Chapter14MarketsforFactorInputsChapter14MarketsforFactorITopicstobeDiscussedCompetitiveFactorMarketsEquilibriuminaCompetitiveFactorMarketFactorMarketswithMonopsonyPowerFactorMarketswithMonopolyPower2Chapter14TopicstobeDiscussedCompetitCompetitiveFactorMarketsCharacteristicsLargenumberofsellersofthefactorofproductionLargenumberofbuyersofthefactorofproductionThebuyersandsellersofthefactorofproductionarepricetakers3Chapter14CompetitiveFactorMarketsCharCompetitiveFactorMarketsDemandforafactorinputwhenonlyoneinputisvariable:FactordemandsarederiveddemandDemandforaninputthatdependson,andisderivedfrom,boththefirm’slevelofoutputandthecostofinputsDemandforcomputerprogrammersisderivedfromhowmuchsoftwareMicrosoftexpectstosell4Chapter14CompetitiveFactorMarketsDemaFactorInputDemand–OneVariableInputAssumefirmproducesoutputusingtwoinputs:Capital(K)andLabor(L)Hiredatpricesr(rentalcostofcapital)andw(wagerate)Kisfixed(shortrunanalysis)andLisvariableFirmmustdecidehowmuchlabortohire5Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInputHowdoesafirmdecideifitisprofitabletohireanotherworker?IftheadditionalrevenuefromtheoutputofhiringanotherworkerisgreaterthanitscostMarginalRevenueProductofLabor(MPRL)Additionalrevenueresultingfromthesaleofoutputcreatedbytheuseofoneadditionalunitofaninput6Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInputTheincrementalcostofaunitoflaboristhewagerate,wProfitabletohiremorelaboriftheMRPLisatleastaslargeasthewagerate,wMustmeasuretheMRPL7Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInputMRPListheadditionaloutputobtainedfromanadditionalunitoflabor,multipliedbytheadditionalrevenuefromanextraunitofoutputAdditionaloutputisgivenbyMPLandadditionalrevenueisMR8Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInput9Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInputInacompetitivemarket,MR=PThismeans,foracompetitivemarketGraphically,diminishingmarginalreturns,MPLfallsasLincreases10Chapter14FactorInputDemand–OneVariMarginalRevenueProductHoursofWorkWages($perhour)MRPL=MPLx

