Question

1. What happens to the equilibrium level of labor and wages after a decline in the level of technology? Use both the firm’s one period profit maximization problem and the labor market graph to illustrate your answer.

(please post a graph for reference)

Answer 1

When labor is an input to production, firms hire workers. Firms are demand labor and workers provide it at a price called the wage rate. Colloquially, “wages” refer to just the dollar amount paid to a worker, but in economics, it refers to total compensation.

The marginal benefit of hiring an additional unit of labor is called the marginal product of labor: it is the additional revenue generated from the last unit of labor. In theory, as with other inputs to production, firms will hire workers until the wage rate (marginal cost) equals the marginal revenue product of labor (marginal benefit).

Changes in Supply and Demand

In competitive markets, the demand curve for labor is the same as the marginal revenue curve. Thus, shifts in the demand for labor are a function of changes in the marginal product of labor. This can occur for a number of reasons. First of all, you can imagine that a new product or company is created that represents new demand for labor of a certain type. There are also three main factors that would shift the labor demand curve:

1. Technology which affects the output of a unit of labor.
2. Changes in the price of the output which affect the value of the unit of labor.
3. Changes in the price of labor relative to other factors of production.

In the long run, the supply of labor is a function of the population. A decrease in the supply of labor will typically cause an increase in the wage rate. The fact that a reduction in supply tends to strengthen wages explains why unions and other professional associations have often sought to limit the number of workers in their particular industry. Physicians, for example, have a financial incentive to enforce rigorous training, licensing, and certification requirements in order to limit the number of practitioners and keep the labor supply low.

Wage Rate in the Long Run: In the long run the supply of labor is fixed and demand is downward-sloping. The wage rate is determined by their intersection.