Lecture Labour market economics: Chapter 7 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Chapter 7 - Wages and employment in a single labour market. The following will be discussed in this chapter: Equilibrium in a single labour market, imperfect competition, payroll taxes, monopsony, minimum wage.

Chapter Seven Wages and Employment in a Single Labour Market  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 7­1 Chapter Focus  Equilibrium in a single labour market  Imperfect competition  Payroll taxes  Monopsony  Minimum wage © 2002 McGraw­Hill Ryerson Ltd Chapter 7­2 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  © 2002 McGraw­Hill Ryerson Ltd Chapter 7­3 Figure 7.1 Competitive Product and Labour Markets W W W0 S1 Wc S W W0 S2 Wc Wc D= Di N 01 N Firm N N02 N2 Firm N Ni N Aggregate Labour Marke © 2002 McGraw­Hill Ryerson Ltd Chapter 7­4 Short-Run  A firm may have to raise its wages to attract additional workers  dynamic  monopsony Short-run labour supply curve is upward sloping © 2002 McGraw­Hill Ryerson Ltd Chapter 7­5 Figure 7.2  in  demand  leads to  higher  wages The Labour Market in the Short Run and Long Run SS WS Wc Wage D S’S Supply of  workers  increase  S1 depressing  the high short  run wage D’ Labour © 2002 McGraw­Hill Ryerson Ltd Chapter 7­6 Short-run and Long-run Labour Supply  Long run  Temporary wage increases above norm are consistent with the firm being a competitive buyer of labour  Short-run wage increases can be a market signal  ensures that market forces operate in the longer run © 2002 McGraw­Hill Ryerson Ltd Chapter 7­7 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”  no queues for jobs or rationing of jobs  © 2002 McGraw­Hill Ryerson Ltd Chapter 7­8 In Reality…  The market-clearing model is not entirely true     Wages 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 7­9 Imperfect Competition  Monopoly  is the industry  Effects of hiring more labour  marginal physical product of labour falls  marginal revenue falls  Sells more output only by lowering the product price © 2002 McGraw­Hill Ryerson Ltd Chapter 7­10 Figure 7.5 The Effect of a Payroll Tax on Employment and Wages NS D W0 A C B W1 T ND(W) ND(W+T) N1 N0 © 2002 McGraw­Hill Ryerson Ltd Chapter 7­17 Characteristics of a Monopsony  Large relative to the size of the labour market  Influences wage  Raises wages to attract labour  Will not lose all of its work force if decreases wages  Upward-sloping labour supply schedule © 2002 McGraw­Hill Ryerson Ltd Chapter 7­18 Monopsony  Average cost is the wage rate  Marginal cost is the new wage plus the cost of paying the higher wage to existing workers  Marginal cost is higher than average cost  Profit Maximization when MC=VMP © 2002 McGraw­Hill Ryerson Ltd Chapter 7­19 Figure 7.6 Monopsony Wage MC VMPM WC WM S0 S=AC SM VM VMPN=MPPnPQ NC NM © 2002 McGraw­Hill Ryerson Ltd Chapter 7­20 Implications of a Monopsony  Employment is lower than a competitive situation  Restricts employment because hiring additional labour is costly  Higher wages must be paid to intramarginal workers © 2002 McGraw­Hill Ryerson Ltd Chapter 7­21 Characteristics of Monopsonists Some inelasticity of supply of labour  Most firms have an element of monopsony power in short run  Long run costly problems of recruitment, turnover and morale issues  Examples of monopsony in long run:    would be a one industry town in an isolated region if workers have specialized skills that are useful mainly in a specific firm © 2002 McGraw­Hill Ryerson Ltd Chapter 7­22 Perfect Monopsonistic Wage Differentiation  Existing workers receive wages greater when a monopsony raises the wage rate  seller’s surplus or economic rent  Monopsonist may try to retain some of this seller’s surplus by differentiating it’s work force © 2002 McGraw­Hill Ryerson Ltd Chapter 7­23 ... aggregate labour market  © 2002 McGraw­Hill Ryerson Ltd Chapter 7 3 Figure 7. 1 Competitive Product and Labour Markets W W W0 S1 Wc S W W0 S2 Wc Wc D= Di N 01 N Firm N N02 N2 Firm N Ni N Aggregate Labour. .. of labour  Short-run wage increases can be a market signal  ensures that market forces operate in the longer run © 2002 McGraw­Hill Ryerson Ltd Chapter 7 7 Equilibrium in a Competitive Market. .. © 2002 McGraw­Hill Ryerson Ltd Chapter 7 10 Monopolist Versus Competitive Demand for Labour Figure 7. 3 W* DC = MPPN X PQ= VMPN DM = MPPN X MRQ= MRPN NM * N C* N © 2002 McGraw­Hill Ryerson Ltd Chapter 7 11 Product Market