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