PCompetitiveOutputMarket(P=MR)MRPL=MPLxMRMonopolisticOutputMarket(P<MR)11Chapter14MarginalRevenueProductHoursFactorInputDemand–OneVariableInputChoosingtheprofit-maximizingamountoflabor:IfMRPL>w(themarginalcostofhiringaworker):hiretheworkerIfMRPL<w:hirelesslaborIfMRPL=w:profitmaximizingamountoflabor12Chapter14FactorInputDemand–OneVariSLInacompetitivelabormarket,afirmfacesaperfectlyelasticsupplyoflaborandcanhireasmanyworkersasitwantsatw*.HiringbyaFirmintheLaborMarketQuantityofLaborPriceofLaborMRPL=DLw*L*TheprofitmaximizingfirmwillhireL*unitsoflaboratthepointwherethemarginalrevenueproductoflaborisequaltothewagerate.13Chapter14SLInacompetitivelabormarkeFactorInputDemand–OneVariableInputQuantityoflabordemandchangesinresponsetothewagerateIfthemarketsupplyoflaborincreasesrelativetodemand(babyboomersorfemaleentry),asurplusoflaborwillexistandthewageratewillfall14Chapter14FactorInputDemand–OneVariAShiftintheSupplyofLaborQuantityofLaborPriceofLaborw1S1MRPL=DLL1L2w2S215Chapter14AShiftintheSupplyofLaborFactorInputDemand–OneVariableInputComparingInputandOutputMarkets16Chapter14FactorInputDemand–OneVariFactorInputDemand–OneVariableInputBoththehiringandoutputchoicesofthefirmfollowthesameruleInputsoroutputsarechosensothatmarginalrevenuefromthesaleofoutputisequaltomarginalcostfromthepurchaseofinputsTrueforbothcompetitiveandnoncompetitivemarkets17Chapter14FactorInputDemand–OneVariFactorInputDemand–ManyInputsInchoosingmorethanonevariableinput,achangeinthepriceofoneinputchangesthedemandfortheothersScenarioProducingfarmequipmentwithtwovariableinputs:LaborAssembly-linemachinery18Chapter14FactorInputDemand–ManyInFactorInputDemand–ManyInputsIfthewageratefalls:MorelaborwillbedemandedevenifamountofmachinerydoesnotchangeMCofproducingfarmequipmentfallsProfitableforfirmtoincreaseoutputWillinvestinadditionalmachinerytoexpandproductionMRPLwillshiftright,quantityoflabordemandedincreases19Chapter14FactorInputDemand–ManyInFactorInputDemand–ManyInputsIfwagerateis$20/hr,firmhires100workerhours–pointAWageratefallsto$15/hrMRPL>W,firmdemandsmorelaborMRPL1isdemandforlaborw/machineryfixedIncreasedlaborcausesMPKtorise,encouragingthefirmtorentmoremachineryMPLincreasesMRPLcurveshiftsright,firmuses140hrslabor20Chapter14FactorInputDemand–ManyInMRPL1MRPL2FactorInputDemand–ManyInputsWages($perhour)5101520HoursofWork04080120160Whenthewageratefallsto$15,theMRPcurveshifts,generatinganewpointConthefirm’sdemandforlaborcurve.ThusAandCareonthedemandforlaborcurve,butBisnot.DLABC21Chapter14MRPL1MRPL2FactorInputDemandMarketDemandCurveAllfirms’demandforlaborvarysubstantiallyAssumethatallfirmsrespondtoalowerwageAllfirmswouldhiremoreworkersMarketsupplywouldincreaseThemarketpricewillfallThequantitydemandedforlaborbythefirmwillbesmaller22Chapter14MarketDemandCurveAllfirms’IndustryDemandforLaborMRPL1Labor(worker-hours)Labor(worker-hours)Wage($perhour)Wage($perhour)05101505101550100150L0L2120MRPL2DL1HorizontalsumifproductpriceunchangedL1IndustryDemandCurveDL2FirmIndustry23Chapter14IndustryDemandforLaborMRPL1TheIndustryDemandforLaborIfthewageratefallsforallfirmsinindustry,allfirmswilldemandmorelaborMoreindustryoutputandsupplyforoutputwillrise,causingpricestofallTheincreaseinlaborissmallerthaniftheproductpricewerefixedAddingalllabordemandcurvesinallindustriesgivesmarketdemandcurveforlabor24Chapter14TheIndustryDemandforLaborITheDemandforJetFuelJetfuelisafactor(input)forairlinesCostofjetfuel1971–Jetfuelcostequaled12.4%oftotaloperatingcost1980–Jetfuelcostequaled30.0%oftotaloperatingcost1990’s–Jetfuelcostequaled15.0%oftotaloperatingcost25Chapter14TheDemandforJetFuelJetfueTheDemandforJetFuelAirlinesrespondedtohigherpricesinthe1970’sbyreducingthequantityofjetfuelusedOutputofairlines(ton-miles)increasedby29.6%andjetfuelconsumedroseby8.8%Effectofincreasedfuelcostsonairlinesdependsonabilitytocutfuelusagebyreducingweight26Chapter14TheDemandforJetFuelAirlineTheDemandforJetFuelPriceelasticityofdemandforjetfueldependsonabilitytoconservefuelandelasticitiesofdemandandsupplyoftravelThedemandforjetfuelimpactstheairlinesandrefineriesalikeTheshort-runpriceelasticityofdemandforjetfuelisveryinelastic27Chapter14TheDemandforJetFuelPriceeShort-RunPriceElasticity

ofDemandforJetFuelAmerican -0.06 Delta -0.15Continental -0.09 TWA -0.10Northwest -0.07 United -0.10Airline Elasticity Airline Elasticity28Chapter14Short-RunPriceElasticity

ofTheDemandforJetFuelThereisnogoodsubstituteforjetfuelLongrunelasticityofdemandishigher,however,becauseairlinescaneventuallyintroducemoreenergy-efficientairplanesCanshowshort-andlong-rundemandsforjetfuelMRPSRismuchlesselasticthanlongrundemandsinceittakestimetosubstitute29Chapter14TheDemandforJetFuelThereiTheShort-andLong-Run

