According to Name, the labor market “is the institution by which workers and employers come together to engage in the production of output” (Name 297). A distinctive feature of the labor market is fixed level of wages and its correlation with a number of working hours. Key issues of the labor market are health-related issues, issues related to labor supply, and the ones related to total compensation. Health-related issues state that healthy worker is more productive than workers with health problems. Labor supply issues determine a correlation between the health status of the worker and his or her employment. Total compensation issues go for health insurance as a part of workers’ compensation. One more set of issues connected with the labor market determines wages and employment for health care workers.
DEMAND FOR LABOR
Demand for Labor by the Individual Firm
First of all, it is necessary to study the demand for labor by an individual provider. In the study, the provider is a healthcare producer, and the sphere of interest is the demand for labor, or derived demand. Derived demand means that the demand is determined by the output it generates for the firm, or, in other words, by its usefulness. Of course, healthcare firms may have other aims than profits, but profit is a good start for analysis the demand of labor. The analysis is held through the example of a commercial laboratory specialized in blood tests. The time frame is a single day, and the output is measured in a number of blood tests per day. The firm’s inputs are materials and supplies, capital equipment, fixed management time, and labor time. As an object of the study, labor time is the only variable input in the analysis.
Production function. The relationship between inputs and outputs is hypothesized. The relationship shows increasing marginal productivity followed by decreasing one. Marginal productivity is the extra output resulted from the employment of an extra input unit. It increases because of opportunity to effectively use fixed resources and decreases with employing less effective unites and problems in coordinating activities.
Revenue derived from worker production. Assume that every lab tests for $6. The marginal value product is an addition of successive technicians, extra revenue gotten from hiring one more input unit.
Labor cost. Assume that every lab technician earns $160 per week, and the same is the marginal cost of the input.
Firm’s objectives. Assume that the main goal is profit maximization. Profit is the difference between revenue and cost. Maximum profit means equality of the extra worker revenue and the extra cost.
The first worker will be hired when the resulting marginal value product exceeds the marginal cost, and the firm will continue hiring until it will be profitable.
The demand curve is the quantity of inputs a firm demands at a specific price. The change of the price will affect the quantity. The quantity is shown with the MVP curve, the demand curve for the input. It is a value of extra revenue given for any wage rate. The demand curve will shift outward with more productive labor or increased output prices.
The extended analysis introduces the effects of benefits, one of the forms of compensation. Assume that the only form of compensation is the wages. Suppose that the firm provides $20 benefits per day. The labor compensation increases, but the marginal value product does not change. A total compensation for the 200th labor day is $60. Under the new benefits agreement, the firm could hire 200 workers for $40 rather then $60. Assume that the firm pays a 10% profits tax. If the before-tax profit is $20, than the after-tax profit is $18. If wages and insurance premiums are both deductible expenses, there is no difference to the firm to pay the compensation as wages or benefits. Insurance premiums are not taxed, and thus are more preferable by employees.
Market Demand for Labor
The market demand for labor can be determined the same way as other market demands. Hypothesize the number of firms and the demand curve for each of them is known, and the price for every product is fixed. A market demand labor curve is the sum of the labor quantities at each wage rate. The market demand for labor is a sloping downward demand curve shifting together with changes in variables (number of firms, productivity, etc.).
LABOR SUPPLY
Individual Labor Supply
The analysis concentrates on the quantity of individuals ready to supply labor for earning income. The general framework is the consumer demand model. Assume that consumer has a demand for income and for leisure time. The model analyzes how individuals change their desire to work under the changes in labor compensation. The main result of the analysis is a supply-of-labor curve that refers to the quantity of labor supplied to the wage rate. The unit of observation is the individual consumer; the dependent variable is the number of willing working hours. Assume that a utility-maximizing individual has a utility function with income and leisure time, and the more he or she obtains of each good, the higher levels of utility become. Also assume that a higher utility level is the preferable one.
The individual will increase working hours until the value of the lost leisure is lower than the wage rate. Also the individual must be compensated with higher wage rates to be convinced contributing additional leisure hours for work.
The positive wages-labor time relationship is called the substitution effect of income leisure. The substitution effect means the increased motivation for work as work has higher rewards than leisure. However, the substitution effect could be replaced with the income effect. The income effect means that the more individual works, the more leisure time he or she would like to have for spending money, and, hence, the less he or she would like to work.
Labor supply curves can have different slopes. For instance, if an individual does not want to work more even with increased wages, the curve will be steeply sloped.
