class: center, middle, inverse, title-slide # Econ 330: Urban Economics ## Lecture 9 ### John Morehouse ### April 26th, 2021 --- class: inverse, center, middle # Lecture 9: Urban Labor Markets I --- # Schedule ## Today .pull-left[ 1) .hi.purple[Labor Markets and Urban Econ] 2) .hi.purple[Urban Labor Demand] ] .pull-right[ 3) .hi.purple[Urban Labor Supply] 4) .hi.purple[Equilibrium] ] -- ## Upcoming .col-left[ - .hi.slate[Read] - .hi.slate[HWII] due Friday ⚠️⚠️⚠️ - .hi.slate[Midterm]: One week from today ⚠️⚠️⚠️ ] -- --- # Quick Midterm Notes - __Midterm will be given next Monday (May 3rd)__ - You must take it during class hours --- count: false # Quick Midterm Notes - __Midterm will be given next Monday (May 3rd)__ - You must take it during class hours --- count: false # Quick Midterm Notes - __Midterm will be given next Monday (May 3rd)__ - You must take it during class hours - __Write your answers on a piece of paper -- upload a pdf__ - No need to answer it on the same page as the test. However if this is easier for you, there is space provided and you can do so. Single pdf - Review with specifics next class. Fun stuff coming after midterm! --- count: false # Quick Midterm Notes - __Midterm will be given next Monday (May 3rd)__ - You must take it during class hours - __Write your answers on a piece of paper -- upload a pdf__ - No need to answer it on the same page as the test. However if this is easier for you, there is space provided and you can do so. Single pdf - Review with specifics next class. Fun stuff coming after midterm! ## Moving Forward We are now transitioning from looking at __within__ city sorting to __across__ city sorting --- # Labor Markets Why labor econ in urban econ? - David Card: -- > A city _is_ a labor market .hi[Question]: What does Card mean? Do you agree? -- -- - Cities provide incentives for firms and workers to locate close to each other - In a sense, the density of a city is generated entirely by incentives in the labor market -- --- # Motivation To further motivate our study of urban labor markets, lets ask the following: .qa[Question]: If we wanted to model .hi.orange[individual] decision making for locations, what things would we throw into this model? - Put differently, what are some of the most important features for where people decide to live? -- - .hi[wages] - Rents - Amenities (this can include tons of things) -- - Birthplace? - Distance to birthplace? -- -- --- # Motivation - It turns out that wages are a pretty big feature of individual and household location choices -- - If Amazon opens in Portland, will this impact where people live? -- .qa[Q2] Let's now take it as given that people care about their wage. Followup question: How do wages respond to changes in household/individual location decisions? -- .hi.orange[It depends]™️ (on what?) - The structure of the labor market (production proccesses, competitiveness of the labor market) -- --- # Labor Markets A labor market consists of: 1. Buyers of labor (firms) - Note: __firms__ generate labor demand 2. Sellers of labors (people) - Note: __people__ generate labor supply --- # Labor EC101 Usually: - Labor economists discuss labor supply as being generated from a labor-leisure tradeoff - Model: Rational agent's making optimal choices over leisure choice/education choice, etc -- Urban is different -- -- - Assume that labor supply is generated from _location choices_ - Assume people work the same amount, but choose where to work and live -- --- # Labor EC101 What do both fields have (somewhat) in common? -- <center> <font size="15"> Labor Demand </font> </center> -- - Definition: .hi[Labor Demand] - A _set_ of quantities of labor demanded corresponding to a _set_ of wages (the entire curve) .hi.purple[Question]: -- How is a change in _labor demand_ different than a change in _quantity of labor demanded_? -- --- class: inverse, middle # Checklist .col-left[ 1) .hi[Labor Markets and Urban Econ: overview]: ✅ 2) .hi[Urban Labor Demand] ] .col-right[ 3) .hi.purple[Urban Labor Supply] 4) .hi.purple[Equilibrium] ] --- # Labor EC101: Labor Demand We will start with the .hi[competitive] model: -- ## Assumptions 1. Firms seek to maximize profits -- 2. Markets are perfectly competitive (in .pink[both] inputs and output) -- - .hi[Implication]: - No individual firm can influence the price of labor (or other inputs) - No individual firm can influence the output price -- -- Are these assumptions reasonable? Discuss -- --- # Firm Labor Demand Can we derive a rule for how much labor the firm will hire in the competitive model? `\begin{align*} \pi &= P*Q - TC \end{align*}` --- # Firm Labor Demand Can we derive a rule for how much labor the firm will hire in the competitive model? `\begin{align*} \pi &= P*Q - TC\\ \pi &= \underbrace{P*F(L,K)}_\text{TR} - \underbrace{w*L-r*K}_{\text{TC}} \end{align*}` where: -- - `\(P\)`: output price - `\(F(L,K)\)`: quantity produced, as a function of labor and capital utilized. Sometimes written `\(Q = F(L,K)\)` -- - `\(w\)`: wage rate, `\(L\)`: total labor employed -- - `\(r\)`: rental rate of capital, `\(K\)`: capital used -- --- # Firm Labor Demand .hi.orange[Claim]: The firm hires more labor so long as the _marginal profit_ w.r.t labor is positive. - __Defn__: Marginal Profit (w.r.t labor), `\(\frac{\Delta \pi}{\Delta L}\)`: The change in profit from hiring an additional unit of labor -- "Proof" of claim: - If `\(\frac{\Delta \pi}{\Delta L} <0\)`, the added profit from an additional unit of labor is negative (ie a loss), so the firm _should not_ hire the next unit -- - If `\(\frac{\Delta \pi}{\Delta L} > 0\)` then the added profit from an additional unit of labor is positive (ie a gain), so the firm should hire the next unit -- -- - If `\(\frac{\Delta \pi}{\Delta L} = 0\)`, this is optimal for the firm (next unit of labor yields negative profit) -- -- --- # Reminder From 201, remember that the following: - .hi.slate[Marginal Product (of labor)]: The change in output from a one unit change in the amount of labor employed -- - `\(MP_L = \frac{\Delta F(L,K)}{\Delta L}\)` -- -- - .hi.slate[Marginal Revenue Product (of labor)]: The _value_ of the change in output from a one unit change in the amount of labor employed -- - `\(MRP_L = P*\frac{\Delta F(L,K)}{\Delta L}\)` -- -- --- #Firm Labor Demand: Math So what is `\(\frac{\Delta \pi}{\Delta L}\)`? -- `\begin{align*} \frac{\Delta \pi}{\Delta L} = P*\frac{\Delta F(L,K)}{\Delta L} - w*\frac{\Delta L}{\Delta L} \end{align*}` -- --- #Firm Labor Demand: Math So what is `\(\frac{\Delta \pi}{\Delta L}\)`? `\begin{align*} \frac{\Delta \pi}{\Delta L} &= P*\frac{\Delta F(L,K)}{\Delta L} - w*\frac{\Delta L}{\Delta L} \\ &= P*MP_L - w\\ & = MRP_L - w \end{align*}` -- Now, set `\(\frac{\Delta \pi}{\Delta L}=0\)` to get the labor demand curve: `\begin{align*} MRP_L - w =0 \implies MRP_L = w \end{align*}` -- --- # Urban Labor Demand: Graph <img src="lecture_nine_files/figure-html/supply_demand-1.svg" style="display: block; margin: auto;" /> --- # Demand Variation Why might .hi[labor demand] curves vary across cities? -- 1) Differences in productivity across cities (agglomeration) -- -- 2) Variation in Business Taxes Across cities -- -- 3) Industrial public service infastructure (electricity, water, gas pipelines) -- -- 4) Land use policies (stricter zoning `\(\implies\)` higher land price `\(\implies\)` less money for other inputs) -- -- 5) Demand for cities exports - If a particular type of good is manufactured in a given city, and demand for this good increases, demand shifts out -- --- # Labor Demand: Ex 1 .qa[Q]: What would two cities where everything is equal except one has a higher productivity of labor look like? -- <img src="lecture_nine_files/figure-html/supply_demand2-1.svg" style="display: block; margin: auto;" /> -- --- #Labor Demand: Ex 2 .qa[Q]: What about a city with lower export demand? -- <img src="lecture_nine_files/figure-html/supply_demand3-1.svg" style="display: block; margin: auto;" /> -- --- class: inverse, middle # Checklist .col-left[ 1) .hi[Labor Markets and Urban Econ: overview]: ✅ 2) .hi[Urban Labor Demand]: ✅ ] .col-right[ 3) .hi.purple[Urban Labor Supply] 4) .hi.purple[Equilibrium] ] --- #Labor Supply Labor supply is driven from location decisions of individuals. What generates location choices? -- 1) .hi[Wages] 2) Rents 3) Amenities 4) Other, individual specific stuff (like birth location) -- --- # Labor Supply A _set_ of quantities of labor supplied