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- [Prof. Alex Tabarrok] In this set[br]of lectures on labor markets,

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we'll be looking at questions,

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such as: How are wages determined?

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Why do Americans[br]earn so much by global standards?

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What's human capital and how[br]does it help us to increase wages?

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Do labor unions help workers?

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And if so, by how much?

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And how does discrimination[br]affect labor markets?

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We're going to begin[br]in this part of the lecture

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with the determination of wages.

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In this set of lectures[br]on labor markets,

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we'll be looking at questions such as

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How are wages determined?

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Why do most Americans[br]earn so much by global standards?

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What's human capital?

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How does it help us[br]in increased wages?

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Do labor unions help workers,[br]and if so, by how much?

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And how does discrimination[br]affect labor markets?

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We're going to begin[br]in this part of the lecture

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with the determination of wages.

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What makes the demand for labor[br]different than the demand for apples

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is that the demand[br]for labor is a derived demand.

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Firms hire workers because[br]the workers increase their revenues.

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The key idea[br]behind the demand for labor

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is the marginal product of labor,

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the increase in a firm's revenues

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created by hiring[br]an additional laborer.

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And we're going to see[br]several important things

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about this marginal[br]product of labor.

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First, it declines[br]as more labor is added.

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And this is because the first laborer[br]goes to the most important task,

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the second laborer goes[br]to the second most important task

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and so forth.

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Moreover, firms[br]will hire workers, laborers,

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as long as the wage is less[br]than the marginal product of labor.

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Let's take a look[br]at this in a table.

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This table shows how[br]a restaurant like McDonald’s

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might think about hiring janitors.

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The first janitor is assigned[br]to the most important task --

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cleaning the restrooms once a day.

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That task adds $35[br]an hour to the firm’s revenues.

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Customers like restaurants[br]with clean restrooms.

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The second janitor empties the trash,

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the third janitor hired will also[br]be assigned to cleaning restrooms,

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now done twice a day --

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and that use increases revenues[br]by less -- by $24 an hour.

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The demand curve for labor

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is derived from[br]the marginal product of labor.

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Notice that as the wage goes down,

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the firm will want to hire[br]more and more janitors

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and as the firm hires[br]more and more janitors,

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the marginal product of labor falls.

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So let's take a closer look[br]at this derivation.

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Here's the marginal product[br]of labor schedule

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and here is the demand for labor[br]derived from that schedule.

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Notice that if the wage[br]were greater than $35 an hour

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the firm would demand no janitors.

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That's because[br]the very first janitor

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adds $35 an hour[br]to the firm's revenues.

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If the wage is higher than that,[br]that janitor is not worth hiring.

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As the wage falls, however,

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more and more janitors[br]become worthwhile to hire.

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If the market wage were $10,[br]7 janitors would be hired.

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If the market wage were $30,[br]only 1 janitor would be hired.

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Now this is the demand for janitors[br]from a single firm.

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Now consider summing up[br]the quantity of janitors

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demanded at each wage[br]for all the firms in the market.

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That's how we get[br]to the market demand for janitors.

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So let's go to the market demand.

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So here's the market for janitors[br]in the United States.

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We have a demand curve derived[br]from the marginal product of labor

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and a supply curve.

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The supply curve says[br]that as the wage increases

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the quantity of janitors supplied[br]will also increase.

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That's intuitive[br]but I want to say a little bit more

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about the supply curve in a moment

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because there's[br]one possible complication

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which we should discuss.

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For now, however,[br]let's focus on the main point,

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which is that the wage[br]is determined as usual

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by the point[br]where the quantity demanded

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is equal to the quantity supplied --

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the intersection of the demand[br]and the supply curve.

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In the United States,

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the wage for janitors[br]is about $10 an hour

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and the quantity supplied[br]is about 168 million hours per week.

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Overall, there are about 4.2 million[br]janitors in the United States.

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So the key here is really that we can[br]use our tools of demand and supply

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to understand the market for labor.

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So we can predict what will happen[br]with an increased demand for labor

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or a reduced supply.

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Other factors which might influence[br]the demand and supply of labor --

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we now know[br]how to analyze this market.

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Let's add one qualification[br]to the supply of labor.

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We need to make a distinction

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between an individual’s[br]supply curve for labor

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and the market[br]supply curve for labor.

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So let's suppose we have a janitor --[br]let's call him Joe --

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and let's imagine that his wage[br]is currently $16 an hour

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and he's working 40 hours a week.

