WEBVTT

00:00:00.000 --> 00:00:02.750
♪ [music] ♪

00:00:08.160 --> 00:00:10.770
- [Prof. Alex Tabarrok] In this set
of lectures on labor markets,

00:00:10.770 --> 00:00:12.520
we'll be looking at questions,

00:00:12.520 --> 00:00:14.596
such as: How are wages determined?

00:00:14.596 --> 00:00:18.296
Why do Americans
earn so much by global standards?

00:00:18.296 --> 00:00:22.036
What's human capital and how
does it help us to increase wages?

00:00:22.036 --> 00:00:24.105
Do labor unions help workers?

00:00:24.105 --> 00:00:26.185
And if so, by how much?

00:00:26.185 --> 00:00:29.055
And how does discrimination
affect labor markets?

00:00:29.605 --> 00:00:31.834
We're going to begin
in this part of the lecture

00:00:31.834 --> 00:00:34.314
with the determination of wages.

00:00:38.340 --> 00:00:40.643
In this set of lectures
on labor markets,

00:00:40.643 --> 00:00:42.440
we'll be looking at questions such as

00:00:42.440 --> 00:00:44.380
How are wages determined?

00:00:44.380 --> 00:00:47.920
Why do most Americans
earn so much by global standards?

00:00:47.920 --> 00:00:49.400
What's human capital?

00:00:49.400 --> 00:00:51.840
How does it help us
in increased wages?

00:00:51.840 --> 00:00:55.230
Do labor unions help workers,
and if so, by how much?

00:00:55.230 --> 00:00:58.018
And how does discrimination
affect labor markets?

00:00:58.018 --> 00:01:00.042
We're going to begin
in this part of the lecture

00:01:00.042 --> 00:01:02.622
with the determination of wages.

00:01:03.142 --> 00:01:06.582
What makes the demand for labor
different than the demand for apples

00:01:06.582 --> 00:01:10.495
is that the demand
for labor is a derived demand.

00:01:10.495 --> 00:01:15.322
Firms hire workers because
the workers increase their revenues.

00:01:15.322 --> 00:01:18.454
The key idea
behind the demand for labor

00:01:18.454 --> 00:01:20.710
is the marginal product of labor,

00:01:20.710 --> 00:01:22.960
the increase in a firm's revenues

00:01:22.960 --> 00:01:25.640
created by hiring
an additional laborer.

00:01:25.640 --> 00:01:27.270
And we're going to see
several important things

00:01:27.270 --> 00:01:29.560
about this marginal
product of labor.

00:01:29.560 --> 00:01:33.980
First, it declines
as more labor is added.

00:01:33.980 --> 00:01:37.530
And this is because the first laborer
goes to the most important task,

00:01:37.530 --> 00:01:40.750
the second laborer goes
to the second most important task

00:01:40.750 --> 00:01:42.030
and so forth.

00:01:42.030 --> 00:01:46.680
Moreover, firms
will hire workers, laborers,

00:01:46.680 --> 00:01:51.520
as long as the wage is less
than the marginal product of labor.

00:01:51.520 --> 00:01:53.550
Let's take a look
at this in a table.

00:01:54.030 --> 00:01:56.870
This table shows how
a restaurant like McDonald’s

00:01:56.870 --> 00:01:59.240
might think about hiring janitors.

00:01:59.240 --> 00:02:02.740
The first janitor is assigned
to the most important task --

00:02:02.740 --> 00:02:04.820
cleaning the restrooms once a day.

00:02:04.820 --> 00:02:09.640
That task adds $35
an hour to the firm’s revenues.

00:02:09.640 --> 00:02:12.750
Customers like restaurants
with clean restrooms.

00:02:12.750 --> 00:02:15.060
The second janitor empties the trash,

00:02:15.060 --> 00:02:18.590
the third janitor hired will also
be assigned to cleaning restrooms,

00:02:18.590 --> 00:02:20.390
now done twice a day --

00:02:20.390 --> 00:02:25.050
and that use increases revenues
by less -- by $24 an hour.

00:02:25.050 --> 00:02:27.140
The demand curve for labor

00:02:27.140 --> 00:02:30.250
is derived from
the marginal product of labor.

00:02:30.250 --> 00:02:32.980
Notice that as the wage goes down,

00:02:32.980 --> 00:02:36.720
the firm will want to hire
more and more janitors

00:02:36.720 --> 00:02:39.730
and as the firm hires
more and more janitors,

00:02:39.730 --> 00:02:42.110
the marginal product of labor falls.

