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LABOUR

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter Outline

• THE PERFECTLY COMPETITIVE FIRM’S SHORT-RUN DEMAND FOR LABOUR• THE PERFECTLY COMPETITIVE FIRM’S LONG-RUN DEMAND FOR LABOUR• THE MARKET DEMAND CURVE FOR LABOUR• AN IMPERFECT COMPETITOR’S DEMAND FOR LABOUR• THE SUPPLY OF LABOUR• THE NON-ECONOMIST’S REACTION TO THE LABOUR SUPPLY MODEL• THE MARKET SUPPLY CURVE• MONOPSONY• MINIMUM WAGE LAWS• LABOUR UNIONS• DISCRIMINATION IN THE LABOUR MARKET• STATISTICAL DISCRIMINATION• THE INTERNAL WAGE STRUCTURE• WINNER-TAKE-ALL MARKETS

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Value Of The Marginal Product Of Labour

• Value of marginal product (VMP): the value, at current market price, of the extra output produced by an additional unit of input.

• The hiring rule for the firm is to choose that amount of labour for which the wage rate is equal to the VMP

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Figure 12.1: The Competitive Firm’s Short-Run Demand for Labour

0 0

Value of marginal product(R/unit of labour)

Marginal product of labour(units of output/unit of labour)

Optimal quantity oflabour when w = 120

160

W = 120

80

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Labour Demand in the Long-run

• The firm’s demand for labour will tend to be more elastic the more elastic the demand is for its product.

• The firm’s demand for labour will tend to be more elastic the more it is able to substitute the services of labour for those of other inputs.

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Figure 12.2: Short and Long-Run Demand Curves for Labour

0

Short-run demand for labour

Long-run demand for labour

Labour (person-hr/day)

Wage (R/day)

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Figure 12.3: The Market DemandCurve for Labour

0

R/L

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Marginal Revenue Product Of Labor

• Marginal revenue product (MRP): the amount by which total revenue increases with the employment of an additional unit of input.

• The firm will hire that quantity for which the wage rate and MRPL are equal.

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Figure 12.4: The Optimal Choiceof Leisure and Income

Income (R/day)

0

24 w0 = 2 400

(24 – h*)w0 = 900

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Figure 12.5: Optimal Leisure Choicesfor Different Wage Rates

Income (R/day)

0

24(140) = 3 360

24(100) = 2 400

24(40) = 960

W = 140

W = 100

W = 40

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The Supply Of Labour

• Leisure activities: which here include play, sleep, eating, and any other activity besides paid work in the labour market.

• The choice is between two goods we may call “income” and “leisure.” As in the standard consumer choice problem, the individual is assumed to have preferences over the two goods that can be summarized in the form of an indifference map.

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Figure 12.6: The Labor Supply Curve for the ith Worker

140

Wage (R/hr)

100

40

0i’s labour supply (hr/day)

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Figure 12.7: Substitution and Income effects of a Wage Increase

0 Hours of leisure

Income (Rand /day)

3 360

2 480

W = R100

W = R140

R

CA

B

Q

P

12 241715

Substitution effect

Income effect

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Figure 12.8: The Labour Supply Curvefor a Worker Seeking a Target Level of Income

200

400

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Figure 12.9: When Leisure and Income are Perfect Complements

Income (R/day)

4 800

1 600

M = 4 800 – 200hM = 100h

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Figure 12.10: An Increase in Demandby One Category of Employer

0 0 0QU2 QU1

Du

Du

Du

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Monopsony

• Average factor cost (AFC): another name for the supply curve for an input.

• Total factor cost (TFC): the product of the employment level of an input and its average factor cost.

• Marginal factor cost (MFC): the amount by which total factor cost changes with the employment of an additional unit of input.

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Monopsony

• The optimal level of employment for a monopsonist is the level for which MFC and the demand for labour are equal.– For the monopsony firm wages will be lower

than under competition.

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Figure 12.11: Average and Marginal Factor Cost

0

141

41

40

R/L

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Figure 12.12: The Profit-Maximizing Wage and Employment Levels for a Monopsonist

0

R/L

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Figure 12.13: Comparing Monopsony and Competition in the Labor Market

0

R/L

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Minimum Wage Laws

• Labour Relations Act 97 of 1995• Basic Conditions of Employment Act of 1997• Basic Conditions of Employment Act of 1997• Employment Equity Act 55 of 1998

• Whether the net effect of the minimum wage is to increase the amount of income earned by unskilled workers depends on the elasticity of demand for that category of labour.

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Figure 12.14: A Statutory Minimum Wage

0

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Figure 12.15: The Minimum Wage Lawin the Case of Monopsony

R/L

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Labour/Trade Unions

• Labour movements are very active in South Africa and about 30% of all workers are members of a trade union. – Unionized workers bargain collectively over the

terms and conditions of employment.– Unions may also facilitate communication

between labour and management.

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Figure 12.16: The Allocative Effectsof Collective Bargaining

0 0

Non-union sector

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Figure 12.17: The Minimum Wage Lawin the Case of Monopsony

0

Wage Per

worker

Labour

W1

W2

W3

L3 L2 L1 L*

MR

MR1

DL

SL

A

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Discrimination In The Labour Market

• From any individual employer’s point of view examples of different wages across various population groups are examples of non-market discrimination— effects that lower productivity before job applicants even make contact with the employer.

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Discrimination In The Labour Market

• Customer discrimination: the firm’s customers do not wish to deal with minority employees.

• Co-worker discrimination: when some type of worker (i.e white workers) feel uneasy about working with other type of workers (i.e. blacks) and may prefer employment in firms that hire only their type.

• Employer discrimination: wage differentials that arise from an arbitrary preference by the employer for one group of worker over another.

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Statistical Discrimination

• Statistical discrimination is the result, not the cause, of average productivity differences between groups. Its sole effect is to reduce wage variation within each group.

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Figure 12.18: A Hypothetical Uniform Productivity Distribution

(R/hr)100 400300200

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Figure 12.19: Productivity Distributions for Two Groups

400300200100 (R/hr)

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The Internal Wage Structure

• The wage structure within many private firms seems much more egalitarian than would be warranted under our marginal productivity theory of wages.

1. Most people prefer high-ranked to low-ranked positions among their co-workers;

2. No one can be forced to remain in a firm against his wishes.

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Figure 12.20: The Wage Structurewhen Local Status Matters

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Figure 12.21: Wage Schedules andthe Intensity of Interaction

0