The Marginal Product of Labor
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0:00 - 0:03♪ [music] ♪
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0:08 - 0:11- [Prof. Alex Tabarrok] In this set
of lectures on labor markets, -
0:11 - 0:13we'll be looking at questions,
-
0:13 - 0:15such as: How are wages determined?
-
0:15 - 0:18Why do Americans
earn so much by global standards? -
0:18 - 0:22What's human capital and how
does it help us to increase wages? -
0:22 - 0:24Do labor unions help workers?
-
0:24 - 0:26And if so, by how much?
-
0:26 - 0:29And how does discrimination
affect labor markets? -
0:30 - 0:32We're going to begin
in this part of the lecture -
0:32 - 0:34with the determination of wages.
-
0:38 - 0:41In this set of lectures
on labor markets, -
0:41 - 0:42we'll be looking at questions such as
-
0:42 - 0:44How are wages determined?
-
0:44 - 0:48Why do most Americans
earn so much by global standards? -
0:48 - 0:49What's human capital?
-
0:49 - 0:52How does it help us
in increased wages? -
0:52 - 0:55Do labor unions help workers,
and if so, by how much? -
0:55 - 0:58And how does discrimination
affect labor markets? -
0:58 - 1:00We're going to begin
in this part of the lecture -
1:00 - 1:03with the determination of wages.
-
1:03 - 1:07What makes the demand for labor
different than the demand for apples -
1:07 - 1:10is that the demand
for labor is a derived demand. -
1:10 - 1:15Firms hire workers because
the workers increase their revenues. -
1:15 - 1:18The key idea
behind the demand for labor -
1:18 - 1:21is the marginal product of labor,
-
1:21 - 1:23the increase in a firm's revenues
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1:23 - 1:26created by hiring
an additional laborer. -
1:26 - 1:27And we're going to see
several important things -
1:27 - 1:30about this marginal
product of labor. -
1:30 - 1:34First, it declines
as more labor is added. -
1:34 - 1:38And this is because the first laborer
goes to the most important task, -
1:38 - 1:41the second laborer goes
to the second most important task -
1:41 - 1:42and so forth.
-
1:42 - 1:47Moreover, firms
will hire workers, laborers, -
1:47 - 1:52as long as the wage is less
than the marginal product of labor. -
1:52 - 1:54Let's take a look
at this in a table. -
1:54 - 1:57This table shows how
a restaurant like McDonald’s -
1:57 - 1:59might think about hiring janitors.
-
1:59 - 2:03The first janitor is assigned
to the most important task -- -
2:03 - 2:05cleaning the restrooms once a day.
-
2:05 - 2:10That task adds $35
an hour to the firm’s revenues. -
2:10 - 2:13Customers like restaurants
with clean restrooms. -
2:13 - 2:15The second janitor empties the trash,
-
2:15 - 2:19the third janitor hired will also
be assigned to cleaning restrooms, -
2:19 - 2:20now done twice a day --
-
2:20 - 2:25and that use increases revenues
by less -- by $24 an hour. -
2:25 - 2:27The demand curve for labor
-
2:27 - 2:30is derived from
the marginal product of labor. -
2:30 - 2:33Notice that as the wage goes down,
-
2:33 - 2:37the firm will want to hire
more and more janitors -
2:37 - 2:40and as the firm hires
more and more janitors, -
2:40 - 2:42the marginal product of labor falls.
-
2:42 - 2:46So let's take a closer look
at this derivation. -
2:47 - 2:50Here's the marginal product
of labor schedule -
2:50 - 2:53and here is the demand for labor
derived from that schedule. -
2:53 - 2:58Notice that if the wage
were greater than $35 an hour -
2:58 - 3:00the firm would demand no janitors.
-
3:00 - 3:03That's because
the very first janitor -
3:03 - 3:07adds $35 an hour
to the firm's revenues. -
3:07 - 3:10If the wage is higher than that,
that janitor is not worth hiring. -
3:11 - 3:13As the wage falls, however,
-
3:13 - 3:16more and more janitors
become worthwhile to hire. -
3:16 - 3:20If the market wage were $10,
7 janitors would be hired. -
3:20 - 3:25If the market wage were $30,
only 1 janitor would be hired. -
3:25 - 3:28Now this is the demand for janitors
from a single firm. -
3:28 - 3:31Now consider summing up
the quantity of janitors -
3:31 - 3:36demanded at each wage
for all the firms in the market. -
3:36 - 3:40That's how we get
to the market demand for janitors. -
3:40 - 3:42So let's go to the market demand.
-
3:42 - 3:45So here's the market for janitors
in the United States. -
3:45 - 3:48We have a demand curve derived
from the marginal product of labor -
3:48 - 3:50and a supply curve.
