Robin Naylor, Department of Economics, Warwick 1 Factor markets: The Labour market Topic 4 Lecture 18

Robin Naylor, Department of Economics, Warwick 2 In previous material (running through Topics 2 and 3) we have focused on the question: “What determines the firm’s choice of output?” We now ask the question is: “What determines the firm’s demand for labour?” [The two questions are clearly related – because if we know the firm’s chosen output, the level of labour demand should follow from the production function, which links labour employed to output produced.] Our answer to this question is that the profit-maximising firm will employ labour up to the level at which the addition to the firm’s total revenue (from the sale of the extra units produced when the firm takes on an extra unit of labour) is just equal to the addition to the firm’s total costs incurred by employing the extra unit of labour. I.e., the profit-maximising employment rule is to employ an amount of Labour such that: Marginal Revenue Product of Labour = Marginal Cost of Labour. Topic 4 Lecture 18

Robin Naylor, Department of Economics, Warwick 3 Topic 4 Lecture 18 Marginal Revenue Product of Labour = Marginal Cost of Labour. What is the Marginal Revenue Product of Labour (MRPL)? What is the Marginal Cost of Labour (MCL)? If the product market is perfectly competitive, then: MRPL = ? If the labour market is perfectly competitive, then: MCL = ?

Robin Naylor, Department of Economics, Warwick 4 Topic 4 Lecture 18 Marginal Revenue Product of Labour = Marginal Cost of Labour. What is the Marginal Revenue Product of Labour (MRPL)? What is the Marginal Cost of Labour (MCL)? If the product market is perfectly competitive, then: MRPL = (MPPL) multiplied by (competitive market product price, p) If the labour market is perfectly competitive, then: MCL = unit cost of an extra unit of labour = wage rate

Robin Naylor, Department of Economics, Warwick 5 Topic 4 Lecture 18 Consider the Marginal Revenue Product of Labour (MRPL) L MRPL p.MPPL=MRPL What does this assume?

Robin Naylor, Department of Economics, Warwick 6 Topic 4 Lecture 18 Consider the Marginal Cost of Labour (MCL) L MCL Ls = w = MCL What does this assume?

Robin Naylor, Department of Economics, Warwick 7 Topic 4 Lecture 18 Consider MCL and MRPL together L MCL Ls = w = MCL What is the firm’s chosen level of employment? Why? MRPL

Robin Naylor, Department of Economics, Warwick 8 Topic 4 Lecture 18 Consider MCL and MRPL together L MCL Ls = w = MCL What happens to the firm’s chosen level of employment if the competitive wage shifts up? MRPL L*

Robin Naylor, Department of Economics, Warwick 9 Topic 4 Lecture 18 Consider MCL and MRPL together L MCL Ls = w = MCL MRPL L* Ls = w 2 = MCL 2 L* 2 What do you conclude about the firm’s demand for labour?

Robin Naylor, Department of Economics, Warwick 10 Topic 4 Lecture 18 L MCL Ls = w = MCL MRPL We have assumed perfect competition in both product and labour markets. How is the analysis different for a monopolist?

Robin Naylor, Department of Economics, Warwick 11 Topic 4 Lecture 18 L MCL Ls = w = MCL MRPL We have assumed perfect competition in both product and labour markets. How is the analysis different for a monopolist? The answer is that product price is higher, but now falls as X (and hence L) increase. What does this do to the MRPL curve of the monopolist? MRPL (monopoly)

Robin Naylor, Department of Economics, Warwick 12 Topic 4 Lecture 18 L MCL Ls = w = MCL MRPL We have assumed perfect competition in both product and labour markets. How is the analysis different for a monopsonist? Consider the next slide...

Robin Naylor, Department of Economics, Warwick 13 Topic 4 Lecture 18 L MCL Ls MRPL How is the analysis different for a monopsonist? L1L1 L 1 +1 dw

Robin Naylor, Department of Economics, Warwick 14 Topic 4 Lecture 18 L MCL Ls MRPL How is the analysis different for a monopsonist? L1L1 L 1 +1 dw dw.L 1

Robin Naylor, Department of Economics, Warwick 15 Topic 4 Lecture 18 L MCL Ls MRPL How is the analysis different for a monopsonist? L1L1 L 1 +1 dw dw.L 1 MCL

Robin Naylor, Department of Economics, Warwick 16 Topic 4 Lecture 18 L MCL Ls MRPL MRPL=L d, in a perfectly competitive labour market What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony) LCLC wCwC

Robin Naylor, Department of Economics, Warwick 17 Topic 4 Lecture 18 L MCL Ls MRPL MRPL=L d, in a perfectly competitive labour market What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony) w min LCLC L REG wCwC w min

Robin Naylor, Department of Economics, Warwick 18 Topic 4 Lecture 18 L MCL Ls MRPL What happens with the introduction of a Minimum Wage (MWL) under a monopsonist? MCL LCLC LMLM wMwM

Robin Naylor, Department of Economics, Warwick 19 Topic 4 Lecture 18 L MCL Ls MRPL What happens with the introduction of a Minimum Wage (MWL) under a monopsonist? MCL LCLC LMLM wMwM w min The minimum wage is introduced

Robin Naylor, Department of Economics, Warwick 20 Topic 4 Lecture 18 L MCL Ls MRPL What happens to the Labour Supply curve with the introduction of a Minimum Wage (MWL) under a monopsonist? MCL LCLC LMLM wMwM w min The labour supply curve is unaffected in this region but is affected in this region L CRIT

Robin Naylor, Department of Economics, Warwick 21 Topic 4 Lecture 18 L MCL Ls MRPL What happens to the MCL curve with a Minimum Wage (MWL) under a monopsonist? MCL LCLC LMLM wMwM w min The MCL curve is unaffected in this region but is affected in this region L CRIT

Robin Naylor, Department of Economics, Warwick 22 Topic 4 Lecture 18 L MCL Ls MRPL What happens to the Monopsonist’s chosen employment level with the introduction of a Minimum Wage (MWL)? MCL LCLC LMLM wMwM w min L CRIT For L<L CRIT, how does MRPL compare with MCL? And therefore... ? For L>L CRIT, how does MRPL compare with MCL? And therefore... ? What do you conclude happens to employment with the introduction of a Minimum Wage under Monopsony?

Robin Naylor, Department of Economics, Warwick Topic 3: Lecture Now read B&B 4 th Ed., pp , , You might also consult: Frank, Chapters Estrin, Laidler and Dietrich, Chapter 18 Morgan, Katz and Rosen, Chapter 10.2