corresponding to a _set_ of wages. .qa[Q1]: What causes _movement along_ the labor supply curve? -- - A change in wages. That's it! -- .qa[Q2]: What causes a _shift_ of the labor supply curve? -- 1) Changes in amenities (building of a nicer school, eroding of air quality) 2) Changes in residential government expenditures (increase in taxes drives people away, increases in govt spending brings people in) -- --- # Labor Supply Knowing how responsive workers are to changes in wages is key for vast swaths of policies - Estimates for labor supply elasticities are pretty big - If `\(\varepsilon_{\text{workforce},\text{wage}} = 2\)`, what does this mean? -- .hi.orange[In general] estimated labor supply elasticities are higher for workers with a college degree than without a college degree. What does this mean? -- - College educated individuals are more responsive to changes in wages w.r.t their location decisions -- -- --- # Labor Supply Example <img src="lecture_nine_files/figure-html/labor_supply-1.svg" style="display: block; margin: auto;" /> --- # Labor Supply .qa[Question]: What happens when a city improves its school quality? -- <img src="lecture_nine_files/figure-html/labor_supply2-1.svg" style="display: block; margin: auto;" /> -- --- class: inverse, middle # Checklist .col-left[ 1) .hi[Labor Markets and Urban Econ: overview]: ✅ 2) .hi[Urban Labor Demand]: ✅ ] .col-right[ 3) .hi[Urban Labor Supply] ✅ 4) .hi.purple[Equilibrium] ] --- #Equilibrium __Defn__ - A .hi[labor market equilibrium] is a pair of points `\((L^*, W^*)\)` such that: - labor supply = labor demand - In other words: a labor market eq is where there is no excess supply or demand -- We usually think of cities as being "separate" labor markets, so the eqs can be different across cities -- --- # Equilibrium: Example <img src="lecture_nine_files/figure-html/eq1-1.svg" style="display: block; margin: auto;" /> --- # Min Wage Refresher Recall from EC201: minimum wages are a form of .hi[price controls]. Specifically, a minimum wage is a: -- - Price floor: dictates the _minimum_ allowed price for transactions in a marketplace -- We say that a price floor is .hi.purple[effective] if it has an impact on the market equilibrium -- - Price floors that are below the market price are ineffective -- --- # Min Wage Refresher Is the following effective/ineffective?: <img src="lecture_nine_files/figure-html/min1-1.svg" style="display: block; margin: auto;" /> --- # Min Wage Refresher The following is .hi[ineffective] <img src="lecture_nine_files/figure-html/min1.5-1.svg" style="display: block; margin: auto;" /> --- # Min Wage Refresher Is the following effective/ineffective?: <img src="lecture_nine_files/figure-html/min2-1.svg" style="display: block; margin: auto;" /> --- # Min Wage Refresher The following is .hi[effective] <img src="lecture_nine_files/figure-html/min3-1.svg" style="display: block; margin: auto;" /> --- # Min Wage Refresher <img src="lecture_nine_files/figure-html/min4-1.svg" style="display: block; margin: auto;" /> --- # Example: Two Cities If we treat cities as two _separate_ labor markets, have: .pull-left[ <img src="lecture_nine_files/figure-html/city_1-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ <img src="lecture_nine_files/figure-html/city_2-1.svg" style="display: block; margin: auto;" /> ] --- #Significance? __2 Questions__ - Why do we care so much about modeling cities as different labor markets? .hi.purple[Discuss] -- - Do you think all labor markets across cities and industries are competitive? .hi.purple[Discuss] -- --- # Some Notes - All else equal, low tax cities grow faster than high tax cities - Elasticity (business activity, taxes) -- - Across cities: -0.1 to -0.6 - Within cities: -1.0 to -3.0 -- - Manufacturers are more sensitive to tax differences --- class: inverse, middle # Checklist .col-left[ 1) .hi[Labor Markets and Urban Econ: overview]: ✅ 2) .hi[Urban Labor Demand]: ✅ ] .col-right[ 3) .hi[Urban Labor Supply]: ✅ 4) .hi[Equilibrium]: ✅ ] --- exclude: true <!-- --- --> <!-- exclude: true --> <!-- ```{R, generate pdfs, include = F} --> <!-- system("decktape remark 02_goodsmarket_part1.html 02_goodsmarket_part1.pdf --chrome-arg=--allow-file-access-from-files") --> <!-- ``` -->