Markets for Factors of Production -Land -Labour -Physical Capital -Human Capital -Other These factors are bought and sold in a factor market with supply and demand curves similar to the goods market

Markets for Factors of Production These markets are important because: money incomes are primarily determined by the prices set in these markets. distribution of income production costs determine which factors are used and in what quantities resource allocation

Products Product Market Products $ Spending $ Revenue Government CIRCULAR FLOW Products Product Market Products $ Spending $ Revenue PRODUCTS $SPENDING Products & Services Products & Services Households Resource Owners Government Business Firms $ Taxes $ Taxes $SPENDING RESOURCES $ Income Resource Market $ Costs Resources Resources LAND LABOR CAPITAL

The Versatility of Supply & Demand (a) The Market for Apples (b) The Market for Apple Pickers Price of Apples Supply Supply Wage of Apple Pickers  P  W Demand Demand L Q Quantity of Apples Quantity of Apple Pickers The Versatility of Supply & Demand

Shifters of Labor Demand Factors other than Wage that affect Labour Demand 1) Changes in demand for the product 2) Changes in labour productivity (technology, etc) 3) Change in the price of other factors (land, human capital, etc.)

Shifters of Labour Supply 4) Expectations Future wages Income Job availability 5) Population (workforce) Examples of Factors other than Wage which affect Labour Supply: 1) Income, wealth 2) Lifestyle 3) The wage of competing jobs Essentially, all factors affecting demand have a parallel affecting labour supply

Labour Market: Perfect Competition 1. many firms competing with one another in hiring a specific type of labour. 2. numerous qualified workers with identical skills independently supplying this type of labour service. 3. neither firms nor workers can exert control over the market wage rate. price takers.

Labour Market: Perfect Competition Industry Labour Market The Firm: on the demand side is a price taker S D Wage Wage L1 w1 w1 SL Labour Input (workers per week) Labour Input (workers per week)

Labour Market: Perfect Competition There are many households selling to many firms, and no one household or firm has any power to influence the price. Demand for Labour Assume that the firm on the demand side of the market is buying (hiring) apple pickers in a perfectly competitive labour market, and selling apples in a perfectly competitive goods market.

Labour Market: Perfect Competition: Demand for Labour. The firm, on the Demand side of the market, is a “price taker”. It has to decide: how many apple pickers to hire given the price of apples ( goods market) given the wage rate for apple pickers (factor market) in order to maximize profit

Marginal Review Marginal Product of Labour Marginal Revenue Product Additional production of last worker hired MPL=Q /L Marginal Revenue Product Additional revenue of last worker hired MRP=P x MPL MRP= TR /  L

MRP marginal revenue product MRP marginal revenue product The Competitive Firm Decides How Much Labour to Hire: Price of Apples=$10/bu. Wage Rate=$500/week MRP marginal revenue product MRP marginal revenue product Output (Bushels/ Week) (Q) 100 180 240 280 300 Marginal Product of Labour (MPL=Q /L) 100 80 60 40 20 Labor (# of workers) (L) 1 2 3 4 5 of Labour (MRP=PxMPL) $1000 800 600 400 200 TR Total revenue $1000 1800 2400 2800 3000 of Labour (TR /  L) $1000 800 600 400 200

The Demand for Labour: The Profit Max Hiring Decision In order to find the MR of the Profit Maximizing decision: The firm must consider : 1. the production function - how the size of the work force affects the amount produced by each worker, MPL 2. the contribution to revenue, MRPL, and to the profit equation that each worker makes MRP = TR /  # of workers. MRP = Product Price x MPL. When MP   MRP  .

Profit Maximizing Hiring Decision In order to find the MC of the profit maximizing decision; the firm must find 3 The Marginal Factor Cost (MFC) = wage rate in perfect competition = additional cost of hiring one more unit of labour in all types of markets hire workers up to the point where: MRP  Wage (MFC) (MR) (MC)

Demand for Labour: MRP schedule is the MRP = MFC (W in P.C.) The quantity of labour a firm will hire at any given wage, cet. par. To maximize profit the firm hires the quantity of labour where the MRP = MFC (W in P.C.) MRP schedule is the Demand for Labour, for a competitive profit maximizing firm

Profit Max: MRP=W(MFC): The MRP is the Demand for Labour D=MRP MFC W1 Q1 MRP = P x MPL (the value of the worker’s output) MFC = W (the cost of hiring a worker) Optimal number of employees occurs where MFC = MRP Labour Demand is down sloping Q2 W2 MFC Wage MFC W3 Q3 Market demand for labour in perfect competition Labour Input (workers per week)

“Shifters of Labour Demand” labour does not satisfy wants directly: demand for resources is a “Derived” Demand and therefore depends on 1. How productive (MP) labour is Non labour inputs, technological progress, labour quality, prices of other resources Price of the product Price of other inputs

Market Supply of Labour To attract workers, the wage rate paid must cover the opportunity costs of alternative uses of time spent, in other labour markets, in house-hold activities in leisure. Higher wages attract people whose opportunity costs are not covered at lower wages: therefore the Supply of labour to any labour market is upward sloping.

