1. Wages and Employment in a Single Labour Market
Chapter Seven
Wages and Employment in a Single Labour Market
Modified from Slides Created by: Erica Morrill

2. Chapter Focus Equilibrium in a single labour market
Imperfect competition
Payroll taxes
Monopsony
Minimum wage

3. Competitive Firm’s Demand
Assumptions :
homogeneous type of labour
price taker and wage taker
Supply is perfectly elastic (horizontal) at the wage rate
Firms can employ all the labour they need at the market wage rate
Market wage rate is set by the aggregate labour market

4. Figure 7.1 Competitive Product and Labour MarketsW N Wc W N Wc W N Wc W0 W0 S2 S1
D=Di
N01 N1
N02 N2
Ni
Firm 1
Aggregate Labour Market
Firm 2

5. Short-Run
A firm may have to raise its wages to attract additional workers (see Fig 7-2)
Short-run labour supply curve is upward sloping

6. Figure 7.2 The Labour Market in the Short Run and Long Run
 in demand leads to higher wages WS SS
S’S
Supply of workers increase depressing the high short run wage Wc S1
Wage D
Labour

7. Short-run and Long-run Labour Supply
Temporary wage increases above norm are consistent with the firm being a competitive buyer of labour. Wage then decreases as a result of increase in labour supply.
Short-run wage increases can be a market signal. It ensures that market forces operate in the longer run

8. Equilibrium in a Competitive Market
Market-clearing model (neoclassical)
for markets with homogeneous workers and homogeneous jobs wages will be equalized across workers
absences of “involuntary unemployment”

9. In Reality…. The market-clearing model is not entirely true
Wages do not adjust quickly to clear the market
Involuntary unemployment is frequent
Large wage differentials exist across homogeneous workers and jobs.
However, it still serves as a useful approximation of market theory

10. Imperfect Competition
Monopoly
firm= industry
Effects of hiring more labour
marginal physical product of labour falls; marginal revenue falls; so MR*MP_N falls.
Since P>MR, MR*MP_N<P*MP_N as shown in Fig The demand for labour is thus lower under imperfect competition.

11. Figure 7.3 Monopolist Versus Competitive Demand for Labour
NM*
DM = MPPN X MRQ= MRPN W*
DC = MPPN X PQ=  VMPN
NC* N

12. Working with Supply and Demand
Simulating the effects of a policy change on equilibrium
Incidence of a unit payroll tax

13. Unit Payroll Tax Tax levied on employers
Proportional to the firm’s payroll
CPP/QPP
Workers’ compensation
unemployment insurance
health insurance
Often considered “job killers”

14. Figure 7.5 The Effect of a Payroll Tax on Employment and WagesNS D A W0 B N1
ND(W+T) C T W1
ND(W) N0

15. Monopsony
Large relative to the size of the labour market (I.e., labour market is dictated by the monopsonist)
Influences wage
Raises wages to attract labour (I.e., face an upward-sloping labour supply schedule)

16. Optimal Condition: Average cost is the wage rate
Marginal cost is the new wage plus the cost of paying the higher wage to existing workers (C=w(N)N; MCL=w’N+w)
Marginal cost is higher than average cost (MCL>w)
Profit Maximization when MCL=VMP

17. Figure 7.6 Monopsony Wage MCL VMPM S=AC WC VM SM WM S0 VMPN=MPPnPQ NC

18. Implications of a Monopsony
Employment is lower than a competitive situation
Restricts employment because hiring additional labour is costly

19. Characteristics of Monopsonists
Importance of elasticity of labour supply in wage and employment determination
Most firms have an element of monopsony power in short run
Examples of monopsony in long run:
would be a one industry town in an isolated region
if workers have specialized skills that are useful only in a specific firm

20. Perfect Discriminating Monopsonist (1st degree)
Workers are paid different wages with an intention to raise its profits

21. Discriminating Monopsonist: Wage vs MCL
Supply schedule equal to the average cost and marginal cost , w(L)=MCL
Does not have to pay existing workers any more than their reservation wage (according to the supply curve)

22. Figure 7.7 Monopsony (1st degree)
Solution
is at E
Wage
VMPM
S=AC= MCL E WC Nd NM SM S0
VMPN=MPPnPQ

23. Wage Discrimination (3rd degree)
Monopsonists differentiate between groups of workers
different types of labour can be separated
there are different supply elasticities (e.g., men vs women)
(graph not drawn)

24. Minimum Wage Legislation: Impact on Competitive Labour Market
Adverse employment effect
Firms employ less labour at a higher cost
Higher wage encourages more people to seek work
Magnitude of adverse employment effect depends on the elasticity of the demand for labour

25. Figure 7.8 Effect of Minimum Wage on the Competitive MarketS
Wmin E WC N*
VMPN=MPPnPQ
Nmin

26. Minimum Wage Legislation: Impact on Monopsony
minimum wage (or other form of price fixing) may increase employment
reduces monopsony profits
depends on the extent to which monopsony is associated with workers who are paid below minimum wage

27. Figure 7.9 Monopsony and Minimum WageMC
MC1
VMP0
S=AC W1 W0
VMP N1 N0

28. Minimum Wage: summary Reduces employment in competitive labour markets
Increases employment in monopsonistic labour market

29. End of Chapter Seven