Chapter 6 Labour Market

Outline.  The perfectly competitive model of the labour market  Imperfect competition on the labour market  Further topics

Short-run labour demand  Consider a firm that produces output using 2 inputs: capital K and labour L. Suppose that capital is fixed in the short-run The wage rate is $12/hour  How many units of labour should it hire?  Profit maximisation: = p.Q – w.L

Value of marginal productivity and nominal wage

The long-run demand for labour  Labour demand will be more elastic to the wage in the long run than in the short run. The firm's demand for labour will also be more elastic, the more elastic the demand for its product is. The firm's demand for labour will also be more elastic, the more it can substitute labour for other inputs.

The elasticity of labour demand

The market demand curve for labour

An imperfect competitor's demand for labour  The previous discussion assumes that the firm faces a perfectly elastic demand for its product. If the firm faces imperfect competition, this is no longer the case It faces a downward-sloping demand curve and if it hires new workers, it must cut its price in order to sell the additional output  Under perfect competition, the value obtained by hiring one more worker is the product of price and the marginal product of labour.

An imperfect competitor's demand for labour (ctd)  Under imperfect competition, it is the product of marginal revenue and marginal product. This is called the marginal revenue product of labour and is defined as:  How much labour will a firm hire if it faces a downward-sloping demand curve for its product? It will hire the quantity for which the wage rate and the are equal.

Individual Labour supply  There is only one category of labour and each worker chooses how many hours to work each day. The alternative to working is leisure. If the worker is paid w 0 = $10 per hour, how many hours should he work?  The optimal amount of hours worked is such that utility is maximum

Individual supply of labour (ctd)

Income and substitution effects

The worker’s supply curve of labour  It is backward bending for some values

Target level of income  If the targeted level of income is $200/day, the individual supply of labour looks like :

The conception of welfare reforms  Consider 2 welfare programs the goal of which is to provide additional income to the poor Program 1 consists in a lump-sum payment of $X per day and program 2 of a payment of Y% of the wage income. Which program is most likely to reduce the number of hours worked?  Program 1 is more likely to reduce the number of hours worked than program 2.

The market labour supply curve  For any given category of labour Horizontal addition of the individual supply curves for the potential suppliers of labour in that category. For some individuals: Still, the market supply curve for that category of labour is almost certain to be upward sloping. L w wAwA

Outline.  Imperfect competition on the labour market  Further topics

Monopsony on the labour market  When workers cannot or will not leave the area and new firms cannot enter, an incumbent firm is a monopsonist.

The labour supply curve faced by the monopsonist

The demand curve for labour from the monopsonist

Equilibrium under monopsony vs perfect competition

Minimum Wage  Where minimum wages have been introduced the initial idea was to lift unskilled workers from poverty.  If the minimum wage is set above the equilibrium wage in a competitive market, this may give rise to unemployment.

Minimum wage and unemployment in a perfectly competitive market

Minimum wage and unemployment under monopsony

The role of unions  In all countries however, unions have long been seen as Enhancing the interest of insiders: their own members in the USA, workers in employment in France At the expense of outsiders:non members in the USA, unemployed workers in France.  Union may generate distorsions: Bargaining generates a reduction in total output But this effect is exaggerated  But they may also boost productivity

Wages and employment with and without union bargaining

Outline.  Further topics

Discrimination on the labour market  Large disparities in earnings across various groups on the labour market Non-market discrimination Market discrimination  Why would firms discriminate Customer discrimination. Co-worker discrimination  Employer discrimination: wage differentials arising from an arbitrary preference by the employer for one group of workers over another one

Statistical discrimination  Employers usually do not know the exact marginal productivity of individual workers, in particular job applicants They tend to infer individual productivity from the group productivity. There will be competitive pressure to pay higher wages to the workers belonging to the more productive group.

The internal wage structure  The wage structure within many private firms seems much more egalitarian than predicted by the marginal productivity theory of wages.  Can be accounted for by the fact that most people prefer high-ranked rather than low-ranked positions Low-ranked workers receive extra compen- sation Workers sort themselves among a hierarchy of firms in accordance with their demands for status

Workers sort themselves among firms

The economics of workplace safety  Many production activities entail risks for health and safety.  Consider the introduction of dust filters in coal mines. Cost = $50/wk/worker Whether to install them or not depends on how workers value the enhanced life expectancy  Evaluations may vary across miners.

Job choice under different risk aversion

Compensating wage differentials  Prediction: the more dangerous the job is, the higher the wage will be, all other things equal

Mandatory safety regulations  They force workers to buy more safety than they would if they were free to do so.  But they are a good thing if workers have imperfect information