Topic 3 Labor Market Equilibrium

Labour Market Equilibrium

Intersection of labour demand and supply curves.

Labour Demand (𝑁𝑑)

Represents the number of workers firms want to hire.

Labour Supply (𝑁𝑠)

Total number of workers willing to work.

Value of Marginal Product (VMP)

Revenue generated by one additional worker.

Marginal Product of Labour (MPN)

Additional output from hiring one more worker.

Producer Surplus (Area A)

Difference between what producers are willing to accept and actual wage.

Worker Surplus (Area B)

Difference between actual wage and reservation wage.

Total Gains from Trade

Sum of producer and worker surplus areas.

Perfectly Inelastic Labour Supply

Labour supply does not change with wage variations.

Homogenous Production

Identical goods produced across different regions.

Perfect Substitutability of Labour

Workers in different regions have identical skills.

Migration Impact on Wages

Movement of workers equalizes wages across regions.

Law of Diminishing Marginal Returns

Increased input results in smaller output increases.

Tax Impact on Labour Market

Taxes distort equilibrium by increasing hiring costs.

Initial Equilibrium (𝑁0, 𝑤0)

Starting point of employment and wage before tax.

Wage Reduction Due to Tax

Wage decreases from 𝑤0 to 𝑤0 −𝜏.

Equilibrium Adjustment

Shifts in supply and demand lead to new equilibrium.

Inflow of Workers

Migration increases labour supply in high-wage regions.

Wage Equalization

Wages become similar across regions due to migration.

Employment Level Changes

Shifts in labour supply affect regional employment.

Government Payroll Tax

Tax imposed on firms for each worker hired.

Reservation Wage

Minimum wage at which a worker is willing to work.

Tax Imposition

Tax reduces firm's wage payment ability.

Wage Drop

Wage decreases from 𝑤0 to 𝑤0 −𝜏.

Employment Level

Initial number of workers at 𝑁0.

Employment Reduction

Firm reduces workers from 𝑁0 to 𝑁1.

Payroll Tax

Tax paid per worker hired by firm.

Higher Total Cost

Total employment cost is 𝑤1 + 𝜏.

Worker Wage Impact

Workers earn less due to tax burden.

One Sided Tax Burden

Tax burden fully transfers to workers.

Inelastic Labour Supply

Vertical supply curve indicates no wage change.

Labour Demand Shift

Tax causes downward shift in labour demand.

Subsidy Program

Government pays firms to hire more workers.

Demand Curve Upward Shift

Subsidies increase demand from 𝑁0 to 𝑁1.

Equilibrium Change

Initial equilibrium at (𝑁0, 𝑤0).

Subsidized Wage Increase

Wage rises from 𝑤0 to 𝑤0 + 𝑠.

Marginal Product of Labour

Increases due to subsidized wages.

Wage Rate Fall

Wage decreases from 𝑤0 + 𝑠 to 𝑤1.

Total Employment Cost Reduction

Cost decreases to 𝑤1 −𝑠.

Total Subsidy Cost

Calculated as (𝑤1 −𝑤1 −𝑠) × (𝑁1 −0).

Deadweight Loss

Loss represented by triangle area between 𝑁1 and 𝑁0.

Mandated Benefits

Benefits firms must provide to workers.

Examples of Benefits

Includes social security and retirement funds.

Indirect Worker Benefits

Payroll taxes benefit workers indirectly.

Mandated Benefits

Government-required fringe benefits for employees.

Equilibrium Wage

Wage level where labor supply equals demand.

Labor Market Equilibrium

State where employment and wage rates stabilize.

Payroll Taxes

Taxes on wages paid by employers.

Fringe Benefits

Additional compensation beyond regular wages.

Cost Absorption (C)

Expenses firms incur for mandated benefits.

Labor Demand Curve

Graph showing relationship between wage and employment.

Employment Reduction

Decrease in number of workers hired.

Wage Rate Shift

Change in wage due to market conditions.

Willingness to Pay (B)

Amount workers are ready to pay for benefits.

Downward Shift of Labor Supply

Decrease in available workers at given wages.

Efficient Wage Rate

Optimal wage for maximizing worker productivity.

Positive Worker Response

Workers' favorable reaction to benefits offered.

Equilibrium Adjustment

Changes in market to restore balance.

Cost Reduction for Firms

Decrease in expenses due to worker benefits.

Employment Increase

Growth in number of workers hired.

Value of Benefits

Importance of benefits as perceived by workers.

Labor Supply Shift

Change in number of workers willing to work.

Initial Equilibrium (N0, w0)

Starting point for employment and wage rates.

Final Equilibrium (N1, w1)

End state of employment and wage after adjustments.

Complete Offset

Full compensation for changes in labor market.

Government Regulation

Laws mandating firms to provide benefits.

Labour Supply Shift

Movement from 𝑁0𝑠 to 𝑁1𝑤1 due to benefits.

Mandated Benefits

Firms bear costs equal to benefits provided.

Employment Level Change

No change, but wage rate decreases.

Cobweb Model

Labour market adjusts over time due to shocks.

Short-run Adjustment

Immediate response to labour market changes.

Long-run Equilibrium

Stable state after adjustments in the labour market.

Specialised Careers

Fields like engineering show boom and bust cycles.

Engineer Production Time

Time required to train new engineers.

Market Entry Decision

Students choose majors based on market conditions.

Labour Demand Shift

Increase in software engineers shifts demand upward.

New Equilibrium Point

Occurs at 𝑁∗, 𝑤∗ after demand shift.

Immediate Labour Supply Curve

Vertical line indicating current supply constraints.

High Wage Rate

Reflects demand for skilled software engineers.

High School Seniors' Choices

Students prefer lucrative majors like software engineering.

Graduation Surge

Increase in engineering graduates after four years.

Supply Surge Impact

Increased engineers lead to lower wages over time.

Wage Rate Adjustment

Wages drop as supply exceeds demand.

Excess Supply

More engineers than jobs available leads to unemployment.

Employment Level Decline

Falls to 𝑁2 due to oversupply of engineers.

Wage Rate at 𝑤2

New wage after excess supply of engineers.

Market Hype Duration

Four years may lead to outdated demand.

Career Diversification

Engineers may seek jobs outside original field.

Cobweb Model

Economic model explaining cyclical labor supply changes.

Equilibrium

Point where labor supply equals demand.

Labour Supply Curve

Graph showing relationship between wage and labor quantity.

Monopsony

Market structure with a single buyer of labor.

Perfectly Discriminating Monopsonist (PDM)

Firm pays different wages to different workers.

Non-Discriminating Monopsonist (NDM)

Firm pays all workers the same wage.

Marginal Cost (MC)

Cost of hiring one additional worker.

Marginal Product of Labor (MPL)

Additional output produced by one more worker.

Profit Maximization

Strategy to achieve highest possible profit.

Wage Rate

Payment to workers per unit of time.

Upward Sloping Supply Curve

Indicates higher wages lead to more labor supplied.

Downward Sloping Demand Curve

Indicates higher wages reduce quantity of labor demanded.