Question

how do firms decide how to hire workers at different wage rates?

Answer 1

The Decisions of a Firm. Firms hire labor to help them produce output. The amount of labor that a firm needs depends on the amount of output that it wants to produce. At the same time, its decision about how much to produce depends on its costs of production, which include the cost of labor.

In the labor market, the real wage (on the vertical axis) and the total number of hours worked (on the horizontal axis) are determined by the interaction of labor supply and labor demand.

"Labor Market Equilibrium", equilibrium in the labor market occurs at the wage and employment level such that the number of hours supplied and demanded is equal.

The equilibrium real wage in the labor market is the price where supply equals demand.

The upward-sloping supply curve tells us that households will want to supply more labor time as wages increase.

• As the wage increases, some people find it worthwhile to enter the labor force and look for a job.
• As the wage increases, some of those with jobs will find it worthwhile to work more hours.

Labor demand slopes downward for two analogous reasons:

• As the wage increases, some firms find that they are no longer profitable and close down.
• As the wage increases, those firms that are in business choose to hire fewer hours of labor.

Thus an increase in wages will induce job destruction, and a decrease in wages will induce job creation.

DECISION :

MARGINAL RATE OF PRODUCTIVITY = MARGINAL PRODUCTIVITY * PRICE OF GOOD

thus MRPL gives us the monetary contribution of hiring one additional worker. This should always to more than or equal to the market wage rate. that is the employees contribution should be more than his wage, only than he is hired. thus the firm hires upto the point where the MRPL of a labor is greater than his wage rate.

thus equilibrium is where supply is equal to demand and where the MRPL curve meets the wage rate line. this is shown in the figures.