Ch. 9: Labour Market Decisions of Firms (Micro) Demand for Labour

Wage Elasticity of Demand

• Depends on:

  • Percentage of labour costs in total costs

  • Number of subs for labour

  • Price elasticity of th prod. or service

Labour Productivity

The output per worker

Gross Domestic Product

• GDP

• The value of all final goods and services produced in a year

• Workers are more productive

• Increases as output increases

Productity Growth: Macro Influences

• The economy as a whole

  1. Structure of the economy

     • Industrial composition: Manufacturing or services

  2. Economic conditions

     • Recession or expansion

  3. Govt. policies:

     • Fiscal Policies: Spending and taxation

Productity Growth: Micro Influences

• Individuals business firms

  1. Scale of business operations: Large businesses are more productive

  2. Management technique: Educated managers are better at motivating staff an using better tools and equipment leading to higher productivity

Firm’s Demand for Labour

• Dervied from th demand for final goods and services that require labour as an input

• Also influenced by the productivity of lavour improve through experience and education

• Market’s view of the value of the services

Productivity Growth: Micro and Macro

• The economy as a whole

• Quantity and quality of capital: Employees become more productive as the quality and quantity of the tools increase

• Labour Force; Characteristics of the labour force (age, health, education, etc)

Quasi-Fixed Labour Costs

• Non-wage to hiring employees that are not related to the hours of work

  1. Hiring costs: Advertising, screening, recording keeping, payroll, etc

  2. Training: Materials and salaries of trainers

  3. Opportunity Costs: Lost production from those in training

Marginal Revenue

Revenue from selling one more product

Short Run

A period when at least one factor of prod. cannot be changed

Law of Diminishing Returns

• LDR

• States that in the short run a point will be reached at which the extra contribution of the next worker to total output will be less than that of the previously hired worker

• Contribution of the next worker to total output is the Marginal Product of Labour (MPL)

Why the Long Run Demand Curve Slopes Down

• Long Run: All factors of production are variable

• Scale Effect: Cost goes down as quanitity demand increases

• Hire more if selling more

Subsitution Effect

Sub. Capital (machinery) for labour, making it cheaper and faster

Marginal Product of Labour

• MPL

• Can covert the contribution of each successive worker into a dollar of revenue

• Marginal Revenue: Addition to total revenue as a result of selling an extra unit of output

• MPL x MR= MPL

Employer’s Decision Rule for Hiring

• Wage rate > MRP (Marginal Revenue Product)= Don’t hire

• Wage rate < MRP= Hire

• Wage rate = MRP= Indifferent, need to watch that line!

Scale Effect

The change in the number of employees hired as a result of changes in the amount sold

Two Reasons for Increases in Demand for Labour

1. Increases due to greater productivity of labour

   • Improvement in MPL

2. Can also increase due to shifts in demand for final foods or services, tus increasing MR

Demand for Labour in a Given Occupation can Change…

1. Increases in demand for final goods and services to make them

2. Change in the price of substitutes: Unions vs non-unions

3. Change in the price of complements: Price of steel drops= increase in demand for steel workers

Change in Quantity Demand in Response to a Change in Wage Rate

• = Percentage change in the quantity of workers demanded/ percentage change in the wage rate

• Ed= %△ / %△WR

• Ed> 1.0 (elastic)

Cross Elasticity of Demand

• Increase in wages paid to one occupation can lead to changes in another occupation

• Increase= sub effect

• Decrease= complementary effect

• Coefficent= %△OccA / %△WROccB