employers
preferences to avoid
preferences
certain
certain groups of
workers,
workers, the
the ‘perceived’
‘perceived’
MPR
MPR of of that
that group is is
lower than
lower than itit actually
actually is.
is.
This
This group
group will
will not
not be
be
employed
employed at at W1W1 and
and will
will
have
have to
to accept
accept lower
wages.
wages.
SOURCES OF
SOURCES OF DISCRIMINATION
DISCRIMINATION
One
One source
source of
of discriminatory
discriminatory is
is prejudices
prejudices of
of other
other
workers.
workers.
Another source of discrimination against black
workers could come from customers. 

OVERVIEW
OVERVIEW
An individual’s ability to earn or perform useful services can be
An individual’s ability to earn or perform useful services can be
highlighted
highlighted by
by his
his training,
training, education
education and
and experience.
experience.

Human
Human Capital
Capital Investments
Investments is
is the
the action
action which
which can
can determine
determine an
an
individual’s
individual’s earnings.
earnings.
Race and sex are not the only characteristics that affect
hiring and wages. Some studies have found that people
who are short, overweight, or physically unattractive also
suffer from discrimination, and charges of
discrimination 

Competitive markets tend to limit the

the impact
impact of
of
discrimination on wages.

Firms that do not discriminate will be more profitable

than those firms that do discriminate.