Health Insurance Benefits and Labor Supply
The common way of financing health insurance is the payment of health insurance premiums for employees. Assume fringe benefits $5 per worker. Thus, the value of compensation to the worker is $10 for $5 wages, $15 for $10, and so on. Then the wage rate-quantity of supplied labor curve will shift to the right and downward. A $5 wages with $5 fringe benefits will mean the same amount of labor as $10 wages without benefits.
Market Supply of Labor
The market labor supply consists of the sum of the market individuals labor supply curves. The market labor supply curve includes the total number for every individual at every wage rate. Increased number of individuals will lead to the shift of the supply curve to the right.
THE COMPETITIVE LABOR MARKET
Assumptions
The analysis focuses on the market for lab technicians. A competitive labor market model should have assumptions about market supply, demand factors, and their interaction. At a wage $20 per day, the firms demand 20,000 days of lab technician services. At lower wages, the quantity of these days increases. The market supply curve is upward sloping, as it was hypothesized. A market wage of $17,5 per day means 17,500 days of technician labor, its increase to $20 means 20,000 days. The competitive model assumes an equilibrium condition stating that supplied and demanded quantities are equal.
Predictions
1. Supply, Demand, and Wage Rate
The model predicts a single equilibrium wage set at $20 at the equilibrium quantity of 20,000 days as a result of bargaining between labor demanders and suppliers. The equilibrium quantity and price will change together with changes of the related factors. Increased product prices or the number of firms will lead to increased labor days and increased wages. Increased supplies or labor will lead to lower wages and higher labor quantities. The model could be used for analysis of the effect of health insurance benefits as a form of compensations.
2. Health and Labor Market Outcomes
The health has an impact on the supply of labor. Unimpaired health increases the worker’s chances to be employed and get full-time employment. Under the conditions of poor health, the competitive labor market model will shift the labor supply curve to the left. Thus, the quantity of supplied labor will be decreased, the whole amount of employment will reduce, and the wage rate of market participants will increase.
3. Occupational Risk and Labor Market Outcomes
Different industries and occupations are in close connection with variable injury and mortality rates. According to utility-maximized principles, workers prefer low-risk occupations to high-risk ones. However, high-risk occupations provide increased wages, as the on-the-job risk of mortality is one of the factors influencing on the wage rate. After developing the measures that determine occupational wage differences, they could be extrapolated, and the value estimate of a statistical life could be obtained.
MARKET POWER IN LABOR MARKETS
Buyer’s Market Power
The model of a hospital’s buying power can be used for explaining possible reasons of market shortages. Hypothesize that there is a single buyer of nursing labor. The model shows correlation between marginal cost to hospital, value of nurses to hospital, and supply.
Supplier costs. Assume that there are several nurses available for hiring by the hospital. For $200 per week, two nurses will supply their labor, for $300, three nurses, etc.
Revenues. Assume that increased number of nurses allows serving increased number of patients, but the marginal productivity of additional nurses decreases. Assume that the hospital receives constant price for every additional patient. The hospital’s value curve has been developed from the estimated additional revenue generated by extra nurses. The marginal revenue is $90 for the first nurse, $80 for the second, and so on. The total value for three nurses is $240.
Behavioral assumption. Assume that the main wish of the hospital is to maximize profit.
The profit-maximizing hospital will hire extra nurses until the marginal cost is less than the additional revenue. However, the marginal cost (MC) of nurses is not the same as the supply of nurses (the nurses’ supply curve). The nurses’ supply curve is sloped up, and that means every additional nurse wants extra dollar for her work. Assume that the hospital pays every nurse the same wage, and each new nurse means it must pay more to the previous one. Thus, MC curve is more steeply sloped than the supply curve.
Comparing with a competitive market, in a monopsonistic market, fewer nurses would be hired. Competitive market means that the wage increases till equal demand-supply level. A monopsonistic market could prevent hiring more nurses and, thus, could maintain its profits depressing wages and creating a restriction in supply.
Unions as Monopoly Sellers of Labor
According to Name, “a union is an organized group of workers that allows individual workers to act as a cohesive unit when bargaining with employers” (Name 311). In economic terms, unions provide workers with monopoly power and increased wages. The monopoly model predicts the influence of a union on wage levels. Hypothesize that one union supplies labor for several hospitals. The general model shows correlation between the monthly demand, the marginal revenue, and the marginal cost. The marginal revenue shows additional wage connected with expanded employment. The model illustrates increase of the wage nurses get in connection with increase of labor time they provide. Assume that the union will maximize its “surplus,” or difference between total compensation and any costs. Profits are defined for the entire group of labor suppliers. The union bargains for a wage at the quantity of labor that provides maximum income. On the model, it is a position where the marginal revenue and the marginal cost are equal. The model predicts increased wages and restriction of employment.
Works Cited