DemandforJetFuelQuantityofJetFuelPriceMRPLRMRPSR30Chapter14TheShort-andLong-Run

DemandTheSupplyofInputstoaFirmInacompetitivemarket,afirmcanpurchaseasmuchofaninputitwantsatthemarketpriceDeterminedbysupply/demandofinputmarketInputsupplytoafirmisperfectlyelasticFirmissmallpartofmarketsodoesnotaffectmarketprice31Chapter14TheSupplyofInputstoaFirmAFirm’sInputSupplyinaCompetitiveFactorMarketSMarketSupplyofFabricYardsofFabric(thousands)YardsofFabric(thousands)Price($peryard)Price($peryard)DMarketDemandforFabric100ME=AE1010SupplyofFabricFacingFirmDemandforFabricMRP5032Chapter14AFirm’sInputSupplyinaComTheSupplyofInputstoaFirmRememberthatthesupplycurveistheaverageexpenditurecurveSupplycurverepresentingthepriceperunitthatthefirmpaysforagoodAlso,marginalexpenditurecurverepresentsthefirm’sexpendituresonanadditionalunitthatitbuysAnalogoustoMRcurveinoutputmarket33Chapter14TheSupplyofInputstoaFirmTheSupplyofInputstoaFirmWhenfactormarketiscompetitive,averageexpenditureandmarginalexpenditureareidenticalhorizontallinesHowmuchoftheinputshouldthefirmpurchase?AslongasMRP>ME,profitcanbeincreasedbybuyingmoreinputWhenMRP<ME,benefitslowerthancosts34Chapter14TheSupplyofInputstoaFirmTheSupplyofInputstoaFirmProfitmaximizationrequiresthemarginalexpendituretobeequaltothemarginalrevenueproductME=MRPAspecialcaseofcompetitiveoutputmarketshowsprofitmaximizationwhereME=w35Chapter14TheSupplyofInputstoaFirmTheMarketSupplyofInputsThemarketsupplyforfactorinputsisupwardslopingExamples:jetfuel,fabric,steelThemarketsupplyforlabormaybeupwardslopingandbackwardbending36Chapter14TheMarketSupplyofInputsTheTheSupplyofInputstoaFirmTheSupplyofLaborThechoicetosupplylaborisbasedonutilitymaximizationLeisurecompeteswithincomeforutilityWageratemeasuresthepriceofleisureHigherwageratecausesthepriceofleisuretoincrease37Chapter14TheSupplyofInputstoaFirmTheMarketSupplyofInputsTheSupplyofLaborHigherwagesencourageworkerstosubstituteworkforleisureThesubstitutioneffectHigherwagesallowtheworkertopurchasemoregoods,includingleisure,whichreducesworkhoursTheincomeeffect38Chapter14TheMarketSupplyofInputsTheCompetitiveFactorMarketsTheSupplyofLaborIftheincomeeffectexceedsthesubstitutioneffect,thesupplycurveisbackwardbendingByusingutilityandbudgetlinegraph,wecanshowhowthesupplycurvecanbebackwardbendingCanshowhowtheincomeeffectcanexceedthesubstitutioneffect39Chapter14CompetitiveFactorMarketsTheSubstitutionandIncomeEffectsofWageIncreaseWorkerinitiallychoosespointA:16hoursleisure,8hourworkIncome=$80QPw=$10Income($perday)2407201216HoursofLeisure082419Wageincreasesto$30.NewbudgetlineRQ.19hoursleisure,5hoursworkIncome=$150

SubstitutioneffectIncomeeffectABCw=$30RIncomeeffectoverridessubstitutioneffect40SubstitutionandIncomeEffectIncomeEffect<SubstitutionEffectIncomeEffect>SubstitutionEffectBackward-BendingSupplyofLaborHoursofWorkperDayWage($perhour)SupplyofLabor41Chapter14IncomeEffect<IncomeEffect>LaborSupplyforOne-and

