1. MICROECONOMICS STUDY UNIT 11 LABOUR MARKET PRESCRIBED BOOK CHAPTER 14

2. 2 SOME STUDY OBJECTIVES Identify major differences between labour market and goods market. Explain the determinants of labour supply Explain how labour demand is derived Provide reasons for differences in wages & salaries between individuals and occupations Explain what is meant by the informal sector Discuss the role of trade unions

3. 3 LABOUR MARKET vs. GOODS MARKET Supply( household skills) Vs. Demand (Employers) Difference between labour market &other markets:  Non-monetary factors e.g. location of employment, working conditions are very important in labour market.  Labour services are not transferable to other people.  Labour services are rented and not sold.  Labour market can be affected by non-economic considerations e.g discrimination, loyalty, fairness, justice, etc.

4. 4 LABOUR MARKET vs. GOODS MARKET  Labour is heterogeneous and can not be classified as standard  There are a variety of labour markets. The market can be segmented.  The remuneration does not consist of wages only but of non- wage benefits e.g medical aid, motor allowance, housing,etc.  Remuneration of labour is affected by a number of factors which is not directly related to labour market conditions e.g. taxation, views as to what constitutes a living wage.

5. 5 Chapter 14 The labour market © Van Schaik Publishers Figure 14-1 Equilibrium in a perfectly competitive labour market

6. 6 SUPPLY OF LABOUR Total supply of labour  Definition of labour force/economic active population.  Include employed and unemployed people  Include the formal and informal sector  Size of labour force determined by size and growth of population and the propensity to participate in the labour force as reflected by the labour force participation rate.

7. 7 MARKET SUPPLY - LABOUR SLSL

8. 8 Chapter 14 The labour market © Van Schaik Publishers Figure 14-3 The market supply of labour

9. 9 SUPPLY OF LABOUR Market supply of labour will shift entirely if:  A change in population due to a change in birth or death rates.  A change in the labour force participation rate  A change in migration  Trade union action.  HIV/AIDS  Wages in other occupations

10. 10 DECREASE IN THE MARKET SUPPLY - LABOUR SLSL S L1

11. 11 INCREASE IN THE MARKET SUPPLY - LABOUR SLSL S L1

12. 12 DEMAND OF LABOUR Derived demand curve - Employ labour if there is a demand for goods and services. Employ labour if MRP>W. Law of diminishing returns - Labour employed output decrease. Marginal physical product (MPP) is the change in output levels.

13. 13 Chapter 14 The labour market © Van Schaik Publishers Figure 14-4 A perfectly competitive labour market

14. 14 MARGINAL REVENUE PRODUCT OF LABOUR

15. 15 DEMAND OF LABOUR Marginal physical product (MPP) indicate physical value to employ additional labourer. MRP determine the monetary value of an additional worker. MRP = MPP x P MRP>Wage - employ worker MRP<Wage - do not employ worker

16. 16 DEMAND FOR LABOUR DLDL

17. 17 Chapter 14 The labour market © Van Schaik Publishers Figure 14-5 The individual firm’s demand for labour

18. 18 DEMAND OF LABOUR Factors causing a shift in labour demand curve:  A change in number of firms  A change in the price of the product - change the MRP and therefore labour employed.  A change in MPP (or productivity) it affects MRP.  A change in the prices of the other factors of production.  Profit of firms  International trade  A New substitute for labour – ATM’s, Computers

19. 19 Equilibrium condition for a firm that operates in a perfect competitive labour market (MRP = Wage) Wage rate is R300 D L = MRP E MRP=W= S L

20. 20 Chapter 14 The labour market © Van Schaik Publishers Figure 14-6 The equilibrium position of a firm operating in a perfectly competitive labour market

21. 21 EQUILIBRIUM IN A PERFECT COMPETITIVE LABOUR MARKET (QD = QS) SLSL DLDL E QD=QS

22. 22 Changes in the equilibrium wage rate Reason: An increase in the demand for the firm’s product No of Workers S0 D1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

23. 23 Changes in the equilibrium wage rate Reason: Decrease in MPP of workers No of Workers S0 D1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

24. 24 Changes in the equilibrium wage rate Reason: Impact of HIV/AIDS on labour supply No of Workers S0 S1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

25. 25 Changes in the Equilibrium wage rate Reason: Impact if salaries in other occupations are lower than in the industry below

26. 26 Chapter 14 The labour market © Van Schaik Publishers 26 Figure 14-7 Changes in labour market equilibrium

27. 27 Imperfect labour markets Reasons for the existence of imperfect labour markets are:  Trade unions organise workers  If there is only one buyer of workers in the market  Labour is heterogeneous  Labour is not mobile  Labour market is sometimes segmented and workers cannot move between segments freely.  Government intervention through minimum wages and other legislation  Employers and employees have imperfect knowledge of the market.

28. 28 Imperfect labour markets Trade unions can increase wages in three possible ways:  Restriction of labour supply  Increase the demand for the firm’s product  Negotiate a wage rate for members which is higher than equilibrium wage rate

29. 29 Trade unions: Restriction of labour supply No of Workers S0 S1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

30. 30 Trade unions: Increase in the demand for the firm’s product No of Workers S0 D1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

31. 31 Trade unions: Minimum wages e

32. 32 EXAMINATION QUESTION Illustrate how certain trade unions can control the supply of skilled labour in specific trades (or professions) by restricting membership.

33. 33 Make use of the set of axes in the diagram below to illustrate how certain trade unions can control the supply of skilled labour in specific trades (or professions) by restricting membership. Label all axes and curves and clearly indicate any possible change in direction No of Workers S0 S1 D0 E1E1 E W1W1 W0W0 W N1N1 N0N0

34. 34 Complete the table Number of workers Total productAverage product Marginal product 110 212 336 44 58

35. 35 Complete the table Number of workers Total productAverage product Marginal product 110 22412 336 44 5408

36. 36 Complete the table Number of workers Total productAverage product Marginal product 110 22412 336 4404 5 8

37. 37 Complete the table Number of workers Total productAverage product Marginal product 110 2241214 33612 4404 5 80

38. 38 Complete the table Number of workers Total productAverage product Marginal product 110 2241214 33612 440104 54080