L22 perfect labour

Microeconomics: Perfect Labour Markets

Aims of the Factor Markets Lectures

• Basically, we're switching gears from looking at how different types of markets affect prices and products to focusing on the markets where companies get what they need to make those products (things like workers and machines).

• Buyers of Outputs: These are just regular people or families buying stuff to make themselves happy. They pick what they want based on what makes them feel good and how much money they have.

• Buyers of Inputs: These are companies buying stuff to make products and earn money. They're not buying for fun, but to make a profit.

• Demand for Inputs: The need for things like workers depends on how many people want the final product. If more people want to buy burgers, the burger joint will need more cooks.

• Key Questions We'll Look At:

  • How do companies decide how many people to hire? We'll see what makes a business say, "Okay, we need 10 more people," or "We have too many workers."

  • How do the prices of workers and machines affect the prices of the things they make? If it costs more to hire people, how does that change the price of a burger?

  • How does the type of market affect how many people get jobs? Do monopolies hire more or fewer people than small businesses?

Factors of Production

• These are the things you need to make stuff:

  • Labour: This is the people who work. Think of cooks, builders, or anyone who gets paid to do a job.

    • We measure labor by counting people or the number of hours they work.

    • Labor costs money. Companies pay wages or salaries.

  • Capital: This is the machines and equipment. Ovens, tractors, computers – anything that helps you make something.

    • We count capital by the number of machines, tools, or factories.

    • Capital costs money too. You might rent a machine or buy it.

  • Land: This is where you make stuff. It could be a farm, a factory, or an office.

• Short-run vs. Long-run: In the short run, usually, only the number of workers can change easily. If you add more and more workers but don't have more ovens, each worker will eventually be less helpful (diminishing returns). In the long run, you can buy more ovens or even build a new factory, so you're not stuck with diminishing returns.

Aims of This Lecture

• We're going to learn about Perfect Labour Markets.

• We'll see how hiring people is different from selling burgers and how the rules of the game affect things.

• We'll figure out how many people get hired and how much they get paid when everything is "perfect."

Lecture Outline

1. Where workers come from (supply of labor)

2. Where jobs come from (demand for labor)

3. What "perfect" means for hiring

4. What a "perfect" hiring market looks like

5. How things balance out in the short term

• Reading: Core: Lipsey & Chrystal, Ch. 9 & 10; Extra: Perloff, Ch. 15

Supply of Labour (Individual Workers)

• Working costs you in two ways:

  1. You miss out on doing fun stuff (leisure).

  2. Work can be boring or hard.

• The more you work, the worse it gets, so you want more money for each extra hour:

  • Substitution Effect: If you get paid more, you might decide to work more because the money is too good to pass up.

  • Income Effect: If you start making a lot of money, you might decide to work less and enjoy your life more.

Supply of Labour (Market Level)

• What one company does depends on the market:

  • Wage Taker: If a company is small, it can hire as many people as it wants without changing how much everyone gets paid.

  • Wage Maker: If a company is huge, it might have to pay more to attract more workers.

• Usually, if more people want jobs, companies don't have to pay as much. This depends on:

  • How many qualified people are looking for work.

  • What else the job offers (good benefits, nice office).

  • How hard it is to switch jobs.

Demand for Labour

• Marginal Input Rule: Companies should hire people until the extra money they make from hiring one more person equals the cost of hiring that person.

  • MRPL (Marginal Revenue Product of Labour): How much extra money you get from hiring one more worker.

  • MCL (Marginal Cost of Labour): How much it costs to hire that worker.

• If hiring someone brings in more money than they cost, you should hire them.

Marginal Revenue Product of Labour

• How to calculate MRPL:

  • MRPL = MR x MPPL

    • MR (Marginal Revenue): How much extra money you get from selling one more thing.

    • MPPL (Marginal Physical Product of Labour): How many more things you make when you hire one more worker.

  • MCL / MPPL: This tells you how much it costs to make one extra thing by hiring another worker.

Assumptions of Perfectly Competitive Labour Markets

• A(1): Companies are small and can't change the price of what they sell.

• A(2): Companies are small and can't change how much workers get paid.

• A(3): Everyone knows everything:

  • Workers know about all the jobs and what they pay.

  • Bosses know how good the workers are.

• A(4): Workers can't change how much they get paid either.

• A(5): Anyone can get a job; there are no barriers.

Appropriate Market Structure

• A: Lots of small workers looking for jobs.

• B: Easy for anyone to get a job.

• C: All workers are pretty much the same unless they're really good or really bad.

• D: Lots of small companies are hiring; no one company can control how much people get paid.

Equilibrium in the Labour Market (Short Run)

• Things balance out when:

  1. Companies hire the right number of people for what they're paying.

  2. Workers work the right amount for what they're getting paid.

  3. The number of jobs equals the number of people working.

• The price of stuff and how much workers get paid depend on how many people want jobs and how many jobs are available.

Summary

• When no one can control wages, lots of companies compete for workers who are all pretty much the same.

• What workers get paid matches how much they help the company make.

• Companies can make extra money in this situation.

Learning Outcomes

1. Know how workers react to different wages.

2. Know the rules for a "perfect" job market.

3. Know what a "perfect" job market looks like.

4. Be able to draw a picture of how things balance out.