-
3:50 - 3:52The supply curve says
that as the wage increases -
3:52 - 3:56the quantity of janitors supplied
will also increase. -
3:56 - 3:58That's intuitive
but I want to say a little bit more -
3:58 - 4:00about the supply curve in a moment
-
4:00 - 4:02because there's
one possible complication -
4:02 - 4:04which we should discuss.
-
4:04 - 4:06For now, however,
let's focus on the main point, -
4:06 - 4:10which is that the wage
is determined as usual -
4:10 - 4:12by the point
where the quantity demanded -
4:12 - 4:13is equal to the quantity supplied --
-
4:13 - 4:16the intersection of the demand
and the supply curve. -
4:16 - 4:17In the United States,
-
4:17 - 4:20the wage for janitors
is about $10 an hour -
4:20 - 4:25and the quantity supplied
is about 168 million hours per week. -
4:25 - 4:29Overall, there are about 4.2 million
janitors in the United States. -
4:29 - 4:34So the key here is really that we can
use our tools of demand and supply -
4:34 - 4:36to understand the market for labor.
-
4:36 - 4:39So we can predict what will happen
with an increased demand for labor -
4:39 - 4:41or a reduced supply.
-
4:41 - 4:45Other factors which might influence
the demand and supply of labor -- -
4:45 - 4:48we now know
how to analyze this market. -
4:49 - 4:52Let's add one qualification
to the supply of labor. -
4:52 - 4:53We need to make a distinction
-
4:53 - 4:56between an individual’s
supply curve for labor -
4:56 - 4:58and the market
supply curve for labor. -
4:58 - 5:02So let's suppose we have a janitor --
let's call him Joe -- -
5:02 - 5:07and let's imagine that his wage
is currently $16 an hour -
5:07 - 5:10and he's working 40 hours a week.
-
5:10 - 5:13If the wage were
to increase to $20 an hour, -
5:13 - 5:17Joe decides he may work more,
50 hours per week, -
5:17 - 5:19in order to take advantage
of that higher wage. -
5:19 - 5:24But now suppose that the wage
increases even more to $28 an hour. -
5:24 - 5:30Well, will Joe choose to work more
at $28 an hour than he did at $20? -
5:30 - 5:31Not necessarily.
-
5:31 - 5:34After all, there's only
so many hours in the week. -
5:34 - 5:37Anyway, Joe has other things
to do with his time. -
5:37 - 5:39Now that his wage is higher,
-
5:39 - 5:41Joe might want
to take his family on a vacation. -
5:41 - 5:44His income
is pretty high as well now -- -
5:44 - 5:46$28 an hour, 40 hours a week,
-
5:46 - 5:51Joe may decide he in fact
would like to work a little bit less. -
5:51 - 5:54He in fact would like
to buy more leisure -
5:54 - 5:57with the income
which he is earning from his job. -
5:58 - 6:01So an individual’s labor supply curve
-
6:01 - 6:05could possibly have
a backward bending component. -
6:05 - 6:08There's nothing irrational
or peculiar about that. -
6:08 - 6:10Although it's possible for an individual
-
6:10 - 6:13to have a backward bending
labor supply component, -
6:13 - 6:16it's less likely
for the market as a whole, -
6:16 - 6:19because even as the wage
for janitors increases -
6:19 - 6:22and Joe works a little bit less,
-
6:22 - 6:25there are lots of other people --
Mary, and Jose and Rita -- -
6:25 - 6:29who are currently employed,
say waiting tables or as sales staff, -
6:29 - 6:32who would be willing
to work in janitorial services -
6:32 - 6:34if the wage were higher.
-
6:34 - 6:37So consider a wage of $20 an hour --
-
6:37 - 6:41the market supply has 320 million
hours of janitorial services. -
6:41 - 6:44As the wage goes up to $28,
-
6:44 - 6:46well Joe works a little bit less,
-
6:46 - 6:48and maybe some
of the other people in the industry -
6:48 - 6:50work a little bit less --
-
6:50 - 6:52people who are
already in the industry -- -
6:52 - 6:56but more people enter the market
for janitorial services -
6:56 - 7:00when the wage is $28
than when it was $20. -
7:00 - 7:03So as the wage increases,
-
7:03 - 7:07the quantity supplied
of janitorial services increases -
7:07 - 7:09for two reasons.
-
7:09 - 7:12The people who are
already janitors may work more, -
7:12 - 7:14but even more importantly,
-
7:14 - 7:17as the wage for janitors increases
-
7:17 - 7:20more people
enter the janitorial industry. -
7:20 - 7:24So what this means
is that our labor supply curve -
7:24 - 7:27will typically have our usual shape --
-
7:27 - 7:30an upward sloped
labor supply curve. -
7:30 - 7:32Even when some individuals
might have a backward slope -
7:32 - 7:34over some portion of the curve,
-
7:34 - 7:37the market slope
is going to have our typical shape. -
7:38 - 7:40So why do janitors
in the United States -
7:40 - 7:42earn more than janitors in India?