Two-EarnerHouseholdsIntwentiethcentury,thepercentoffemalesinlaborforcehasincreased1950–34%2001–60%Comparedtheworkchoicesof94unmarriedfemaleswithworkdecisionsofheadsofhouseholdsandspousesin397familiesCandescribeworkdecisionsbycalculatingelasticityofsupplyforlabor42Chapter14LaborSupplyforOne-and

Two-ElasticitiesofLaborSupply(HoursWorked)43Chapter14ElasticitiesofLaborSupply(LaborSupplyforOne-and

Two-EarnerHouseholdsWhenhigherwagerateleadstofewerhoursworked:LaborsupplycurveisbackwardbendingIncomeeffectoutweighsthesubstitutioneffectElasticityoflaborsupplyisnegative44Chapter14LaborSupplyforOne-and

Two-EquilibriuminaCompetitiveFactorMarketCompetitivefactormarketisinequilibriumwhentheprevailingpriceequatesquantitysuppliedandquantitydemandedSinceworkersarewellinformed,allreceivethesamewageandgenerateidenticalMRPLwhenemployed45Chapter14EquilibriuminaCompetitiveFEquilibriuminaCompetitiveFactorMarketIfoutputmarketisperfectlycompetitive,demandcurveforaninputmeasuresbenefitconsumersplaceonuseofinputinproductionprocessWageratealsoreflectsthecostofthefirmandtosocietyofusingadditionalunitofinputAtequilibrium,MBL=MCL=wage46Chapter14EquilibriuminaCompetitiveFEquilibriuminaCompetitiveFactorMarketWhenoutputandinputmarketsarebothperfectlycompetitive,resourcesareusedefficientlyMaximizeTB–TCEfficiencyrequiresthatMRPLequalsthebenefittoconsumersoftheadditionaloutput,givenby(P)(MPL)47Chapter14EquilibriuminaCompetitiveFEquilibriuminaCompetitiveFactorMarketIfoutputmarketisnotcompetitive:MRPL=(P)(MPL)nolongerholds(P)(MPL)>MRPLAtequilibriumnumberofworkers,marginalcosttofirm,wM,islessthanmarginalbenefittoconsumers,vMAlthoughthefirmmaximizesprofits,outputisbelowefficientlevelanduseslessthanefficientlevelofoutput48Chapter14EquilibriuminaCompetitiveFEquilibriuminaCompetitiveFactorMarketIfoutputmarketisnotcompetitive:Althoughthefirmmaximizesprofits,outputisbelowefficientlevelanduseslessthanefficientlevelofinputEconomicefficiencywouldbeincreasedifmorelaborerswerehiredandmoreoutputwereproducedGainstoconsumerswouldoutweighfirm’slostprofit49Chapter14EquilibriuminaCompetitiveFLaborMarketEquilibriumSL=AESL=AEDL=MRPLDL=MRPLP*MPLNumberofWorkersNumberofWorkersWageWageCompetitiveOutputMarketMonopolisticOutputMarketwCLCwMLMvMAB50Chapter14LaborMarketEquilibriumSL=AEquilibriumina

CompetitiveFactorMarketEconomicRentForafactormarket,economicrentisthedifferencebetweenthepaymentsmadetoafactorofproductionandtheminimumamountthatmustbespenttoobtaintheuseofthatfactorTheeconomicrentassociatedwiththeemploymentoflaboristheexcessofwagespaidabovetheminimumamountneededtohireworkers51Chapter14Equilibriumina

CompetitiveFTotalexpenditure(wage)paidis0w*x0L*EconomicRentEconomicrentisABW*BEconomicRentNumberofWorkersWageSL=AEDL=MRPLw*L*A052Chapter14Totalexpenditure(wage)paidEEquilibriumina

CompetitiveFactorMarketLand:APerfectlyInelasticSupplyOccurswhenlandforhousingoragricultureisfixed,atleastinshortrunItspriceisdeterminedentirelybydemandWhendemandincreases,rentalvalueperunitincreasesandtotallandrentincreases53Chapter14Equilibriumina

