6 Labour Markets

Perfectly Competitive Labour Market

Where wages are set by supply and demand, and neither firms nor workers have market power — all are price (wage) takers.

Supply of Labour (to employer)

• Supply curve of firm

Employer’s labour supply depends on market structure

• If employer is wage taker, supply curve will be perfectly elastic (horizontal).

• If employer is wage maker, supply curve will be upward sloping (less elastic)

Supply Curve = MCL = W (Horizontal)

Supply of Labour (to market)

Depends on

• Number of qualified people

• Non wage benefits/costs oj job and other jobs

What does wage elasticity of Labour Supply depend on

Depends on

• Difficulty to change jobs (easier to change jobs, more elastic)

• Whether long-run or short-run (more elastic in short run)

Demand for Labour (of Firm)

• Shape of curve

Downward Sloping Curve

• D = MRPL

• MRPL = p x MPPL (Marginal Physical Product of Labour)

What is MRPL?

Marginal Revenue Product of Labour

• MRPL = p x MPP

• additional revenue a firm earns from hiring one more unit of labour, holding all else constant.

What is MPPL?

Marginal Product of Labour

• additional output produced by hiring one more unit of labour, keeping all other inputs (like capital) constant.

Assumptions of Perfectly Labour Markets

1. Firms operate in Perfectly competitive market

   • Buy as much labour without affecting wage rate.

   • Wage takers, so w = MCL (Marginal Cost of Labour) = horizontal

2. Workers are Wage Takers

3. Complete information for buyers and sellers

4. Free Entry for Workers

Market Structure Perfectly Labour Market

S Many, Small firms

B Low Barriers to entry

D Undifferentiated Products

BU Many, Small Buyers

Find Profit Maximising Position (E) of an Individual firm: PLM

• What happens to Labour Demanded (MRPL) if output price falls?

• When MCL = MRPL

• When output price fall MRPL shifts down, reducing the quantity of labour demanded by firms.

Find SR Equilibrium of PCLM

1. Find Buyers Demand Curve

   • Find Equil. Price in output market

   • Given price, draw D, MRPL curve for individual buyer

2. FInd Labour Market Demand Curve

   • Find demand of individual buyer at lower wage, shifting D —> D1

   • Draw a line connecting the 2 points of Equil. Labour of individual buyer at 2 different wages.

   • This forms labour market Demand Curve

3. To find E put Labour Supply Curve

Imperfect Labour Market

When employees and/or firms are wage makers

e.g. Monopsony

Monopsony

When there is one large buyers of a particular good or service

• Monopolist of labour market

Employees are wage makers when

• They have unique talent

• Create a union and makes threats if demands aren’t met

Monopsony Assumptions

Similar to Perfect Competition

1. Firm in Competitive Output Market

2. Firm is Wage Maker in Labour Market (Only difference)

   • Higher wages needed for increased labour employment.

3. Complete Information for workers

4. Workers are wage takers

5. Free entry for workers

Market Structure of Monopsony

• Remember workers are considered as sellers

S. Many, Small Sellers (Workers)

• So change in worker’s supply has luttle effect on wage.

B. One Larger Buyer (Firm)