Chapter 6 Labour Market. Outline. The perfectly competitive model of the labour market Imperfect competition on the labour market Further topics.

Chapter 6

Labour Market

Outline. The perfectly competitive model of the

labour market

Imperfect competition on the labour market

Further topics

Short-run labour demand Consider a firm that produces output using

2 inputs: capital K and labour L. Suppose that capital is fixed in the short-run The wage rate is $12/hour

How many units of labour should it hire?

Profit maximisation:

= p.Q – w.L

p

w

L

Q0

L

Value of marginal productivity and nominal wage

The long-run demand for labour Labour demand will be more elastic to

the wage in the long run than in the short run. The firm's demand for labour will also be

more elastic, the more elastic the demand for its product is.

The firm's demand for labour will also be more elastic, the more it can substitute labour for other inputs.

The elasticity of labour demand

The market demand curve for labour

An imperfect competitor's demand for labour The previous discussion assumes that the firm

faces a perfectly elastic demand for its product. If the firm faces imperfect competition, this is no

longer the case

It faces a downward-sloping demand curve and if it hires new workers, it must cut its price in order to sell the additional output

Under perfect competition, the value obtained by hiring one more worker is the product of price and the marginal product of labour.

An imperfect competitor's demand for labour (ctd) Under imperfect competition, it is the product of

marginal revenue and marginal product. This is called the marginal revenue product of labour and is defined as:

How much labour will a firm hire if it faces a downward-sloping demand curve for its product? It will hire the quantity for which the wage rate and the are equal.

L

TR

Q

TR

L

QMRPL

LMRP

Individual Labour supply

There is only one category of labour and each worker chooses how many hours to work each

day. The alternative to working is leisure.

If the worker is paid w0 = $10 per hour, how many hours should he work?

The optimal amount of hours worked is such that utility is maximum

0M

h wp

w

'U

'U

Individual supply of labour (ctd)

Income and substitution effects

The worker’s supply curve of labour It is backward bending for some values

Target level of income If the targeted level of income is $200/day, the

individual supply of labour looks like :

The conception of welfare reforms Consider 2 welfare programs the goal of which is

to provide additional income to the poor

Program 1 consists in a lump-sum payment of $X per day and program 2 of a payment of Y% of the wage income.

Which program is most likely to reduce the number of hours worked?

Program 1 is more likely to reduce the number of hours worked than program 2.

The market labour supply curve For any given category of labour

Horizontal addition of the individual supply curves for the potential suppliers of labour in that category.

For some individuals:

Still, the market supply curve for that category of labour is almost certain to be upward sloping.

L

w

wA

Outline. Imperfect competition on the labour market

Further topics

Monopsony on the labour market When workers cannot or will not leave the area

and new firms cannot enter, an incumbent firm is a monopsonist.

The labour supply curve faced by the monopsonist

The demand curve for labour from the monopsonist

Equilibrium under monopsony vs perfect competition

Minimum Wage Where minimum wages have been

introduced the initial idea was to lift unskilled workers from poverty .

If the minimum wage is set above the equilibrium wage in a competitive market, this may give rise to unemployment.

Minimum wage and unemployment in a perfectly competitive market

Minimum wage and unemployment under monopsony

The role of unions In all countries however, unions have long been

seen as Enhancing the interest of insiders: their own members in

the USA, workers in employment in France

At the expense of outsiders:non members in the USA, unemployed workers in France.

Union may generate distorsions: Bargaining generates a reduction in total output But this effect is exaggerated

But they may also boost productivity

Wages and employment with and without union bargaining

Outline. Further topics

Discrimination on the labour market Large disparities in earnings across various

groups on the labour market Non-market discrimination

Market discrimination

Why would firms discriminate Customer discrimination.

Co-worker discrimination

Employer discrimination: wage differentials arising from an arbitrary preference by the employer for one group of workers over another one

Statistical discrimination Employers usually do not know the exact

marginal productivity of individual workers, in

particular job applicants They tend to infer individual productivity from the group

productivity.

There will be competitive pressure to pay higher wages to the workers belonging to the more productive group.

The internal wage structure The wage structure within many private firms

seems much more egalitarian than predicted by the marginal productivity theory of wages.

Can be accounted for by the fact that most people prefer high-ranked rather than low-ranked positions Low-ranked workers receive extra compen-

sation Workers sort themselves among a hierarchy of

firms in accordance with their demands for status

Workers sort themselves among firms

The economics of workplace safety Many production activities entail risks for health

and safety.

Consider the introduction of dust filters in coal mines. Cost = $50/wk/worker

Whether to install them or not depends on how workers value the enhanced life expectancy

Evaluations may vary across miners.

Job choice under different risk aversion

Compensating wage differentials Prediction: the more dangerous the job is, the

higher the wage will be, all other things equal

Mandatory safety regulations They force workers to buy more safety than they

would if they were free to do so.

But they are a good thing if workers have imperfect information