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If the wage were[br]to increase to $20 an hour,

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Joe decides he may work more,[br]50 hours per week,

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in order to take advantage[br]of that higher wage.

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But now suppose that the wage[br]increases even more to $28 an hour.

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Well, will Joe choose to work more[br]at $28 an hour than he did at $20?

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Not necessarily.

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After all, there's only[br]so many hours in the week.

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Anyway, Joe has other things[br]to do with his time.

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Now that his wage is higher,

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Joe might want[br]to take his family on a vacation.

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His income[br]is pretty high as well now --

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$28 an hour, 40 hours a week,

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Joe may decide he in fact[br]would like to work a little bit less.

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He in fact would like[br]to buy more leisure

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with the income[br]which he is earning from his job.

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So an individual’s labor supply curve

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could possibly have[br]a backward bending component.

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There's nothing irrational[br]or peculiar about that.

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Although it's possible for an individual

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to have a backward bending[br]labor supply component,

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it's less likely[br]for the market as a whole,

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because even as the wage[br]for janitors increases

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and Joe works a little bit less,

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there are lots of other people --[br]Mary, and Jose and Rita --

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who are currently employed,[br]say waiting tables or as sales staff,

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who would be willing[br]to work in janitorial services

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if the wage were higher.

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So consider a wage of $20 an hour --

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the market supply has 320 million[br]hours of janitorial services.

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As the wage goes up to $28,

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well Joe works a little bit less,

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and maybe some[br]of the other people in the industry

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work a little bit less --

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people who are[br]already in the industry --

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but more people enter the market[br]for janitorial services

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when the wage is $28[br]than when it was $20.

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So as the wage increases,

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the quantity supplied[br]of janitorial services increases

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for two reasons.

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The people who are[br]already janitors may work more,

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but even more importantly,

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as the wage for janitors increases

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more people[br]enter the janitorial industry.

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So what this means[br]is that our labor supply curve

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will typically have our usual shape --

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an upward sloped[br]labor supply curve.

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Even when some individuals[br]might have a backward slope

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over some portion of the curve,

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the market slope[br]is going to have our typical shape.

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So why do janitors[br]in the United States

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earn more than janitors in India?

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After all, they're doing[br]pretty much the same thing --

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sweeping floors and so forth.

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It certainly isn't the case[br]that janitors in the United States

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are sweeping more floors per hour[br]or working so many more hours.

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If you answered demand and supply,[br]give yourselves half points.

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Let's go a little bit deeper.

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The demand for janitors[br]is higher in the United States

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because the United States[br]is a more productive economy

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than the Indian economy.

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There's more and better[br]capital to work with,

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the office workers[br]are more productive,

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and the American office[br]produces a more valuable product.

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The result[br]is that it's more valuable

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to keep a U.S. office building clean --

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that's one of the reasons[br]why American janitors earn more.

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The demand[br]for their services is higher.

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This is a useful reminder --

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you may have[br]a number of valuable skills.

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Perhaps you're able[br]to program a computer,

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or write a report,[br]or motivate sales staff,

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and so forth.

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But your skills only have value[br]within a given context.

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If you were transplanted[br]to a different economy,

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your skills might be worth less --

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maybe because your skills[br]would be less useful,

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but also because other people[br]might not have the money

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to pay for your skills.

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It's better to be a barber[br]in a rich country

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than in a poor country,

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even when the same number[br]of people need a haircut.

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Okay.

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So that's one reason why janitors[br]in the United States earn more.

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The demand[br]for their services is higher

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because the United States[br]is a more productive economy.

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Wages, of course,[br]are about demand and about supply.

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So here's the other half --

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India has more workers[br]than in the United States,

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and in particular India[br]has more low-skilled workers

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who eagerly compete[br]for the job of janitor.

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A janitor could be[br]a quite high paying job in India,

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a well-respected job in India.

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So Indian janitors earn less

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because U.S. firms[br]are more productive,

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the demand for labor is higher

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and also because the supply[br]of low-skilled workers

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is greater in India.

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Here's a graph[br]summarizing what we just said.

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Here's the demand and supply[br]of janitors in the Unites States

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with the wage of $10 an hour.

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And here's the demand[br]and supply in India.

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The demand is lower,[br]the supply is higher

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so the wage is lower.

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Okay.

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Next time we'll be[br]looking at some of the factors

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which can increase wages,

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particularly human capital,

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and then we'll turn[br]to discrimination and other topics.

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- [Narrator][br]If you want to test yourself,

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click "Practice questions."

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Or, if you're ready to move on,[br]just click, "Next Video."

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