Lecture Labour market economics: Chapter 5 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Labour demand is derived demand, that is, labour is hired in order to produce goods which are sold in the product market. For this reason, labour demand is always connected to the product market, especially in terms of the degree of competition, whether from foreign or domestic producers. In this chapter, we will address the following contents: Labour demand curve, short and long run, elasticity, competitiveness of Canadian labour, globalization.

Chapter Five Demand for Labour in Competitive Labour Markets  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 5­1 Chapter Focus  Labour demand curve  Short and long run  Elasticity  Competitiveness of Canadian labour  Globalization © 2002 McGraw­Hill Ryerson Ltd Chapter 5­2 Demand for Labour  Factors  inputs of production into the production of final goods  Linked to the firms demand for goods/services  Derived demand © 2002 McGraw­Hill Ryerson Ltd Chapter 5­3 Employment Decisions  Short-run – one or more factors of production cannot be varied  Long-run – firm can adjust all of its inputs  State of technical knowledge is assumed to be fixed © 2002 McGraw­Hill Ryerson Ltd Chapter 5­4 Demand for Labour  The quantity of labour services the firm would employ at each wage  Depends on the firms objectives and constraints  Objective is to maximize profits © 2002 McGraw­Hill Ryerson Ltd Chapter 5­5 Firm’s Constraints  Demand for product (output)  Supply of labour (and other factors of production)  Production function ( the maximum output given the various combinations of inputs)  Fixed quantity of one or more factors of production (short run only) © 2002 McGraw­Hill Ryerson Ltd Chapter 5­6 Theory of Labour Demand  Examines desires the quantity of labour the firm given the market-determined wage rate  given the labour supply function the firm faces  Assume: The firm is a perfect competitor in the labour market © 2002 McGraw­Hill Ryerson Ltd Chapter 5­7 Market Behaviour  A firm’s behaviour in the product market impacts     demand for labour wage rate employment decisions The structure of the labour market affects  supply curve - amount of labour available to the firm at various wage rates © 2002 McGraw­Hill Ryerson Ltd Chapter 5­8 Categorizing the Structure of Product Markets  Industry  perfect Structures competition  monopolistic  oligopoly  monopoly decreasing degree of competition © 2002 McGraw­Hill Ryerson Ltd Chapter 5­9 Categorizing the Structure of Labour Markets  Industry Structures  perfect competition  monopsonistic competition  oligopsony  monopsony decreasing degree of competition © 2002 McGraw­Hill Ryerson Ltd Chapter 5­10 Figure 5.3 c Derived Labour Demand Schedule K w1 w0 D N1 N0 N © 2002 McGraw­Hill Ryerson Ltd Chapter 5­33 Perfect Competition wage rotates isocost line downwards with a greater slope  The firm will maximize profit by moving to a lower level of output  wage also shifts up the firms’s marginal and average cost curves  In a perfect competitive industry each firm reduces output raising the price of the product  © 2002 McGraw­Hill Ryerson Ltd Chapter 5­34 Figure 5.4 a Perfect Competition Price MC1 MC1 FIRM P1 P0 Q1 Q0 Output © 2002 McGraw­Hill Ryerson Ltd Chapter 5­35 Figure 5.4 a Industry Price S1 S0 P1 P0 D q1 q0 Output © 2002 McGraw­Hill Ryerson Ltd Chapter 5­36 Figure 5.4 a Monopoly Price MC1 MC0 P1 P0 MR q1 q0 D Output © 2002 McGraw­Hill Ryerson Ltd Chapter 5­37 Substitution and Scale Effects of a Wage Change Figure 5.5 K KN K M ES E0 E1 Q0 Q1 N NS N0 NM N © 2002 McGraw­Hill Ryerson Ltd Chapter 5­38 In Theory  Demand schedule is downward sloping  firm would substitute cheaper inputs for the more expensive labour  SUBSITUTION EFFECT  Firm would reduce its scale of operations because of the cost increase associated with the increase in wage  SCALE EFFECT © 2002 McGraw­Hill Ryerson Ltd Chapter 5­39 Relationship Between the Short and Long Run  Short-Run    amount of capital is fixed no substitution effect Long-Run   firm has flexibility by varying its capital stock response to a wage change will be larger in the long run © 2002 McGraw­Hill Ryerson Ltd Chapter 5­40 Elasticity of Demand for Labour  Demand for labour decreases as wages increase (negative function)  Wage increases have an adverse effect on employment  The magnitude of the effect can be seen by the elasticity of the derived demand for labour © 2002 McGraw­Hill Ryerson Ltd Chapter 5­41 Elasticity of Demand  Measures the responsiveness of the quantity of labour demanded to the wage rate  Equals the % change in the quantity of labour demanded divided by the % change in the wage rate © 2002 McGraw­Hill Ryerson Ltd Chapter 5­42 Figure 5.7 a Inelastic W D N © 2002 McGraw­Hill Ryerson Ltd Chapter 5­43 Figure 5.7 b Elastic W D N © 2002 McGraw­Hill Ryerson Ltd Chapter 5­44 Elasticity of Demand for Labour  Basic determinants of the elasticity of demand for labour:  availability of substitute inputs  supply of substitute inputs  demand for output  ratio of labour cost to total cost © 2002 McGraw­Hill Ryerson Ltd Chapter 5­45 Elasticity of Demand  If inputs can not be easily substituted elasticity of labour demand  If demand for output is not effected by a price increase (due to cost of wage increase) demand for labour will be inelastic  Demand for labour will be inelastic if labour cost is small portion of total cost © 2002 McGraw­Hill Ryerson Ltd Chapter 5­46 End of Chapter Five © 2002 McGraw­Hill Ryerson Ltd Chapter 5­47 ... Employs labour services until the value of MP of labour just equals the wage © 2002 McGraw­Hill Ryerson Ltd Chapter 5 23 Labour Demand in Long-Run © 2002 McGraw-Hill Ryerson Ltd Chapter 5- 24 Isoquants... © 2002 McGraw­Hill Ryerson Ltd Chapter 5 11 Demand for Labour in the Short Run Perfect Competition Case © 2002 McGraw-Hill Ryerson Ltd Chapter 5- 12 Production Function  Firms use factors of production (labourN, capital -K)... © 2002 McGraw­Hill Ryerson Ltd Chapter 5 19 Short-Run Demand for Labour  Firm will shut down  if average cost of labour (wage rate) exceeds the average revenue product of labour  Short-run  MRP N labour demand