The supply of labour changes and the supply curve shifts if Supply Shifters The supply of labour changes and the supply curve shifts if The adult population changes Technology and capital in the home change Preferences change

Equilibrium Wage Rate: Perfectly Competitive Labour Market Quantity of Labour Wage Rate per Worker per Week ($) D S 498 Q1 Surplus Shortage The wage adjusts so Qn.D=Qn.S Shifts of demand or supply will change the equilibrium wage and the MRPL by the same amount since they are always equal

Labour Market: Perfect Competition Industry Labour Market The Firm: on the demand side is a price taker S D Wage Wage L1 w1 w1 SL Labour Input (workers per week) Labour Input (workers per week)

Monopsony A monopsony is a market in which there is a single buyer. A monopsonist faces the Market Supply of Labour \ To hire more labour, a higher wage must be paid: \marginal cost of labour (MFC) curve is upward sloping. To maximize profit the monopsonist hires until the marginal cost of labour , that is , the marginal factor cost , is equal to the marginal revenue product. 38

Supply of labour: monopsony in the hire of labour (1) Units of labor 1 2 3 4 5 6 (2) Wage rate $5 6 7 8 9 10 11 (3) Total labor cost (wage bill) $0 6 14 24 36 50 66 (4) Marginal factor(labour) cost TFactorC/QL $6 8 10 12 14 16 the cost of an extra worker : MFC  the wage rate by the amount needed to bring the wage rate of all workers currently employed up to the new wage.

Marginal Factor Cost : Monopsonist: Profit Max Employment Monopsony decreases the level of employment and the wage rate, compared to perfect competition MFC MRP MRP > W S E MFC and MRP per Worker-Week ($) We Qe Wm Hire Qm where MFC = MRP and pay Wm Qm Labour Input (worker-weeks)

Monopsony Results A monopsony reduces employment and wages when compared to PC Provides rationale for regulation of monopsony’s Monopsonistic exploitation – workers are paid a wage rate less than the monopsonist’s revenues Programs such as work camps, free housing, and after-education work contracts can benefit the producers more than the workers 38

Minimum Wage in Monopsony The supply now becomes perfectly elastic at the minimum wage MFC follows suit To maximize profit, MFC =MRP monopsony hires 75 hours at $7.50 an hour. MFCL S Wage rate (dollars per hour) 10.00 7.50 Minimum wage Increase in employment The minimum wage has increased the wage rate by $2.50 an hour and the amount of labour employed by 25 hours a day. 5.00 MRP = D 50 75 Labour (hours per day) 45

2) Unions: Monopoly on the Supply Side of the Labour Market Imperfect Competition 2) Unions: Monopoly on the Supply Side of the Labour Market In some markets, workers collectively “sell” their labour through unions. Labour unions are worker/employee organizations Engage in collective bargaining to establish a contract which sets out Wages,fringe benefits, maximum work days, working conditions

Unions: Goal, Increase Wages Suppose a union is formed in an otherwise competitive market,  the union is bargaining with a large number of employers. Assume the major goal is to increase wages A variety of ways to achieve this

Unions: Increase Wages Wage increases and more labour is hired 1) Increase Demand for Labor. increase demand for the product - union label. Decrease demand for alternatives Often self-fulfilling, as higher wages lead to higher quality increase productivity D` W1 Q1 S Wage Rate per Hour Qe We E D Quantity of Labour per Time Period

Unions: Increase Wages If union membership is limited to Q1, wages increase to $16 instead of $15 when demand increases 2) Restrict Labour Supply exclusive or craft union: union that comprises workers of a given skill. occupational licensing. 16 E2 S2 S1 D2 Q2 E3 15 Wage Rate per Hour ($) D1 Q1 14 E1 Number of Workers per Time Period

Unions: Increase Wages Supply becomes horizontal at the union wage rate: MFC=Wu. 2) Restrict Labour Supply. inclusive/ industrial union: union that seeks as members all unskilled, semi skilled & skilled workers in a given industry. MRP=MFC D= MRP Wage Rate per Hour ($) Number of Workers per Time Period Wc Qc Su Wu SL Qu

Unions: Goal, Increase Wages Contracts for higher wages can be negotiated via the THREAT of reduced labour supply (ie: a strike) Control over the supply side of the labour market is required here

Unions: Employ workers 2) A union may want to employ more workers than at equilibrium. This requires, however a reduction in wage from W1 to W2 This union goal is less common due to the decrease in wages for employed workers S1 D2 E2 W1 W2 E3 Wage Rate per Hour ($) Q1 Q2 Number of Workers per Time Period

3.) Bilateral Monopoly In communities with a single major employer, there is typically also a union. A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer. Wages are determined by bargaining. 40

3.) Bilateral Monopoly The monopsony hires 50 hours and pays $5/hour. MCL The monopsony hires 50 hours and pays $5/hour. The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour=MRPL S 10.00 7.50 Wage rate (dollars per hour) 5.00 MRP 50 75 Labour (hours per day) 41

3.) Bilateral Monopoly It is unlikely the union will get $10/hour or that the firm can keep wages at $5.00/hr. The monopsony firm and union bargain over the wage rate It will settle between $5 and $10/hour (depending upon who is stronger). MCL S Wage rate (dollars per hour) 10.00 7.50 5.00 MRP 50 75 Labour (hours per day) 42

Wage Differentials If all labour was homogeneous and all jobs were equally attractive, and all labour markets were perfectly competitive, then all wages would be the same…….. Wages & earnings typically exhibit wide variations: 1) Labour Market Imperfections workers are not always mobile institutional restrictions – unions.. discrimination – hiring practices - another model of labour market imperfection

Wage Differentials jobs vary in attractiveness 2) Compensating Differences jobs vary in attractiveness 3) Non-competing Occupational Groups workers aren’t homogeneous, they have different ability, different education and training.

Union Benefits 1) Allows for increased productivity, skill and efficiency 2) Reduce wage inequality 3) Reduce profits (transfer surplus to workers) 4) Provide a voice for workers 5) Increase workforce stability (and job security)

Union Drawbacks 1) Job security can lead to reduced productivity. Free-riding = expecting others to work hard Featherbedding = forcing employers to use more workers than needed 2) Increase wage inequality between union and non-union workers 3) Cause businesses with little economic profit to fold, resulting in unemployment 4) Generally causes unemployment 5) Often prevents natural market mechanisms to take place (ie: raises to hard workers, fire others)