Markets for Resources

We will discuss markets for

Review

Recall

marginal productivity of labor:: the additional output as a result of adding one unit of labor, with all other inputs held steady and ceteris paribus.

VMP=p*MP

and the maximum-profit rule is

VMP=wage

A Simple Graphical Example

We can visualize the VMP and the wage as in the following figure:

Figure 1: VMP=wage

This is the demand curve for labor for an individual firm. For an industry, however, it is a little more complicated.

A Complication

If labor is cheaper, to the industry as a whole, that will shift the industry supply curve to the right. That will lead to lower prices for industry output.

Figure 2: Changing Output Prices

This means that the industry demand curve of labor is actually a little steeper than the VMP curve for a constant output price.

Labor Supply

Some economists argue that the labor supply curve could slope backward, for at least a part of its range. This is shown in figure 3, below.

Figure 3: Supply of Labor to the Economy as a Whole -- Perhaps

When we look at the supply of labor to a particular industry, we don't need to worry about this. The supply curve of labor to an individual industry will usually be upward sloping.

Equilibrium in the Market for Labor

Recall, the price of labor is the wage, shown by w, and the quantity demanded is the number of labor-hours employed, shown by N. The demand for labor is the pMP, the price of output times the marginal productivity of labor in units of output. As usual, the equilibrium price (wage) and the equilibrium quantity demanded and supplied (employment) are at the point where the supply and demand curve intersect.

Figure 4: Supply and Demand for Labor in an Industry

Labor Market with a Minimum Wage Law

Figure 5: Supply and Demand for Labor with a Minimum Wage Law

Workers still employed under the minimum wage law are presumably better off, but there are workers offering N_s-N_d labor hours who cannot find jobs in the industries covered by the minimum wage.

Some Cannot Get Jobs at the Minimum Wage

What are they to do? They might

Shift into industries with equilibrium wages above the minimum wage.: But most will not be able to do this.
Shift into industries that pay less than the minimum wage but are not covered by the minimum wage law.: They will be working for lower wages and be worse off in this case.
Become self-employed in some very small enterprise.: Again, they will presumably obtain less income and be worse off.
Drop out of the labor force entirely.: Some may retire, or rely on the income of spouses or relatives, while some may drop out of the legal labor force to engage in illegal "hustling" for an income.
Become unemployed.: People who are looking for a job and not finding one are said to be unemployed.

Criticism of the Supply-and-Demand Approach to Labor Markets

Wages and income distribution may be influenced or determined by bargaining power.
- Labor unions can create bargaining power for employees
- Employers may limit wages because of limited competition for employees and by means of wage discrimination.
Perceptions of fairness may influence wages and working conditions.
Productivity itself may be influenced by wages and working conditions.
The Marxist view is that employment is a social relationship based on exploitation, and that wages and labor cannot be understood except in those terms.

The Marginal Productivity Approach in General

We can define the

marginal productivity of any input as: the additional output as a result of adding one unit more unit of that input, with all other inputs held steady.

In algebraic terms, that is approximately

Then

VMP_input=p*MP_input

The rule for maximization of profits, for each input, is to increase the use of the input until

VMP_input=price_input

Land

Then the marginal productivity of land is

The value of the marginal product of land will be

VMP_land=p*MP_land

where p, again, stands for the price of the output -- a bushel of potatos, in this case.

The farmer will increase the number of acres of land he rents until

VMP_land=price_land

And so the value of the marginal product of land is the demand curve for land of a standard quality.

Some land is more fertile than other kinds of land, or more profitable because it is closer to markets; and some land is more suitable to one kind of crop than another. Let us think of a very small economy with just three kinds of land: good, fair, and bad. The supply and demand for each kind of land is shown below:

Figure 6: Marginal Productivity of Land with Different Fertilities

This is called the "differential" theory of rent -- that the rent of any land is just large enough to offset its differential productivity relative to marginal land.

Demand for Capital

Here is a diagram the demand for capital by an individual firm as it is sketched in the previous page. We assume that the firm uses a given quantity of labor and land and that the quantity of capital used varies. The quantity of capital used (measured in dollars' worth) is marked off on the horizontal axis. On the vertical axis is the rate of interest, which we understand as the price of capital.

Figure 7: Marginal Net Productivity as the Demand for Capital

The Labor Market and the Distribution of Income

Here is a visualization of the distribution of income between labor and property as John Bates Clark envisioned it.

Figure 9: Division of Income Between Work and Property

Functional and Personal Distribution

Economists distinguish two concepts of the distribution of income:

The functional distribution of income: The functional distribution of income is the distribution between groups in society who own different factors of production, i.e. the proportion of income going to employees, landowners, and owners of capital respectively.
The personal distribution of income

Just Distribution of Income

Here are some questions about the value judgment that "it is just to pay people according to what they contribute to the product of society:"

What people contribute depends on the opportunities they have to contribute. For example, what if a person cannot find a job, despite his best attempts, so his failure to contribute to society is unavoidable?
Why should we be rewarded for being lucky enough to have natural gifts and technology and historic experience?
Just what is a contribution? Is land a contribution? Is anything other than work a contribution?
Is the distribution of property just?

Visualizing the Personal Distribution of Income

We can visualize the personal distribution of income using a graphic presentation called the Lorenz curve. Here is a Lorenz curve for the American economy in 1994.

Figure 10. Lorenz Curve for the American Economy

Changing Income Inequality in The United States

Income inequality in the United States has increased in recent decades, and this has recently become a concern to some economists and others interested in economic and political issues. Lorenz curves for the United States are shown in Figure 12 below.

Figure 12. Lorenz Curves for the United States

Shifting Distribution

Here are some data on labor incomes and property incomes and Gini coefficients. Labor incomes include all wages and other labor compensation, while property incomes include interest, rent, and dividends, as reported by the census bureau.

Table 6

year	1970	1980	1990	1994
Gini Coefficient	0.394	0.403	0.428	0.456
labor incomes	0.86	0.83	0.80	0.82
property incomes	0.14	0.17	0.20	0.18