(Labour) Markets Central Theory 1

 Demand  Diminishing marginal value  Price is given  Maximization  Equilibrium for a buyer  Labour demand  Diminishing marginal productivity  Price = wage rate  Maximization of profits  Equilibrium for an employer (firm) 2

 There is an inverse (negative) relationship between price and quantity demanded = Law of Demand  Endogenous variables  Exogenous variables  Price of a substitute  Price of a complement  Income  Expectations  Tastes  Number of buyers  Terms  (change in) Demand vs quantity demanded 3

 Supply  Increasing marginal cost  Price is given  Maximization of profit  Equilibrium for a seller  Labour supply  Increasing marginal cost (think about other activities in a 24 hr day)  Price = wage rate  Maximization  Equilibrium for an employee (worker) 4

 There is a positive relationship between price and quantity supplied = Supply schedule  Endogenous variables  Exogenous variables  Input costs  Price of a related good/service  Technology  Expectations  Taxes and regulations  Number of buyers  Terms  (change in) supply vs quantity supplied 5

 Market  A place to trade  An institution that produces price for all to see  Demand + Supply = model of a market  Surplus => downward pressure on price  Shortage (deficit) => upward pressure on price  Equilibrium  State of rest  Market clearing price  Equilibrium is observable 6

 Tech details  Elasticity of demand  Responsiveness to price  Index  Price elasticity formulae  Elastic/inelastic  Main determinants of elasticity  Share of income spent on the product  Good/close substitutes  Elasticity of supply 7

 Labour markets are special  Price = wage rate  Quantity = employment  Surplus = unemployment  Product is people  Not real ownership (lots of constraints)  Information in exchange is a problem  Education as a signal – it’s expensive!  Long-term relationship  Heterogeneous labour  Price is less informative  Labour demand is derived 8

 Institutional aspects  Jurisdiction  Diverse  Federal employees  Employment standards  Diverse  Minimum age  Hours of work  Overtime pay  Vacation with pay  Statutory holidays  Minimum wage  Pay equity  Maternity leave,  Paternity leave  When wage is paid  etc 9

 Union density  = union members / number of paid employees  Can be for firm/industry/province/occupation…  Education – about 70%  Accommodation and food – about 7%  Why? 10