-
7:42 - 7:44After all, they're doing
pretty much the same thing -- -
7:44 - 7:46sweeping floors and so forth.
-
7:46 - 7:50It certainly isn't the case
that janitors in the United States -
7:50 - 7:54are sweeping more floors per hour
or working so many more hours. -
7:54 - 7:58If you answered demand and supply,
give yourselves half points. -
7:58 - 7:59Let's go a little bit deeper.
-
7:59 - 8:03The demand for janitors
is higher in the United States -
8:03 - 8:06because the United States
is a more productive economy -
8:06 - 8:08than the Indian economy.
-
8:08 - 8:10There's more and better
capital to work with, -
8:10 - 8:12the office workers
are more productive, -
8:12 - 8:17and the American office
produces a more valuable product. -
8:17 - 8:19The result
is that it's more valuable -
8:19 - 8:22to keep a U.S. office building clean --
-
8:22 - 8:25that's one of the reasons
why American janitors earn more. -
8:25 - 8:27The demand
for their services is higher. -
8:27 - 8:29This is a useful reminder --
-
8:29 - 8:32you may have
a number of valuable skills. -
8:32 - 8:33Perhaps you're able
to program a computer, -
8:33 - 8:36or write a report,
or motivate sales staff, -
8:36 - 8:37and so forth.
-
8:37 - 8:41But your skills only have value
within a given context. -
8:41 - 8:43If you were transplanted
to a different economy, -
8:43 - 8:45your skills might be worth less --
-
8:45 - 8:47maybe because your skills
would be less useful, -
8:47 - 8:51but also because other people
might not have the money -
8:51 - 8:53to pay for your skills.
-
8:53 - 8:55It's better to be a barber
in a rich country -
8:55 - 8:57than in a poor country,
-
8:57 - 9:00even when the same number
of people need a haircut. -
9:00 - 9:01Okay.
-
9:01 - 9:06So that's one reason why janitors
in the United States earn more. -
9:06 - 9:09The demand
for their services is higher -
9:09 - 9:14because the United States
is a more productive economy. -
9:14 - 9:18Wages, of course,
are about demand and about supply. -
9:18 - 9:19So here's the other half --
-
9:19 - 9:21India has more workers
than in the United States, -
9:21 - 9:24and in particular India
has more low-skilled workers -
9:24 - 9:27who eagerly compete
for the job of janitor. -
9:27 - 9:33A janitor could be
a quite high paying job in India, -
9:33 - 9:34a well-respected job in India.
-
9:34 - 9:35So Indian janitors earn less
-
9:35 - 9:37because U.S. firms
are more productive, -
9:37 - 9:40the demand for labor is higher
-
9:40 - 9:41and also because the supply
of low-skilled workers -
9:41 - 9:43is greater in India.
-
9:43 - 9:47Here's a graph
summarizing what we just said. -
9:48 - 9:49Here's the demand and supply
of janitors in the Unites States -
9:49 - 9:52with the wage of $10 an hour.
-
9:52 - 9:56And here's the demand
and supply in India. -
9:56 - 9:57The demand is lower,
-
9:57 - 9:59the supply is higher
so the wage is lower. -
9:59 - 10:00Okay.
-
10:00 - 10:01Next time we'll be
looking at some of the factors -
10:01 - 10:03which can increase wages,
-
10:03 - 10:06particularly human capital,
-
10:06 - 10:08and then we'll turn
to discrimination and other topics. -
10:10 - 10:11- [Narrator]
If you want to test yourself, -
10:11 - 10:14click "Practice questions."
-
10:14 - 10:17Or, if you're ready to move on,
just click, "Next Video." -
10:17 - 10:20♪ [music] ♪
- Title:
- The Marginal Product of Labor
- Description:
-
In this video on the marginal product of labor, we discuss some commons questions such as: How are wages determined? Why do most Americans earn so much by global standards? What exactly is meant by ‘human capital’? Do labor unions help workers, and if so, by how much? How does discrimination affect labor markets? How is the demand for labor different than the demand for a good? We’ll discuss how to derive the demand for labor based on the marginal product of labor, and use real-world examples — such as the demand for janitors in a fast food restaurant — to illustrate this calculation. We’ll also cover an individual’s labor supply curve vs. market supply of labor.
Microeconomics Course:http://mruniversity.com/courses/principles-economics-microeconomic
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/labor-economics-marginal-product-labor#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/human-capital-wages-education-globalization
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 10:22
Marilia_PM edited English subtitles for The Marginal Product of Labor | ||
Cindy Hurlow edited English subtitles for The Marginal Product of Labor | ||
Cindy Hurlow edited English subtitles for The Marginal Product of Labor | ||
MRU2 edited English subtitles for The Marginal Product of Labor | ||
MRU2 edited English subtitles for The Marginal Product of Labor | ||
MRU2 edited English subtitles for The Marginal Product of Labor |