© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-1 Chapter Seven Wages and Employment in a Single Labour Market Created by: Erica Morrill, M.Ed Fanshawe College

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-2 Chapter Focus  Equilibrium in a single labour market  Imperfect competition  Payroll taxes  Monopsony  Minimum wage

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-3 Competitive Firm’s Demand  Assumptions :  homogeneous type of labour  price taker and wage taker  Supply is perfectly elastic (horizontal) at the wage rate  Firms can employ all the labour they need at the market wage rate  Market wage rate is set by the aggregate labour market

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-4 Figure 7.1 Competitive Product and Labour Markets W N Wc W N W N S W0W0 W0W0 N01N01 N1N1 N02N02 N2N2 NiNi D=  D i S1S1 S2S2 Firm 1 Firm 2 Aggregate Labour Market

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-5 Short-Run  A firm may have to raise its wages to attract additional workers  dynamic monopsony  Short-run labour supply curve is upward sloping

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-6 Figure 7.2 The Labour Market in the Short Run and Long Run Labour 0 Wage DS S1S1 S’ S Supply of workers increase depressing the high short run wage D’  in demand leads to higher wages WSWS WcWc

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-7 Short-run and Long-run Labour Supply  Long run  Temporary wage increases above norm are consistent with the firm being a competitive buyer of labour  Short-run wage increases can be a market signal  ensures that market forces operate in the longer run

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-8 Equilibrium in a Competitive Market  Market-clearing model (neoclassical)  for markets with homogeneous workers and homogeneous jobs wages will be equalized across workers  absences of “involuntary unemployment”  no queues for jobs or rationing of jobs

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-9 In Reality….  The market-clearing model is not entirely true  Wages do not adjust quickly to clear the market  Involuntary unemployment is frequent  Large wage differentials exist across homogeneous workers and jobs.  However, it still serves as a useful approximation of market theory

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-10 Imperfect Competition  Monopoly  is the industry  Effects of hiring more labour  marginal physical product of labour falls  marginal revenue falls  Sells more output only by lowering the product price

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-11 Figure 7.3 Monopolist Versus Competitive Demand for Labour NNC*NC* 0 W* NM*NM* D M = MPP N X MR Q = MRP N D C =  MPP N X P Q =  VMP N

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-12 Product Market Structure and Departure from Market Wages  Monopolist  earns higher profits and labour may be able to appropriate some of these profits  may be less cost conscious and may yield to wage demands  sensitive to public image pay higher wages to buy good image  large firms pay higher wages

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-13 Oligopoly in the Product Market  Few firms  Similar products  Action of one firm affects the others  May depart from Market wages because;  earn above normal profits which may be captured by workers  larger firms and may pay above-market wages for reasons related to size

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-14 Monopolistic Competition in the Product Market  Many small firms with differentiated products giving the firm some discretion in price setting  competitive in the labour market  paying market wages  no economic rents (high profits yielding higher wages)  no large size factors leading to higher wages

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-15 Working with Supply and Demand  Simulating the effects of a policy change on equilibrium  Incidence of a unit payroll tax

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-16 Unit Payroll Tax  Tax levied on employers  Proportional to the firm’s payroll  CPP/QPP  Workers’ compensation  unemployment insurance  health insurance  Often considered “job killers”

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-17 Figure 7.5 The Effect of a Payroll Tax on Employment and Wages N0N0 W1W1 W0W0 A T NSNS N D (W) B N1N1 N D (W+T) C D

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-18 Characteristics of a Monopsony  Large relative to the size of the labour market  Influences wage  Raises wages to attract labour  Will not lose all of its work force if decreases wages  Upward-sloping labour supply schedule

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-19 Monopsony  Average cost is the wage rate  Marginal cost is the new wage plus the cost of paying the higher wage to existing workers  Marginal cost is higher than average cost  Profit Maximization when MC=VMP

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-20 Figure 7.6 Monopsony Wage 0 VMP N= MPP n P Q S=AC MCMC VMVM NMNM WMWM SMSM WCWC NCNC S0S0 VMP M

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-21 Implications of a Monopsony  Employment is lower than a competitive situation  Restricts employment because hiring additional labour is costly  Higher wages must be paid to intramarginal workers

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-22 Characteristics of Monopsonists  Some inelasticity of supply of labour  Most firms have an element of monopsony power in short run  Long run costly problems of recruitment, turnover and morale issues  Examples of monopsony in long run:  would be a one industry town in an isolated region  if workers have specialized skills that are useful mainly in a specific firm

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-23 Perfect Monopsonistic Wage Differentiation  Existing workers receive wages greater when a monopsony raises the wage rate  seller’s surplus or economic rent  Monopsonist may try to retain some of this seller’s surplus by differentiating it’s work force

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-24 Perfect Monopsonistic Wage Differentiation  Supply schedule equal to the average cost and marginal cost  Does not have to pay existing workers any more than their reservation wage  Monopsonists may try to conceal higher wages or use nonwage mechanisms to attract additional labour

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-25 Imperfect Monopsonistic Wage Differentiation  Monopsonists differentiate between groups of workers  different types of labour can be separated  there are different supply elasticities

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-26 Minimum Wage Legislation: Impact on Competitive Labour Market  Adverse employment effect  Firms employ less labour at a higher cost  Higher wage encourages more people to seek work  Magnitude of adverse employment effect depends on the elasticity of the demand for labour

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-27 Minimum Wage: Offsetting Factors  Labour could increase…  if there is exogenous increase in demand for output  if there is an increase in the demand for labour substitutes

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-28 Minimum Wage Legislation: Impact on Monopsony  minimum wage (or other form of price fixing) may increase employment  reduces monopsony profits  depends on the extent to which monopsony is associated with workers who are paid below minimum wage

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-29 Figure 7.9 Monopsony and Minimum Wage MC S=AC VMP N1N1 N0N0 MC 1 VMP 0 W1W1 W0W0

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-30 Minimum Wage  Reduces employment in competitive labour markets  Increases employment in monopsonistic labour market  Theory  Short-run effects are small  Disemployment effects are higher in long-run

© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-31 End of Chapter Seven