Chapter 8 Resources Economics: The Case of Labour Economics

Labour as a Resource Market How do firms decide between inputs (land, labour, entrepreneurship and capital)? Relative price of inputs provides the answer Labour market supplies the labour input

Demand for Labour Derived Demand based on consumer demand for good or service being produced The greater the demand for a good or service, the greater the demand for the labour producing it Second factor is productivity – how much each worker can produce in a given time period

Marginal Revenue Product of Labour aka MRPL Related to the marginal product – the additional product created by adding a unit of labour MRPL is the additional revenue generated from the marginal product In Perfect Competition MRPL = Price x Marginal Product

Marginal Revenue Product of Labour MRPL is the Demand Curve for Labour for any firm MRPL decreases because of diminishing returns How many workers to hire? Answer: continue to hire workers until MRPL is less than the wage rate (price of labour)

Marginal Revenue Product of Labour Number of Workers Wage Rate (per day) MRPL 1234 Wage Rate 200

Factors Shifting the Labour Demand Curve Change in the demand for the product – if more popular more workers needed Change in the price of other productive resources – technology may mean fewer workers needed Change in worker productivity – enhances need for workers

Supply of Labour The Market Labour Supply Curve shows all workers willing to offer their services at every wage rate Opportunity Cost affects number of workers Specific skills necessary (e.g doctor) Geographic location – urban areas offer more workers

Factors Shifting Labour Supply Curve Changes in income tax rates – an increase shifts curve to the left Changes in size and composition of population – aging workforce?? Changes in household technology – more time for work Changes in attitude – more women in workforce

Wage Determination & Trends In equilibrium no shortages or surpluses High skilled labour earns higher wage rate than low skill Education means higher income! Trends include knowledge, computer literacy and retraining Read info on pages 178, 179

Labour Unions Organization of workers promoting interests of its members through collective bargaining – collective agreement Trade unions represent an occupation Industrial unions represent and industry e.g. CAW – auto workers Public Sector Unions – gov’t employees

Labour Unions Negotiate wages, benefits, working conditions Open Shop – membership voluntary Closed Shop – mandatory Union Shop – membership over time Rand Formula – all workers pay union dues whether members or not

Labour Unions Negotiations may fail… if so: Conciliation/mediation means third party enters Voluntary Arbitration mean both sides agree to decision Compulsory Arbitration means no choice! Job actions include strikes, lockouts, work to rule and rotating strike, encouraging boycott Higher wages are an impact