AED Economics 200
Principles of Food and Resource Economics
Winter, 2003


7.  Government Intervention:
Agriculture Resource Markets:  Labor

Agricultural Price and Income Policy

Goals of public policy
-peace
-security - economic, political, social stability
-freedom
-justice
     conflicting principles of justice
-merit
-laissez faire
-egalitarian

Values - Principles that guide action
Agricultural Creed (Paarlberg) - based on Jeffersonian democracy, free markets
farmers are good citizens
farming is not only a business, but a way of life
farming should be a family enterprise
land should be owned by [person tilling it
increasing productivity is encouraged
anyone who wants to farm should be free to do so
a farmer should be his/her own boss
Sometimes values are conflicting

Early agr. policies
land policies
Conservation of resources
agricultural credit
land grant universities - Morrill Act (1862)
agr. research - Hatch Act (1887)
agr. extension - Smith-Lever Act (1914)
transportation

Policy goals -should be consistent with values
family farms
parity
equality of bargaining power
secure food supply
environment and resource conservation

Persistent problems in agriculture
overcapacity
technological change
low income elasticity of demand
price instability
low demand price elasticity
low supply price elasticity
rural poverty
substitution of capital for labor and resulting out migration

Farm programs - based on market intervention
Grains, Cotton, Rice
Sugar
Tobacco
Honey, Wood
Peanuts
Milk
Sugar

Farm Programs' Mechanisms - Some History
Two-price plan
Land retirement
Set-aside
Conservation Reserve
Target Prices
Direct Payment or Deficiency Payment
Quotas or Acreage Allotments
Price Support
Farmer Owned Reserve
Loan Rates
Payment limitations

Other programs include:
Demand expansion
food stamp program
school lunch program
direct food distribution programs
PL480
Education
Research
Resource conservation - soil, water, wetlands
Subsidized credit

Federal Agricultural Improvement and Reform Act of 1996
production flexibility contracts
cash payments based on past program participation

Payment =
      program     program     payment
      acreage  x   0.85    x    yield x rate
payment limitation ($40,000)
no set aside requirements
flexibility in crops planted
loan rates
export enhancement program
price supports for dairy phased out over 4 years
Farm Security and Rural Investment Act of 2002, which governs Federal farm programs for the next 6 years, was signed into law on May 13, 2002.

Alters the farm payment program
Direct payments - amounts are changed - includes soybeans in direct cash payments

Loan rates

Introduces counter - cyclical farm income support when effective price is less than target price

Extends milk price supports for dairy

Introduces dairy market loss payments

Increases payment limitation

Expands conservation land retirement programs and emphasizes on-farm environmental practices

Relaxes rules to make more borrowers eligible for Federal farm credit assistance

Extends food stamp program and restores food stamps eligibility for legal immigrants

Extends export enhancement program and other trade programs

What have government farm programs achieved?
higher farm income?  Yes, but...
higher land values?  Yes
stabilized prices?  probably
secure food supply?  Yes
farm size distribution affected?  Yes

Resource (Input or Factor) Markets - Labor and Capital

Theoretical Overview -

Production Function
Total Physical Product
Marginal Physical Product
     MPP = TPP / X

Economic Perspective
Value Marginal Product
     VMP = (TPP)(Py)/  X = (MPP)(Py)
Marginal Revenue Product
     MRP = (MR)(TPP) / X = (MR)(MPP)
Marginal Factor Cost
     MFC = (Px)(X) / X

Economic Principle
Max. Profit
VMP = MFC
    or
MRP = MFC

Economic Principles

1.

   How Much of an Input to Use?
VMP = MFC
    or
MRP = MFC

2.

   What Combination of Inputs to Use?
MPPx1 / Px1 = MPPx2 / Px1

Labor Market

Market Demand for Labor
Hortizontal Sum of Firms' Derived Demand

Shifts in Firm's Derived Demand Curve for Labor
Changes in Product Prices
Changes in marginal physical product of labor
Changes in price of capital

Market Supply for Labor
For firm, labor supply curve (MFC) may be horizontal
For market, labor supply curve is upward sloping
Individuals must receive sufficient wages to cover their opportunity costs.
Opportunity cost rises as quantity of labor increases.
Factors shifting labor supply curve
Wage rates in other labor markets
Non-monetary aspects of job - people prefer "enjoyable" work to dirty, heavy, socially unacceptable, or dangerous work
Available skills
Training costs to acquire skills
Labor immobility


Labor Market Fundamentals

          Demand shifters Supply shifters
          Marginal physical product
          Product price
          Price of capital		 opportunity cost
non-monetary aspects
available skills
training cost
mobility of labor

Labor Market Issues
  1. Effect of government legislated wage rates
  2. Why does worker in Ethiopia receive different wage than worker in Japan?
  3. Why is Army recruitment up during economic recessions?
  4. Why do Eddie George and other sports stars earn so much money?
  5. Why do jobs that carry a health risk offer higher pay than jobs that do not, ceteris paribus?
  6. What factors might prevent the equalization of wage rates for identical jobs across labor markets?
  7. Why might women earn less than men?


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