1. Chapter 20: Work and the Labour Market
Prepared by:
Kevin Richter, Douglas College
Charlene Richter,
British Columbia Institute of Technology
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Chapter Objectives
1a. Use the theory of rational choice to explain how taxes affect the quantity of labour supplied.
1b. List three factors that influence the elasticity of labour supply.
2. Explain how the demand for labour is a derived demand.
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Chapter Objectives
3. List three factors that influence labour demand.
4. Describe the impact of technology and globalization on the demand for labour.
5. Explain what is meant by efficiency wages.
6. Define monopsonist and bilateral monopoly.
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Chapter Objectives
7a. Discuss real-world characteristics of labour markets.
7b. List three types of discrimination.
8. Describe how labour laws and labour unions have improved working conditions.
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Supply of Labour
Of the many motivations for work, economists focus on the incentive effect.
Incentive effect – how much a person will change his or her hours worked in response to a change in the wage rate.
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6. Real Wages and the Opportunity Cost of Work
The nominal wage is the actual number of dollars one is paid per hour.
The real wage is the nominal wage adjusted for inflation – if nominal wages rise faster than inflation, real wages rise.
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7. Income Tax, Work, and Leisure
An increase in the marginal tax rate is likely to reduce the quantity of labour supplied.
Marginal tax rate – the tax you pay on an additional dollar of income.
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8. Elasticity of Labour Supply
Elasticity of labour supply depends on:
A person’s opportunity cost of working.
The elasticities of each person’s supply curve.
Persons entering and leaving the labour market.
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9. Derived Demand for Labour
Firms translate consumer demand into a demand for factors of production.
Derived demand – a firm’s demand for factors of production depends upon consumers’ demands.
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10. Derived Demand for Labour
Marginal revenue product (MRP) is the marginal revenue a firm expects to earn from selling the additional worker’s output.
Value of marginal product (VMP) is the marginal revenue product of a perfectly competitive firm (where MR = P).
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11. Derived Demand for Labour
Value of marginal product is calculated as the marginal physical product (MPP) (the output of the additional worker hired) times the output price.
VMP = MPP x P
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12. Derived Demand for Labour
Labour productivity is the average output per worker.
Workers’ marginal product declines as more workers are hired, due to diminishing marginal productivity.
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14. Firm’s Derived Demand for Labour
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15. Factors Affecting Demand for Labour
Factors affecting the labour demand of a firm:
Changes in the demand for a firm’s product.
Market structure.
A change in other factors of production that a firm uses.
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16. Factors Affecting Demand for Labour
The firm’s cost minimization condition – the ratio of marginal product to the price of an input is equal for all inputs.
If this condition is not met, the firm could produce at a lower cost by hiring more of the input whose marginal product relative to price is higher.
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17. Labour Versus Entrepreneurship
Entrepreneurship refers to labour services that require high degrees of organizational skills, responsibility, and creativity.
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18. Equilibrium in the Labour Market
Wage
Quantity of labour
Demand
Supply we Qe D2 D3
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Efficiency Wages
Efficiency wages are wages paid above the going market wage to keep workers happy and productive.
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20. Maintaining Excess Supply
Quantity
Wage
Demand
Supply w1 QD QS
Excess supply of labour
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Increase in Supply
Quantity
Wage D S0 S1 w0 Q0 Q1 w1
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Monopsony
The marginal factor cost is above the supply curve.
Marginal factor cost – the additional cost to a firm of hiring another worker.
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23. Monopsony and the Labour Market
Marginal factor cost
Quantity
Wage
Demand
Supply QM wC QC wM
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24. Union Power and the Labour Market
Quantity
Wage
Demand
Supply MR wU QU wC QC
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Bilateral Monopoly
Marginal factor cost
Quantity
Wage
Demand
Supply MR wU QU QM wC QC wM
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26. Outsourcing, X-Inefficiency, and Downsizing
During the 1980s and 1990s, at the same time as employment grew there was much concern about downsizing.
Downsizing – a reduction in the workforce.
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27. Outsourcing, X-Inefficiency, and Downsizing
Outsourcing grew during the 1990s.
Outsourcing – a firm shifts production from its own plant to other firms, either in the country or abroad, where costs are lower.
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Average Earnings, 2000
Union member
Nonunion
Average hourly wage
$19.46
$15.31
Men
$20.45
$17.32
Women
$18.35
$13.19
Average weekly earnings
$712.79
$568.23
$794.59
$684.80
$620.27
$445.87
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Pay Equity Laws
Pay equity laws mandate equal pay for equal work.
The problem is defining what is equal work.
Pay equity laws are designed to affect institutional biases.
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30. Three Types of Discrimination
Individual characteristics that will affect job performance.
Correctly-perceived statistical characteristics of the group.
Individual characteristics that do not affect job performance.
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31. Three Types of Discrimination
Whenever discrimination saves the firm money, it will have an economic incentive to discriminate.
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32. Institutional Discrimination
Institutional demand-side discrimination can also exist.
Institutional discrimination is discrimination in which the structure of the job makes it difficult for certain groups of individuals to succeed.
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33. Evolution of Labour Markets
Labour markets as we know them developed in the 1700s and 1800s.
Wage rates were at the subsistence level.
Work weeks were long and working conditions were poor.
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Evolving Labour Laws
Labour laws have evolved in response to workers' political pressure.
Eight hours is the normal work day, with time-and-a-half for over eight hours.
One 30-minute break every six hours.
Child labour laws prohibit hiring a person less than 16 years of age.
Workers can be fired only for cause.
Sexual harassment is prohibited.
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35. Provincial Union Membership, 2001.
Province
Union membership (%)
British Columbia
33.1
Alberta
22.5
Saskatchewan
34.1
Manitoba
35.6
Ontario
26.1
Quebec
36.6
New Brunswick
28.6
Nova Scotia
28.4
Prince Edward Island
29.7
Newfoundland
39.4
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36. Characteristics of Union Membership

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Labour Market and You
There is much more to consider in choosing a job than just the money.
Wage
Lifestyle that goes with the job
Limited supply of labour
Increasing demand for labour
Your special ability
You enjoy it
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Labour Market and You
Choosing your career is one of the most important decisions you’ll make in your life.
Good Luck!
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39. Work and the Labour Market
End of Chapter 20
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