Transcript Document

CHAPTER 10
The labour market
©McGraw-Hill Education, 2014
Some important questions
• Why does a top professional footballer earn so
much more than a professor?
• Why does an unskilled worker in the EU earn more
than an unskilled worker in India?
• Why do market economies not manage to
provide jobs for all their citizens who want to
work?
• Why are different methods of production used in
different countries?
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The demand for labour
• Derived demand
– the demand for a factor of production is
derived from the demand for the output
produced by that factor
• Equilibrium wage differential
– the monetary compensation for the differential
non-monetary characteristics of the same job
in different industries
– so workers have no incentive to move
between industries
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The demand for labour in the short run
The marginal value product of labour (MVPL) is simply the
marginal product of labour in physical goods MPL multiplied by
the output price.
• Under perfect
competition, with
diminishing marginal
productivity, the firm
maximizes profit when the
marginal cost of
employing an extra
worker equals the MVPL.
W0
MVPL
Employment
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The demand for labour in the short run
W0
E
MVPL
…this occurs at E
where wage = MVPL.
Employment is L*.
Below L*, extra employment
adds more to revenue than
to labour costs.
Above L*, the reverse is so.
This decision is consistent
with the MR = SMC rule for
maximizing profit under
perfect competition.
L* Employment
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Demand for factors in the long run (1)
• The optimum mix of capital and labour depends on
the relative prices of each input.
• This helps to explain why more labour-intensive
means of production are used in some countries
where labour is relatively abundant.
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Demand for factors in the long run (2)
• A change in the price of one factor will have both
output and substitution effects.
• A rise in the wage rate leads to
– substitution towards more capital-intensive
techniques,
– but also leads to lower total output.
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Monopoly &monopsony power in
the labour market
• A firm may have MONOPOLY power in its output market
– facing a downward-sloping demand curve
– so the marginal revenue product of labour (MRPL)
received from expanding output is less than the MVPL as
the firm must reduce price to sell more.
• A firm may face MONOPSONY power in its input market
– facing an upward-sloping supply curve for inputs
– so the marginal cost of labour rises with employment.
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Monopoly & monopsony power (2)
£
Under perfect competition,
a firm sets MVPL = W0
and employs L1 workers.
W0
MRPL
L3
MVPL
L1 Employment
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Facing a downwardsloping demand curve for
its product, the firm sets
MRPL = W0 and employs L3
workers.
Monopoly & monopsony power (3)
£
MCL
A monopsonist recognises
that additional employment
bids up wages for existing
workers, so MCL shows the
marginal cost of an extra
worker.
W0
MRPL
L3 L2
MVPL
L1 Employment
Facing a given goods
price, the monopsonist
sets MCL = MVPL and
employs L2 workers.
©McGraw-Hill Education, 2014
Monopoly & monopsony power (4)
£
MCL
W0
For a monopsonist who
also faces a downwardsloping demand curve
for the product, MCL
is set equal to MRPL to
employ L4 workers.
So monopoly and
monopsony power both
tend to reduce the firm’s
demand for labour.
L4 L3 L2
L1 Employment
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The supply of labour
• The LABOUR FORCE
– all individuals in work or seeking employment.
• Labour supply
– for an individual, the decision on how many
hours to offer to work depends on the real
wage
– an individual’s attitude towards leisure and
income determines will influence how many
hours of work are supplied at any given real
wage rate.
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The individual’s supply curve of labour
SS2
SS1
Hours of work supplied
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For the labour supply
curve SS1, an increase
in the real wage always
Induces higher labour
supply.
Whereas for SS2,
there comes a point
where a higher wage
induces less hours of
work to be supplied:
labour supply is
backward-bending.
Labour supply in aggregate
• If we consider the economy as a whole, or
an industry a higher real wage rate also
encourages a higher participation rate.
• Higher wage rates encourage those
already working to supply more hours and
those not working to enter the labour
force.
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Labour market equilibrium for an industry
SL
DL
• The industry supply curve
SLSL slopes up
– higher wages are
needed to attract
workers into the
industry
W0
DL
SL
L0
Quantity
of labour
• For a given output
demand curve, industry
demand for labour slopes
down
• Equilibrium is W0, L0.
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A shift in product demand
DL
Beginning in equilibrium,
D'L
A fall in demand for the
product also shifts the
derived demand for labour
to D'L
W0
W1
D'L
L1 L0
DL
The new equilibrium is
at W1, L1.
Quantity
of labour
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A change in wages in another industry
SL
DL
Again starting in equilibrium,
an increase in wages in
another industry attracts
labour,
W0
DL
SL
L0
Quantity
of labour
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Transfer earnings and economic rent
• Transfer earnings
– the minimum payments required to
induce a factor of production to work in
a particular job.
• Economic rent
– the extra payment a factor receives over
and above the transfer earnings needed
to induce the factor to supply its services
in that use.
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Wage
Transfer earnings and economic rent (2)
In labour market
equilibrium at W0, L0,
D
SS
if workers were paid only
the transfer earnings, the
industry would need only
pay AEL0 in wages.
E
W0
D
0
A
L0
Quantity
But if all workers must be
paid the highest wage
needed to attract the
marginal worker into the
industry (W0), then workers
as a whole derive economic
rent of 0AEW0.
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Concluding comments (1)
• The demand for labour is derived from the
demand for what it is used to produce.
• Firms stop hiring workers when the value of what
they produce (VMPL) begins to fall below what it
costs to hire them (W).
• Labour supply will fall as the wage increases if the
income effect dominates the substitution effect.
• A lack of competition on the buying side of the
labour market (monopsony) is associated with
lower employment and wages when compared
to a perfectly competitive market.
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Concluding comments (2)
• For someone already in the labour force, a rise in
the hourly real wage has both a substitution
effect tending to increase the supply of hours
worked, and an income effect tending to reduce
the supply of hours worked.
• Economic rent is the difference between income
received and the reservation wage for that
individual.
• In free market equilibrium, some workers choose
not to work at the equilibrium wage rate. They
are voluntarily unemployed.
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Concluding comments (3)
• Involuntary unemployment is the difference
between desired supply and desired demand at
a disequilibrium wage rate.
• Possible causes of involuntary unemployment are
minimum wage agreements, trade unions, scale
economies, insider–outsider distinctions and
efficiency wages.
©McGraw-Hill Education, 2014