00:02:42.410 --> 00:02:45.850
So let's take a closer look
at this derivation.

00:02:47.410 --> 00:02:49.650
Here's the marginal product
of labor schedule

00:02:49.650 --> 00:02:53.360
and here is the demand for labor
derived from that schedule.

00:02:53.360 --> 00:02:57.800
Notice that if the wage
were greater than $35 an hour

00:02:57.800 --> 00:03:00.500
the firm would demand no janitors.

00:03:00.500 --> 00:03:03.160
That's because
the very first janitor

00:03:03.160 --> 00:03:06.530
adds $35 an hour
to the firm's revenues.

00:03:06.530 --> 00:03:10.430
If the wage is higher than that,
that janitor is not worth hiring.

00:03:10.980 --> 00:03:12.970
As the wage falls, however,

00:03:12.970 --> 00:03:16.350
more and more janitors
become worthwhile to hire.

00:03:16.350 --> 00:03:20.150
If the market wage were $10,
7 janitors would be hired.

00:03:20.150 --> 00:03:24.510
If the market wage were $30,
only 1 janitor would be hired.

00:03:24.510 --> 00:03:27.860
Now this is the demand for janitors
from a single firm.

00:03:27.860 --> 00:03:31.230
Now consider summing up
the quantity of janitors

00:03:31.230 --> 00:03:36.090
demanded at each wage
for all the firms in the market.

00:03:36.090 --> 00:03:39.952
That's how we get
to the market demand for janitors.

00:03:39.952 --> 00:03:42.080
So let's go to the market demand.

00:03:42.380 --> 00:03:45.220
So here's the market for janitors
in the United States.

00:03:45.220 --> 00:03:48.240
We have a demand curve derived
from the marginal product of labor

00:03:48.240 --> 00:03:49.700
and a supply curve.

00:03:49.700 --> 00:03:52.230
The supply curve says
that as the wage increases

00:03:52.230 --> 00:03:55.580
the quantity of janitors supplied
will also increase.

00:03:55.580 --> 00:03:57.680
That's intuitive
but I want to say a little bit more

00:03:57.680 --> 00:03:59.853
about the supply curve in a moment

00:03:59.853 --> 00:04:02.113
because there's
one possible complication

00:04:02.113 --> 00:04:03.639
which we should discuss.

00:04:03.639 --> 00:04:06.349
For now, however,
let's focus on the main point,

00:04:06.349 --> 00:04:09.730
which is that the wage
is determined as usual

00:04:09.730 --> 00:04:11.860
by the point
where the quantity demanded

00:04:11.860 --> 00:04:13.470
is equal to the quantity supplied --

00:04:13.470 --> 00:04:16.220
the intersection of the demand
and the supply curve.

00:04:16.220 --> 00:04:17.282
In the United States,

00:04:17.282 --> 00:04:20.442
the wage for janitors
is about $10 an hour

00:04:20.442 --> 00:04:24.542
and the quantity supplied
is about 168 million hours per week.

00:04:24.542 --> 00:04:28.760
Overall, there are about 4.2 million
janitors in the United States.

00:04:29.170 --> 00:04:33.570
So the key here is really that we can
use our tools of demand and supply

00:04:33.570 --> 00:04:35.770
to understand the market for labor.

00:04:35.770 --> 00:04:39.000
So we can predict what will happen
with an increased demand for labor

00:04:39.000 --> 00:04:40.834
or a reduced supply.

00:04:40.834 --> 00:04:44.757
Other factors which might influence
the demand and supply of labor --

00:04:44.757 --> 00:04:47.700
we now know
how to analyze this market.

00:04:48.510 --> 00:04:51.520
Let's add one qualification
to the supply of labor.

00:04:51.520 --> 00:04:53.010
We need to make a distinction

00:04:53.010 --> 00:04:55.820
between an individual’s
supply curve for labor

00:04:55.820 --> 00:04:58.440
and the market
supply curve for labor.

00:04:58.440 --> 00:05:02.260
So let's suppose we have a janitor --
let's call him Joe --

00:05:02.260 --> 00:05:07.330
and let's imagine that his wage
is currently $16 an hour

00:05:07.330 --> 00:05:10.060
and he's working 40 hours a week.

00:05:10.060 --> 00:05:12.760
If the wage were
to increase to $20 an hour,

00:05:12.760 --> 00:05:16.680
Joe decides he may work more,
50 hours per week,

00:05:16.680 --> 00:05:19.010
in order to take advantage
of that higher wage.

