TAILIEUCHUNG - Matthias Doepke - Marcroeconomics - Chapter 6,7

Chapter 6 The Labor Market This chapter works out the details of two separate models. Section contains a oneperiod model in which households are both demanders and suppliers of labor. Market clearing in the labor market determines the equilibrium wage rate. | Chapter 6 The Labor Market This chapter works out the details of two separate models. Section contains a one-period model in which households are both demanders and suppliers of labor. Market clearing in the labor market determines the equilibrium wage rate. Section further develops the two-period model from Chapter 3. In this case the households are permitted to choose their labor supply in each period. Equilibrium in the bobor Market This economy consists of a large number of identical households. Each owns a farm on which it employs labor to make consumption goods and each has labor that can be supplied to other farmers. For each unit of labor supplied to others a household receives a wage w which is paid in consumption goods. Households take this wage as given. In order to make the exposition clear we prohibit a household from providing labor for its own farm. This has no bearing on the results of the model. The first task of the representative household is to maximize the profit of its farm. The output of the farm is given by a production function Zd where Zd is the labor demanded . employed by that farm. The only expense of the farm is its labor costs so the profit of the farm is 7r f ld wld- The household that owns the farm chooses how much labor Id to hire. The first-order condition with respect told is d K . 0- f -w 0 so old f l . This implies that the household will continue to hire laborers until the marginal product 48 The Labor Market of additional labor has fallen to the market wage. Equation pins down the optimal labor input ZJ. Plugging this into the profit equation yields the maximized profit of the household f l wl . After the profit of the farm is maximized the household must decide how much to work on the farms of others and how much to consume. Its preferences are given byu c ls where c is the household s consumption and Zs is the amount of labor that the household supplies to the farms of other households. The household

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