Transcript Wages and Employment in a Single Labour Market

Chapter Seven
Wages and Employment
in a Single Labour
Market
Created by: Erica Morrill, M.Ed
Fanshawe College
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-1
Chapter Focus
 Equilibrium
in a single labour market
 Imperfect competition
 Payroll taxes
 Monopsony
 Minimum wage
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-2
Competitive Firm’s Demand

Assumptions :


homogeneous type of labour
price taker and wage taker

Supply is perfectly elastic (horizontal) at the
wage rate
 Firms can employ all the labour they need at
the market wage rate
 Market wage rate is set by the aggregate
labour market
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-3
Figure 7.1
Competitive Product and
Labour Markets
W
W
W0
S1
Wc
W
W0
S2
Wc
S
Wc
D=Di
N01 N1
Firm 1
N
N02
N2
Firm 2
N
N
Ni
Aggregate Labour Market
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-4
Short-Run

A firm may have to raise its wages to
attract additional workers
 dynamic

monopsony
Short-run labour supply curve is
upward sloping
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-5
Figure 7.2
 in
demand
leads to
higher
wages
The Labour Market in the
Short Run and Long Run
SS
S’S Supply of
workers
increase
S1 depressing
the high short
run wage
WS
Wc
Wage
D’
D
0
Labour
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-6
Short-run and Long-run
Labour Supply
 Long
run
 Temporary
wage increases above norm
are consistent with the firm being a
competitive buyer of labour
 Short-run
wage increases can be a
market signal
 ensures
that market forces operate in the
longer run
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-7
Equilibrium in a Competitive
Market
 Market-clearing
model (neoclassical)
for markets with homogeneous workers
and homogeneous jobs wages will be
equalized across workers
 absences of “involuntary unemployment”
 no queues for jobs or rationing of jobs

© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-8
In Reality….

The market-clearing model is not entirely true




Wages do not adjust quickly to clear the market
Involuntary unemployment is frequent
Large wage differentials exist across
homogeneous workers and jobs.
However, it still serves as a useful
approximation of market theory
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-9
Imperfect Competition
 Monopoly
 is
the industry
 Effects
of hiring more labour
 marginal
physical product of labour falls
 marginal revenue falls
 Sells more output only by lowering the
product price
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-10
Monopolist Versus
Competitive Demand for Labour
Figure 7.3
W*
DC = MPPN X PQ=  VMPN
DM = MPPN X MRQ= MRPN
0
NM*
NC*
© 2002 McGraw-Hill Ryerson Ltd.
N
Chapter 7-11
Product Market Structure and
Departure from Market Wages
 Monopolist
 earns
higher profits and labour may be
able to appropriate some of these profits
 may be less cost conscious and may yield
to wage demands
 sensitive to public image pay higher wages
to buy good image
 large firms pay higher wages
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-12
Oligopoly in the Product
Market

Few firms
 Similar products
 Action of one firm affects the others
 May depart from Market wages because;


earn above normal profits which may be captured
by workers
larger firms and may pay above-market wages for
reasons related to size
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-13
Monopolistic Competition in
the Product Market
 Many
small firms with differentiated
products giving the firm some discretion
in price setting
 competitive
in the labour market
 paying market wages
 no economic rents (high profits yielding
higher wages)
 no large size factors leading to higher
wages
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Chapter 7-14
Working with Supply and
Demand
 Simulating
the effects of a policy
change on equilibrium
 Incidence of a unit payroll tax
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Chapter 7-15
Unit Payroll Tax
 Tax
levied on employers
 Proportional to the firm’s payroll
 CPP/QPP
 Workers’
compensation
 unemployment insurance
 health insurance
 Often
considered “job killers”
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-16
Figure 7.5
The Effect of a Payroll Tax on
Employment and Wages
NS
D
W0
A
C
B
W1
T
ND(W)
ND(W+T)
N1
N0
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-17
Characteristics of a
Monopsony
 Large
relative to the size of the labour
market
 Influences wage
 Raises wages to attract labour
 Will not lose all of its work force if
decreases wages
 Upward-sloping labour supply schedule
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-18
Monopsony
 Average
cost is the wage rate
 Marginal cost is the new wage plus the
cost of paying the higher wage to
existing workers
 Marginal cost is higher than average
cost
 Profit Maximization when MC=VMP
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-19
Figure 7.6
Monopsony
Wage
MC
VMPM
WC
WM
S=AC
VM
SM
S0
0
VMPN=MPPnPQ
NM
NC
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-20
Implications of a Monopsony
 Employment
is lower than a competitive
situation
 Restricts employment because hiring
additional labour is costly
 Higher wages must be paid to
intramarginal workers
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-21
Characteristics of Monopsonists

Some inelasticity of supply of labour
 Most firms have an element of monopsony power in
short run
 Long run costly problems of recruitment, turnover
and morale issues
 Examples of monopsony in long run:


would be a one industry town in an isolated region
if workers have specialized skills that are useful mainly in a
specific firm
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-22
Perfect Monopsonistic Wage
Differentiation
 Existing
workers receive wages greater
when a monopsony raises the wage
rate
 seller’s
surplus or economic rent
 Monopsonist
may try to retain some of
this seller’s surplus by differentiating it’s
work force
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-23
Perfect Monopsonistic Wage
Differentiation
 Supply
schedule equal to the average
cost and marginal cost
 Does not have to pay existing workers
any more than their reservation wage
 Monopsonists may try to conceal higher
wages or use nonwage mechanisms to
attract additional labour
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-24
Imperfect Monopsonistic
Wage Differentiation
 Monopsonists
differentiate between
groups of workers
 different
types of labour can be separated
 there are different supply elasticities
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-25
Minimum Wage Legislation: Impact
on Competitive Labour Market

Adverse employment effect
 Firms employ less labour at a higher cost
 Higher wage encourages more people to
seek work
 Magnitude of adverse employment effect
depends on the elasticity of the demand for
labour
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-26
Minimum Wage: Offsetting
Factors
 Labour
could increase…
 if
there is exogenous increase in demand
for output
 if there is an increase in the demand for
labour substitutes
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-27
Minimum Wage Legislation:
Impact on Monopsony
 minimum
wage (or other form of price
fixing) may increase employment
 reduces monopsony profits
 depends on the extent to which
monopsony is associated with workers who
are paid below minimum wage
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-28
Figure 7.9
Monopsony and
Minimum Wage
MC
MC1
VMP0
S=AC
W1
W0
VMP
N0
N1
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-29
Minimum Wage

Reduces employment in competitive labour
markets
 Increases employment in monopsonistic
labour market
 Theory


Short-run effects are small
Disemployment effects are higher in long-run
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-30
End of Chapter Seven
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 7-31