00:05:19.460 --> 00:05:24.340
But now suppose that the wage
increases even more to $28 an hour.

00:05:24.340 --> 00:05:29.690
Well, will Joe choose to work more
at $28 an hour than he did at $20?

00:05:30.030 --> 00:05:31.420
Not necessarily.

00:05:31.420 --> 00:05:34.230
After all, there's only
so many hours in the week.

00:05:34.230 --> 00:05:37.160
Anyway, Joe has other things
to do with his time.

00:05:37.160 --> 00:05:38.760
Now that his wage is higher,

00:05:38.760 --> 00:05:41.260
Joe might want
to take his family on a vacation.

00:05:41.260 --> 00:05:43.940
His income
is pretty high as well now --

00:05:43.940 --> 00:05:46.460
$28 an hour, 40 hours a week,

00:05:46.460 --> 00:05:50.620
Joe may decide he in fact
would like to work a little bit less.

00:05:50.620 --> 00:05:54.140
He in fact would like
to buy more leisure

00:05:54.140 --> 00:05:57.240
with the income
which he is earning from his job.

00:05:58.220 --> 00:06:01.330
So an individual’s labor supply curve

00:06:01.330 --> 00:06:05.040
could possibly have
a backward bending component.

00:06:05.040 --> 00:06:08.170
There's nothing irrational
or peculiar about that.

00:06:08.170 --> 00:06:09.990
Although it's possible for an individual

00:06:09.990 --> 00:06:12.800
to have a backward bending
labor supply component,

00:06:12.800 --> 00:06:15.792
it's less likely
for the market as a whole,

00:06:15.792 --> 00:06:19.312
because even as the wage
for janitors increases

00:06:19.312 --> 00:06:21.500
and Joe works a little bit less,

00:06:21.500 --> 00:06:25.250
there are lots of other people --
Mary, and Jose and Rita --

00:06:25.250 --> 00:06:29.160
who are currently employed,
say waiting tables or as sales staff,

00:06:29.160 --> 00:06:31.980
who would be willing
to work in janitorial services

00:06:31.980 --> 00:06:33.890
if the wage were higher.

00:06:34.210 --> 00:06:36.700
So consider a wage of $20 an hour --

00:06:36.700 --> 00:06:41.320
the market supply has 320 million
hours of janitorial services.

00:06:41.320 --> 00:06:43.890
As the wage goes up to $28,

00:06:43.890 --> 00:06:46.500
well Joe works a little bit less,

00:06:46.500 --> 00:06:48.490
and maybe some
of the other people in the industry

00:06:48.490 --> 00:06:49.710
work a little bit less --

00:06:49.710 --> 00:06:51.810
people who are
already in the industry --

00:06:51.810 --> 00:06:56.130
but more people enter the market
for janitorial services

00:06:56.130 --> 00:07:00.280
when the wage is $28
than when it was $20.

00:07:00.280 --> 00:07:02.870
So as the wage increases,

00:07:02.870 --> 00:07:07.050
the quantity supplied
of janitorial services increases

00:07:07.050 --> 00:07:08.780
for two reasons.

00:07:08.780 --> 00:07:12.260
The people who are
already janitors may work more,

00:07:12.260 --> 00:07:14.130
but even more importantly,

00:07:14.130 --> 00:07:16.720
as the wage for janitors increases

00:07:16.720 --> 00:07:20.050
more people
enter the janitorial industry.

00:07:20.050 --> 00:07:24.200
So what this means
is that our labor supply curve

00:07:24.200 --> 00:07:27.000
will typically have our usual shape --

00:07:27.000 --> 00:07:29.520
an upward sloped
labor supply curve.

00:07:29.520 --> 00:07:32.160
Even when some individuals
might have a backward slope

00:07:32.160 --> 00:07:34.450
over some portion of the curve,

00:07:34.450 --> 00:07:37.290
the market slope
is going to have our typical shape.

00:07:38.020 --> 00:07:40.176
So why do janitors
in the United States

00:07:40.176 --> 00:07:42.063
earn more than janitors in India?

00:07:42.063 --> 00:07:44.170
After all, they're doing
pretty much the same thing --

00:07:44.170 --> 00:07:45.990
sweeping floors and so forth.

00:07:45.990 --> 00:07:49.640
It certainly isn't the case
that janitors in the United States

00:07:49.640 --> 00:07:53.830
are sweeping more floors per hour
or working so many more hours.

00:07:53.830 --> 00:07:57.750
If you answered demand and supply,
give yourselves half points.