CompetitiveFEconomicRents1s2LandRentNumberofAcresPrice($peracre)SupplyofLandD2D1Whendemandincreases,priceandeconomicrentincrease.54Chapter14Economics1s2LandRentNumberofPayintheMilitaryDuringtheCivilWar,90%ofthearmedforceswereunskilledworkersinvolvedingroundcombatToday,only16%areunskilledworkersinvolvedingroundcombatLeadtosevereshortagesinskilledworkers55Chapter14PayintheMilitaryDuringthePayintheMilitaryRankstructurehasstayedthesamePayincreasesaredeterminedprimarilybyyearsofserviceSimilarly,officerswithdifferingskilllevelsareoftenpaidsimilarsalariesManyskilledworkersleavethearmysincesalariesinprivatesectoraremuchhigher56Chapter14PayintheMilitaryRankstructTheShortageof

SkilledMilitaryPersonnelNumberofSkilledWorkersWageSLDL=MRPLw*w0Shortage57Chapter14TheShortageof

SkilledMilitaPayintheMilitarySolutionSelectivereenlistmentbonusestargetedatskilledjobswherethereareshortagesWithincreasesindemandforskilledmilitaryjobs,weshouldexpectthemilitarytoincreasereenlistmentbonusesandothermarketbasedincentives58Chapter14PayintheMilitarySolution58CFactorMarketswithMonopsonyPowerWeshowedbeforethatmanyfirmshavemonopsonybuyingpowerUSautomobilecompaniesasbuyersofpartsandcomponentsAssumeTheoutputmarketisperfectlycompetitiveInputmarketispuremonopsony59Chapter14FactorMarketswithMonopsonyFactorMarketswithMonopsonyPowerMarginalandAverageExpenditureWhenchoosingtopurchaseagood,increaseamountpurchaseduntilthemarginalvalueequalsmarginalexpenditurePricepaidforgoodisaverageexpenditureandisequaltomarginalexpenditure60Chapter14FactorMarketswithMonopsonyFactorMarketswithMonopsonyPowerSinceamonopsonistpaysthesamepriceforeachunit,thesupplycurveistheaverageexpenditurecurveUpwardsloping,sincedecidingtobuyanextraunitraisespriceitmustpayforallunitsForprofitmaximizingfirm,marginalexpenditurecurveliesabovetheaverageexpenditurecurveFirmmustpayallunitsthehigherprice,notjustlastunithired61Chapter14FactorMarketswithMonopsonySL=AverageExpenditure(AE)MarginalExpenditure(ME)D=MRPLMarginalandAverageExpenditureUnitsofInputPrice(perunitofinput)01234655101520w*=13L*wcLcCHireswhereME=MRPLCiscompetitivemarketlevel62SL=AverageMarginalD=MRPLMaFactorMarketswithMonopsonyPowerExamplesofMonopsonyPowerGovernmentSoldiersMissilesB2BombersNASAAstronautsCompanytown63Chapter14FactorMarketswithMonopsonyMonopsonyPowerintheMarketforBaseballPlayersBaseballownersoperateamonopsonisticcartelReserveclausepreventedcompetitionforplayersEachplayertiedtooneteamforlifeOncedrafted,couldnotplayforanotherteamunlessrightsweresoldBaseballownershadmonopsonypowerinnegotiatingnewcontracts64Chapter14MonopsonyPowerintheMarketMonopsonyPowerintheMarketforBaseballPlayersDuring1960’sand70’s,players’salarieswerefarbelowmarketvalueofMPIfcompetitivemarketPlayersreceiving$42,000in1969wouldhaveinsteadreceivedasalaryof$300,000in1969dollarsStrikein1972followedbylawsuit65Chapter14MonopsonyPowerintheMarketMonopsonyPowerin

theMarketforBaseballPlayersIn1975,playerscouldbecomefreeagentsafterplayingforateamforsixyearsReserveclausenolongerineffectMarketbecamemorecompetitiveFrom1975to1980,expendituresonplayer’scontractswentfrom25%ofteamexpendituresto40%Averageplayersalarydoubledinrealterms66Chapter14MonopsonyPowerin

