Labour Markets

Working out Labour Supply

imagine that we have two options with how we spend our time

1. Spend Time Earning Money (Working)

2. Spend Time Enjoying Leisure 

Factor Market - Wage Determination

a decline in the wage leads to a change in leisure demand, and also a change in labour supply

the change can be divided into an income effect and a substitution effect

the substitution effect of a wage change on labour supply is always positive, the income effect of a wage change on labour supply may be positive or negative

Labour Demand

• In a perfectly competitive labour market, the wage is the marginal cost of labour, and each firm treats it as given

• The perfectly competitive, profit maximising firm will employ workers up to the point where w=MVPL

• In a perfectly competitive labour market, the wage is the marginal cost of labour, and is given

What do you get when you multiply the Marginal Product of Labour (MPL) by Output Price, and what is it?

the marginal value product of labour (MVPL)

the labour demand curve of a perfectly competitive profit maximising firm

What does a Workers Attractiveness to an Employer depend on?

• how many units of good they produce

• the price of the good

• the wage rate

Monopoly Power

• the MPL should be multiplied by the MR (not price) to give the labour demand curve (the marginal revenue product of labour)

• The MRP is left of the MVP

• Since a monopoly produces less output than a competitive firm, it will also employ fewer workers

• The firm is still in perfect competition in the labour market so the wage and MCL are still given

Monopsony Power

• If the firm has monopsony power in the labour market, the MCL will be upward sloping

• Profit maximisation occurs where MCL=MRP, but wage is determined by the average cost of labour (= labour supply)

• Firms gain monopsony power when workers are not constantly searching for alternative employment

Minimum Wages

Can generate an excess supply of labour – that is, unemployment

Minimum Wages in a Monopsony

• Can raise employment

• Once it’s imposed, the MCL becomes it (up to the point where ACL passes above it)

Explaining Differences in Earnings

• Reflect differences in the corresponding marginal value product of labour

• But even if people appear equally talented and hard-working, we may observe differences in their incomes

The Human Capital Theory

a theory of pay determination that says a worker’s wage will be proportional to his or her stock of human capital

What is Human Capital?

an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness and initiative that affect the value of a worker’s marginal product

Trades Unions

a group of workers who bargain collectively with employers for better wages and working conditions

When may 2 workers with the same amount of Human Capital ear different Wages?

when one of them belongs to a labour union - getting them a better wage

Compensating Wage Differential

a difference in the wage rate – negative or positive – that reflects the attractiveness of a job’s working conditions

Discrimination by Employers

refers to wage differentials reflecting an arbitrary preference by an employer for one group of workers over another

Customer Discrimination

the willingness of consumers to pay more for a product produced by members of a favoured group, even if the quality of the product is unaffected

Winner-Takes-All Markets

the top performer or a small number of top performers capture a disproportionately large share of the rewards—such as profits, market share, or attention—while everyone else gets little to nothing

Gini Coefficient

a measure of equality of distribution of income or wealth by percentages of households or individuals from poorest to richest

provides a basis for comparing distributions on a objective numerical basis