00:07:57.750 --> 00:07:59.390
Let's go a little bit deeper.

00:07:59.390 --> 00:08:03.070
The demand for janitors
is higher in the United States

00:08:03.070 --> 00:08:06.500
because the United States
is a more productive economy

00:08:06.500 --> 00:08:07.930
than the Indian economy.

00:08:07.930 --> 00:08:10.160
There's more and better
capital to work with,

00:08:10.160 --> 00:08:12.390
the office workers
are more productive,

00:08:12.390 --> 00:08:16.800
and the American office
produces a more valuable product.

00:08:16.800 --> 00:08:19.490
The result
is that it's more valuable

00:08:19.490 --> 00:08:21.850
to keep a U.S. office building clean --

00:08:21.850 --> 00:08:25.140
that's one of the reasons
why American janitors earn more.

00:08:25.140 --> 00:08:27.400
The demand
for their services is higher.

00:08:27.400 --> 00:08:29.410
This is a useful reminder --

00:08:29.410 --> 00:08:31.610
you may have
a number of valuable skills.

00:08:31.610 --> 00:08:33.179
Perhaps you're able
to program a computer,

00:08:33.179 --> 00:08:35.699
or write a report,
or motivate sales staff,

00:08:35.699 --> 00:08:36.917
and so forth.

00:08:36.917 --> 00:08:40.717
But your skills only have value
within a given context.

00:08:40.717 --> 00:08:42.817
If you were transplanted
to a different economy,

00:08:42.817 --> 00:08:44.900
your skills might be worth less --

00:08:44.900 --> 00:08:47.182
maybe because your skills
would be less useful,

00:08:47.182 --> 00:08:51.062
but also because other people
might not have the money

00:08:51.062 --> 00:08:52.582
to pay for your skills.

00:08:53.152 --> 00:08:55.460
It's better to be a barber
in a rich country

00:08:55.460 --> 00:08:57.280
than in a poor country,

00:08:57.280 --> 00:09:00.250
even when the same number
of people need a haircut.

00:09:00.480 --> 00:09:01.280
Okay.

00:09:01.280 --> 00:09:05.550
So that's one reason why janitors
in the United States earn more.

00:09:05.550 --> 00:09:08.960
The demand
for their services is higher

00:09:09.140 --> 00:09:14.320
because the United States
is a more productive economy.

00:09:14.500 --> 00:09:17.650
Wages, of course,
are about demand and about supply.

00:09:17.650 --> 00:09:18.650
So here's the other half --

00:09:18.650 --> 00:09:21.410
India has more workers
than in the United States,

00:09:21.410 --> 00:09:24.170
and in particular India
has more low-skilled workers

00:09:24.170 --> 00:09:26.930
who eagerly compete
for the job of janitor.

00:09:27.110 --> 00:09:32.720
A janitor could be
a quite high paying job in India,

00:09:32.900 --> 00:09:34.280
a well-respected job in India.

00:09:34.280 --> 00:09:35.280
So Indian janitors earn less

00:09:35.280 --> 00:09:37.280
because U.S. firms
are more productive,

00:09:37.280 --> 00:09:40.390
the demand for labor is higher

00:09:40.390 --> 00:09:41.390
and also because the supply
of low-skilled workers

00:09:41.390 --> 00:09:43.390
is greater in India.

00:09:43.390 --> 00:09:47.490
Here's a graph
summarizing what we just said.

00:09:47.670 --> 00:09:49.240
Here's the demand and supply
of janitors in the Unites States

00:09:49.240 --> 00:09:52.240
with the wage of $10 an hour.

00:09:52.240 --> 00:09:55.850
And here's the demand
and supply in India.

00:09:55.850 --> 00:09:56.850
The demand is lower,

00:09:56.850 --> 00:09:58.850
the supply is higher
so the wage is lower.

00:09:58.850 --> 00:10:00.470
Okay.

00:10:00.470 --> 00:10:01.470
Next time we'll be
looking at some of the factors

00:10:01.470 --> 00:10:03.470
which can increase wages,

00:10:03.470 --> 00:10:06.078
particularly human capital,

00:10:06.078 --> 00:10:08.303
and then we'll turn
to discrimination and other topics.

00:10:09.532 --> 00:10:10.630
- [Narrator]
If you want to test yourself,

00:10:10.630 --> 00:10:13.630
click "Practice questions."

00:10:13.630 --> 00:10:16.510
Or, if you're ready to move on,
just click, "Next Video."

00:10:16.510 --> 00:10:19.500
♪ [music] ♪