December 11, 2011

Wages and the Labor Market - Samuelson and Nordhaus - Review Notes

Wages - Questions

How wages are determined in a market economy?
How wages are determined under competitive conditions?
How imperfect competition (that results when unions or government regulation limits the supply in the labor market) will affect wage rates and employment?

In perfectly competitive equilibrium, if all people and jobs were exactly alike, there would be no wage differentials. The equilibrium wage rate would be determined by supply and demand.

Demand for Labor from Entrepreneurs

The demand for labor is determined by labor's marginal product. The marginal productivity of labor depends upon the quality of labor itself, quantity and quality of cooperating factors of production, and technology of the economy. The quality of labor inputs refers to the basic literacy, higher education, training and skills of the labor force. The quality and quantity of the cooperating factors refers to the capital employed in the economy. Production and managerial methods refer to the technology.

Supply of Labor

Labor supply means the number of man days that people of an economy are will to put in job related activities in agricultural activities or manufacturing and mining activities or service activities. The population size and the pattern of time spending by the people determine the labor supply. How wage rates affect the pattern of spending by time people?

As wages rise, there are two opposite effects on the supply of labor.

Substitution effect tempts each worker to work longer due to high pay for each hour of work. Income effect reduces the need to work as higher wages mean that workers can afford more leisure time to enjoy good things in life.

Wage Differences across Groups and Individuals

We find substantial differences in wages as there is no uniformity in people or jobs.


Paul Samuelson and William D. Nordhaus, Economics, 13th Edition, McGraw-Hill, 1989

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