CHAPTER 19 Labor; Innovation

Test Yourself

1.     The following table shows the number of pizzas that can be produced by a large pizza parlor employing various numbers of pizza chefs.

a.      Find the marginal physical product schedule of the pizza chefs.

b.     Assuming a price of $9 per pizza, find the marginal revenue product schedule.

c.      If chefs are paid $100 per day, how many chefs will this pizza parlor employ? How would your answer change if chefs’ wages rose to $125 per day?

d.     Suppose the price of pizza increases from $9 to $12.

Show what happens to the derived demand curve for chefs.

            (a) The MPP schedule is in the third column.

            (b) The fourth column contains the MRP schedule, when pizzas sell for $9.

            (c) If the wage rate is $100, the pizza parlor hires 3 chefs. It would not pay to hire the fourth, because the wage would exceed the MRP. If the wage rose to $125, employment would still be 3 chefs.

            (d) If the price of pizzas is $12, the MRP schedule, which is the derived demand schedule for chefs, is shown in the fifth column. At a wage of $100, the firm hires 4 chefs, and at a wage of $125, employment would be cut to 3 chefs.

3.     In which of the following industries is wage determination most plausibly explained by the model of perfect competition? The model of bilateral monopoly?

1.  Odd-job repairs in private homes
2. Manufacture of low-priced clothing for children
3. Auto manufacturing

            (a) Odd-job repairs in private homes: perfect competition.

            (b) Low-priced clothing for children: neither perfect competition nor bilateral monopoly.

            (c) Auto manufacturing: bilateral monopoly.

4.     Can you think of some types of workers whose marginal products probably were raised by computerization? Are there any whose marginal products were probably reduced? Can you characterize the difference between the two types of jobs in general terms?

            Many secretaries found their marginal productivities considerably increased by computerization. With modern word processing equipment they could produce more letters and documents, faster and more elegantly. Some telephone operators found their marginal productivity reduced: with the advent of automatic, computerized switches, there was no further need for their skill of plugging wires into holes on black boards. Those whose productivity was increased were in areas in which they could cooperate with and use the new technology. Those whose productivity was decreased were in areas in which the new technology simply replaced their skills.

Discussion Questions

      1.   Colleges are known to pay rather low wages for student labor. Can this trend be explained by the operation of supply and demand in the local labor markets? Is the concept of monopsony of any use? How might things differ if students formed a union?

            The supply of youthful, (fairly) unskilled labor is relatively high in colleges and college towns. This leads one to expect that the marginal productivity of such labor is driven to fairly low levels, and the consequence is low wages. The college itself may be such a major employer of student labor that it can act as a monopsonist, and reduce the wage below the value of the marginal product. If students formed a union they might be able to withhold labor, and/or insist on a minimum wage that is higher than the prevailing wage. They would face the danger, however, of reduced employment.

5. What are some reasonable goals for a union? Use the tools of supply and demand to explain how a union might pursue its goals, whatever they are. Consider a union that has been in the news recently. What was it trying to accomplish?

            A union might try to maximize the wage rate of its members. To achieve this, it could try to restrict the supply of workers, or negotiate a high wage floor. In any case, it will probably have to sacrifice employment. A different goal might be to increase employment. In this case, the union will probably have to sacrifice something in terms of the wage rate. Another goal, which is a compromise between the first two, is to maximize the total wage earnings of its members, that is to say, wages times employment. It could advance all of these goals by taking action to increase the demand curve for its labor, for example by cooperating with the firm’s advertising campaigns, or by lobbying for import restrictions. Unions may also have many goals that are independent of wages and employment. They may, for example, want an improved grievance procedure, more flexible hours, improved safety conditions, more recreational facilities, improved opportunities for internal promotion, etc.

8. Since about 1980, GDP per capita (that is, the average real income per person) in the United States has risen fairly substantially. Yet real wages have failed to rise. What do you think may explain this phenomenon?

            While GDP per capita has risen, real wages have not. There may be many reasons for this, among them increased labor force participation rates and a shift away from wages toward other forms of non-wage income.

13. What steps should the United States consider undertaking to protect itself from the fate of other countries that once were economic leaders of the world and then fell far behind?

            Constant innovation holds the key. What holds good for a leading company also holds good for a leading economy. Most of the erstwhile leading economies stagnated and failed to adapt, because of which the mantle passed over to eager competitors.

 14.   Why do you think, even though high school education in other countries is widely considered to be better than that in the United States, every country sends its best and brightest to the United States to get their doctorate degrees?

            United States is considered to be the land of opportunity and innovations. Development of higher education in the United States has not happened overnight—it is the output of efforts over three centuries. More than anything else, the opportunities provided and the resulting exposure prompts every country to send its best and brightest to the United States to get their Doctorate degrees.

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