the demand for labor is different from the demand for other things because it's what we call a derived demand demand in most cases depends on what your willingness to pay is which itself depends on your preferences and opportunity costs but demand for labor is not as subjective what an employer is willing to pay for a worker depends on the marginal revenue that worker adds to the business imagine that you have a grocery store and you're the only one working the cash register in a way you are the store's one employee and let's say that your store earns 500 in Revenue per hour what is the value of hiring another employee to help run the registers well an additional worker would help when it's busy and would also free you up to complete other valuable tasks perhaps after hiring an additional worker your revenues increase to 615 dollars which allows us to calculate the marginal revenue of that worker hiring that additional worker increased Revenue by 115 dollars per hour that means you would only be willing to hire this worker if they will accept less than a hundred and fifteen dollars per hour what about a second worker if you're running your business well then you and your employees are always spending your time on the most valuable task which means as you hire more people the tasks that will now get completed are less valuable than the ones already being completed so even if this worker is just as productive as a person as the first person you hired their marginal contribution to revenue will be less than the previous hire it looks like this worker increased Revenue by 85 dollars per hour so you will only hire this worker if they will accept less than 85 dollars per hour hiring another worker is still good for the bottom line increasing Revenue by sixty dollars a fourth worker might increase Revenue by forty dollars per hour again this doesn't mean that these workers are worse the diminishing marginal returns of hiring workers happens because the additional work that will be completed when this person is hired just doesn't increase Revenue as much of course now we have a worker for each register but that doesn't mean there's no value in hiring more people there's still work to be done such as hiring people to bag groceries the next worker might boost Revenue by 25 and then 15 after that and the last worker might boost Revenue by only ten dollars per hour the marginal revenue is what defines the amount of firm is willing to pay for an additional worker it is the increase in the productivity due to one more worker which is what we call the marginal product of labor so how many workers should we hire it depends on the wage we have to pay them if people are willing to work for twenty five dollars an hour then we will hire five people in addition to ourselves so we'll have six workers if people are willing to work for 15 or less then we'll hire a seventh person and if they're willing to work for ten dollars or less we'll hire an eighth person to be clear however if we hire seven people it doesn't mean the first person should get a hundred and fifteen dollars per hour and the second person should get eighty five dollars per hour and so on again marginal revenue is not reflecting how good each employee is all of these employees could be equally skilled and capable people it's just that when we only have two people working we will assign them to the most valuable tasks and hiring people means we will be able to get marginally less productive work done this is all to say that it isn't unfair to pay everyone 15 an hour when we hire the seventh worker so long as everyone is willing to work for that wage all the marginal product of labor does is form the demand for labor what firms are willing to pay for labor is determined by the marginal product of labor which is the increase in a firm's revenues due to that labor the supply of labor is made up of everyone willing to work for a wage each of us has a reservation wage which is the lowest wage a person is willing to accept in order to do a job my reservation wage for being a cashier is a bit higher than the typical wage paid to Cashiers which is why I'm not a cashier if you're not working as a cashier it's because your reservation wage is higher than what they're offering if you are working as a cashier right now it means your reservation wage is lower than what they're paying you this mirrors consumer Theory our reservation wage is a secret number we all have which is above which we will accept the job just as our willingness to pay for products is a secret number and when the price is below that number we'll buy something so what determines our reservation wage lots of things my reservation wage for becoming a cashier is high because I already have another job which pays a little better than most cashier jobs other job opportunities are a big perhaps the biggest component in our reservation wage if you are currently a cashier I would guess that you're in this class right now because you're working to expand your job opportunities and don't plan to be a cashier forever working conditions can also be a big part of our reservation wage many people turn down job opportunities that pay more than their current job because that job would be more dangerous less fun or more stressful and there's also the work-life balance to consider head back to chapter 3 and re-watch our video on the labor Leisure decision lots of people choose to work less when given a good wage because they would rather have more Leisure Time that rather than more money whatever the case different people have different preferences when it comes to the work they do and people's opportunity costs differ which means that we all have a unique reservation wage if the going wage is only ten dollars per hour only one of these potential workers will apply for the job if the going wage is thirteen dollars per hour five of these workers will apply for a job and at 18 dollars per hour seven of them will apply and that willingness to accept is what defines the supply curve for labor when you put supply and demand together you have a market where competition will drive the wage to a point where supply and demand cross here they cross at a wage of fifteen dollars per hour at that wage six people are willing to work and the grocery store is willing to hire six people if the wage were higher there would be more applicants than positions available and workers would compete the wage down if the wage were lower the firm wouldn't be able to fill all the positions it wants to hire for in order to maximize profits they'll want to raise the wage until they find the number of positions where it's profitable to hire someone at that wage this is all kind of boring right but this is one of the most important and useful conclusions you will get in this class why do some people get paid High wages well other people get paid low wages this is a really critical question the answer is that markets set wages and they're set by the interaction of people's willingness to accept wages and the marginal product of labor if you feel you're underpaid it's because there's lots of people who can do what you can do or because the marginal product of your labor is not very high this analysis also gives us a recipe for increasing people's wages I for one would like it if everyone gets richer the way we get wages to go up is by increasing the marginal product of labor if we increase how much hiring an additional person adds to the revenues of a firm that will increase the demand for labor and increase the equilibrium wage set by the market to increase people's marginal product we have to increase their productivity we need to take someone who can add fifteen dollars of Revenue per hour to their firm and turn them into someone who can add twenty dollars of Revenue per hour to their firm there are a couple of ways of doing that we can do that through Innovation and the creation of better tools which when used by the employee increases their productivity cashiers used to have to type in each price one at a time but then they invented barcodes and barcode scanners and now one cashier could do the work it used to take two or three cashiers to do and so their wages went up the same is true for self-checkout stations rather than have cashiers ring up small orders one at a time customers are able to quickly do it themselves while overseen by a single cashier Innovation leads to higher productivity which leads to higher wages the other thing we can do is increase the skills of our workers we could train cashiers so they are better and faster at running a register better at increasing sales and better at getting customers to want to come back to the store Education and Training build our stock of skills and that can boost productivity as well which will end up boosting demand for our labor and increasing our wages but let me ask you something you are in college right now getting an education presumably to boost your stock of skills and increase the demand for your labor so that you can earn higher wages that means the whole purpose of you sitting here and watching this video is that this video is increasing your skills and making your labor more valuable so here's my question do you feel like you've learned valuable skills in this class do you know how to do stuff you didn't know how to do before that you'll need to know how to do in some future high-paying job that's the subject of our next video