Chapter 20: Work and the Labour Market Prepared by: Kevin Richter, Douglas College Charlene Richter, British Columbia Institute of Technology © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Chapter Objectives 1a. Use the theory of rational choice to explain how taxes affect the quantity of labour supplied. 1b. List three factors that influence the elasticity of labour supply. 2. Explain how the demand for labour is a derived demand. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Chapter Objectives 3. List three factors that influence labour demand. 4. Describe the impact of technology and globalization on the demand for labour. 5. Explain what is meant by efficiency wages. 6. Define monopsonist and bilateral monopoly. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Chapter Objectives 7a. Discuss real-world characteristics of labour markets. 7b. List three types of discrimination. 8. Describe how labour laws and labour unions have improved working conditions. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Supply of Labour Of the many motivations for work, economists focus on the incentive effect. Incentive effect – how much a person will change his or her hours worked in response to a change in the wage rate. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Real Wages and the Opportunity Cost of Work The nominal wage is the actual number of dollars one is paid per hour. The real wage is the nominal wage adjusted for inflation – if nominal wages rise faster than inflation, real wages rise. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Income Tax, Work, and Leisure An increase in the marginal tax rate is likely to reduce the quantity of labour supplied. Marginal tax rate – the tax you pay on an additional dollar of income. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Elasticity of Labour Supply Elasticity of labour supply depends on: A person’s opportunity cost of working. The elasticities of each person’s supply curve. Persons entering and leaving the labour market. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Derived Demand for Labour Firms translate consumer demand into a demand for factors of production. Derived demand – a firm’s demand for factors of production depends upon consumers’ demands. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Derived Demand for Labour Marginal revenue product (MRP) is the marginal revenue a firm expects to earn from selling the additional worker’s output. Value of marginal product (VMP) is the marginal revenue product of a perfectly competitive firm (where MR = P). © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Derived Demand for Labour Value of marginal product is calculated as the marginal physical product (MPP) (the output of the additional worker hired) times the output price. VMP = MPP x P © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Derived Demand for Labour Labour productivity is the average output per worker. Workers’ marginal product declines as more workers are hired, due to diminishing marginal productivity. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Firm’s Derived Demand for Labour © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Factors Affecting Demand for Labour Factors affecting the labour demand of a firm: Changes in the demand for a firm’s product. Market structure. A change in other factors of production that a firm uses. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Factors Affecting Demand for Labour The firm’s cost minimization condition – the ratio of marginal product to the price of an input is equal for all inputs. If this condition is not met, the firm could produce at a lower cost by hiring more of the input whose marginal product relative to price is higher. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Labour Versus Entrepreneurship Entrepreneurship refers to labour services that require high degrees of organizational skills, responsibility, and creativity. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Equilibrium in the Labour Market Wage Quantity of labour Demand Supply we Qe D2 D3 © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Efficiency Wages Efficiency wages are wages paid above the going market wage to keep workers happy and productive. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Maintaining Excess Supply Quantity Wage Demand Supply w1 QD QS Excess supply of labour © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Increase in Supply Quantity Wage D S0 S1 w0 Q0 Q1 w1 © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Monopsony The marginal factor cost is above the supply curve. Marginal factor cost – the additional cost to a firm of hiring another worker. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Monopsony and the Labour Market Marginal factor cost Quantity Wage Demand Supply QM wC QC wM © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Union Power and the Labour Market Quantity Wage Demand Supply MR wU QU wC QC © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Bilateral Monopoly Marginal factor cost Quantity Wage Demand Supply MR wU QU QM wC QC wM © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Outsourcing, X-Inefficiency, and Downsizing During the 1980s and 1990s, at the same time as employment grew there was much concern about downsizing. Downsizing – a reduction in the workforce. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Outsourcing, X-Inefficiency, and Downsizing Outsourcing grew during the 1990s. Outsourcing – a firm shifts production from its own plant to other firms, either in the country or abroad, where costs are lower. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Average Earnings, 2000 Union member Nonunion Average hourly wage $19.46 $15.31 Men $20.45 $17.32 Women $18.35 $13.19 Average weekly earnings $712.79 $568.23 $794.59 $684.80 $620.27 $445.87 © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Pay Equity Laws Pay equity laws mandate equal pay for equal work. The problem is defining what is equal work. Pay equity laws are designed to affect institutional biases. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Three Types of Discrimination Individual characteristics that will affect job performance. Correctly-perceived statistical characteristics of the group. Individual characteristics that do not affect job performance. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Three Types of Discrimination Whenever discrimination saves the firm money, it will have an economic incentive to discriminate. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Institutional Discrimination Institutional demand-side discrimination can also exist. Institutional discrimination is discrimination in which the structure of the job makes it difficult for certain groups of individuals to succeed. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Evolution of Labour Markets Labour markets as we know them developed in the 1700s and 1800s. Wage rates were at the subsistence level. Work weeks were long and working conditions were poor. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Evolving Labour Laws Labour laws have evolved in response to workers' political pressure. Eight hours is the normal work day, with time-and-a-half for over eight hours. One 30-minute break every six hours. Child labour laws prohibit hiring a person less than 16 years of age. Workers can be fired only for cause. Sexual harassment is prohibited. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Provincial Union Membership, 2001. Province Union membership (%) British Columbia 33.1 Alberta 22.5 Saskatchewan 34.1 Manitoba 35.6 Ontario 26.1 Quebec 36.6 New Brunswick 28.6 Nova Scotia 28.4 Prince Edward Island 29.7 Newfoundland 39.4 © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Characteristics of Union Membership

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Labour Market and You There is much more to consider in choosing a job than just the money. Wage Lifestyle that goes with the job Limited supply of labour Increasing demand for labour Your special ability You enjoy it © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

© 2006 McGraw-Hill Ryerson Limited. All rights reserved. Labour Market and You Choosing your career is one of the most important decisions you’ll make in your life. Good Luck! © 2006 McGraw-Hill Ryerson Limited. All rights reserved.

Work and the Labour Market End of Chapter 20 © 2006 McGraw-Hill Ryerson Limited. All rights reserved.