theMarketFactorMarketswithMonopolyPowerJustasbuyersofinputscanhavemonopsonypower,sellersofinputscanhavemonopolypowerThemostimportantexampleofmonopolypowerinfactormarketsinvolveslaborunions67Chapter14FactorMarketswithMonopolyPSLDLMRDemandwithnomonopsonypower.Supplyofunionlaborw/nomonopolypower.LabormarketcompetitivewithL*workershiredatwagew*DemandequalsSupplyMonopolyPowerofSellersofLaborNumberofWorkersWageperworkerAL*w*68Chapter14SLDLMRDemandwithnomonopsonyMonopolyPowerofSellersofLaborTheunion’smonopolypowerallowsittochooseanywagerateandquantitysuppliedIfitwantedtomaximizenumberofworkershired,itwouldchoosecompetitiveoutcomeIfitwantedtoobtainhigherwages,itwouldrestrictmembershiptoL1workerstogethigherwagew1Thosewhofindjobsarebetteroff.Thosewithoutjobsareworseoff.69Chapter14MonopolyPowerofSellersofLSLDLMRLabormarketcompetitivewithL*workershiredatwagew*LaborsellerswithmonopolypoweratL1andw1MonopolyPowerofSellersofLaborNumberofWorkersWageperworkerAL*w*L1w170Chapter14SLDLMRLabormarketcompetitiveMonopolyPowerofSellersofLaborIsrestrictiveunionworthwhile?Yes,ifmaximizingeconomicrentisthegoalTheunionactslikeamonopolistrestrictingoutputtomaximizeprofitsRentforaunionrepresentsthewagesearnedinexcessofopportunitycostUnionmustchooseworkerssothatthemarginalcostequalsthemarginalrevenue71Chapter14MonopolyPowerofSellersofLMonopolyPowerofSellersofLaborCostisthemarginalopportunitycostsinceitisameasureofwhatanemployerhastoofferanadditionalworkertogethimorhertoworkforthefirmBut,thewagenecessarytoencourageadditionalworkerstotakejobsisgivenbysupplycurveforlabor,SL72Chapter14MonopolyPowerofSellersofLMonopolyPowerofSellersofLaborRentmaximizingcombinationofwagerateandnumberofworkersiswhereMRcrossessupplyPricecomesfromthedemandcurveThisgivesacombinationofL1andw1ShadedareabelowthedemandcurveandabovethesupplycurvetotheleftofL1istheeconomicrentthatallworkersreceive73Chapter14MonopolyPowerofSellersofLEconomicRentSLDLMRMonopolyPowerofSellersofLaborNumberofWorkersWageperworkerL2w2MaximizingrentstoworkersmeanschoosinglaborwhereMRcrossesS.Wagecomesfromdemand.AL*w*w1L174Chapter14EconomicSLDLMRMonopolyPoweroFactorMarketswithMonopolyPowerRentmaximizingpolicycanhelpnonunionworkersiftheycanfindnonunionjobsIfjobsarenotavailable,thiscouldcausetoomuchofadistinctionbetweenwinnersandlosersLookingbackatgraph,analternativeobjectiveistomaximizeaggregatewagesthatallunionmembersreceiveThisgivesL2andw275Chapter14FactorMarketswithMonopolyPUnionizedandNon-UnionizedWorkersWhenunionusesmonopolypower,someworkersarenothired.Thoseworkerseithertrytofindnonunionjobsorchooseinitiallynottojoinunion.Assumethetotalsupplyofworkersisfixed–supplyisSLDemandforunionizedlaborisDUanddemandfornon-unionizedlaborisDNUTotalmarketdemandisDU+DNU=DL76Chapter14UnionizedandNon-UnionizedWoUnionizedandNon-UnionizedWorkersWhatifunionchoosestoraisewageabovecompetitivewagew*,towU?NumberofworkershiredbytheunionfallsbyamountLUAstheseworkersfindemploymentinnon-unionsector,wagerateinthatsectoradjustsuntillabormarketisinequilibriumAtnewwagerate,wNU,additionalnumbershiredinsectorisLNUEqualsnumberofworkerswholeftunionizedsector77Chapter14UnionizedandNon-UnionizedWoWageDiscriminationinLaborMarketNumberofWorkersWageperworkerDUDNUDLSLw*wUWhenamonopolisticunionraisesthewagerateintheunionizedsectoroftheeconomyfromw*towU,employmentinthatsectorfalls.Forthetotalsupplyoflabortoremainunchanged,thewageinthenon-unionizedsectormustfallfromw*towNUwNU78WageDiscriminationinLaborMTheDeclineofPrivateSectorUnionismObservationsUnionmembershipandmonopolypowerhasbeendecliningInitially,duringthe1970’s,unionwagesrelativetonon-unionwagesfell79Chapter14TheDeclineofPrivateSectorTheDeclineofPrivateSectorUnionismObservationsInthe1980’s,unionwagesstabilizedrelativetonon-unionwagesSincethe1990’s,membershiphasbeenfallingandwagedifferentialhasremainedstable80Chapter14TheDeclineofPrivateSectorTheDeclineofPrivateSectorUnionismExplanationTheunionshavebeenattemptingtomaximizetheindividualwagerateinsteadoftotalwagespaidThedemandforunionizedemployeeshasprobablybecomeincreasinglyelasticasfirmsfinditeasiertosubstitutecapitalforskilledlabor81Chapter14TheDeclineofPrivateSectorWageInequality–HaveComputersChangedtheLaborMarket?1950-1980Relativewageofcollegegraduatestohighschoolgraduateshardlychanged1980-1995Therelativewagegrewrapidly82Chapter14WageInequality–HaveComputeWageInequality–HaveComputersChangedtheLaborMarket?In1984,25.1%ofallworkersusedcomputers1993–45.8%2001–53.5%Formanagersandprofessionals,itwasover80%83Chapter14WageInequality–HaveComputeWageInequality–HaveComputersChangedtheLaborMarket?PercentchangeinuseofcomputersCollegedegrees1984-1993:from42%to82%Lessthanhighschooldegree11%:from5%to16%Withhighschooldegree21%:from19%to40%84Chapter14WageInequality–HaveComputeWageInequality–HaveComputersChangedtheLaborMarket?Growthinwages–1983to1993Collegegraduatesusingcomputers–11%Non-computerusers–lessthan4%Statisticalanalysisshowsthat,overall,thespreadofcomputertechnologyisresponsiblefornearlyhalftheincreaseinrelativewagesduringthisperiod85Chapter14WageInequality–HaveComputeWageInequality–HaveComputersChangedtheLaborMarket?Isthisincreaseintherelativewagesofskilledworkersbad?Althoughgrowinginequalitycandisadvantagelow-wageworkers,itcanalsomotivateworkersOpportunitiesforupwardmobilitythroughhigh-wagejobshaveneverbeenbetter86Chapter14WageInequality–HaveComputeWageInequality–HaveComputersChangedtheLaborMarket?Shouldyoucompleteacollegedegree?In2000,collegegraduatesage25andoverearnednearly$400moreperweekthanthosewithonlyahighschooldiplomaThisisarealwageincreaseforcollegegradsandarealwagedecreaseforhighschooldropoutscomparedto1979Unemploymentrateamongcollegegradsisfourtimeslessthanforhighschooldropouts87Chapter14WageInequality–HaveComputeChapter15Investment,Timeand

CapitalMarketsChapter15Investment,TimeandTopicstobeDiscussedStocksVersusFlowsPresentDiscountedValueTheValueofaBondTheNetPresentValueCriterionforCapitalInvestmentDecisionsAdjustmentsforRisk89Chapter14TopicstobeDiscussedStocksVTopicstobeDiscussedInvestmentDecisionsbyConsumersInvestmentsinHumanCapitalIntertemporalProductionDecisions–DepletableResourcesHowAreInterestRatesDetermined?90Chapter14TopicstobeDiscussedInvestmeIntroductionMarketsforfactorsandoutputgiveareasonablycompletepictureCapitalmarketsaredifferentCapitalisdurableItisaninputthatwillcontributetooutputoveralongperiodoftimeMustcomparethefuturevaluetocurrentexpendi