Lab Market 1

7/31/2019 Lab Market 1

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http://www.bized.co.uk

Copyright 2006 Biz/ed

The Labour Market

The Supply and Demand

for Labour


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The Labour Market The labour market is an example of a factor

market Supply of labour those people seeking

employment (employees) Demand for labour from employers

A Derived Demand not wanted for its own sakebut for what it can contribute to production

Demand for labour related to productivity of labourand the level of demand for the product

Elasticity of demand for labour related tothe elasticity of demand for the product


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The Labour Market At higher wage

rates the demand

for labour will beless than at lowerwage rates

Reason linked toMarginalProductivityTheory

The demand for labour is highly dependent on theproductivity of the worker the more the workeradds to revenue, the higher the demand.Copyright: iStock.com


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Marginal Revenue Productivity Productivity refers to the amount

produced per worker per period of time MRP = the addition to total revenue (TR)

received from the sale of an additional unitof output

Worker instrumental in producing that output Marginal Physical Product (MPP) the

addition to total product as a result of theemployment of one additional unit of labour

MRP = MPP x P If a good sells for 1.00 and a worker

produces 300 per day, the MRP of that unitof labour is 300 per day


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The Labour MarketMarginal Productivity Theory

Wage Rate

Number Employed

MRP = MPP x P

ARP

The law of diminishing returns wouldsuggest that as successive units oflabour are employed, the addition to totalproduct will rise at first but then decline.The MRP represents the value added tototal output by successive workers.

The ARP is the average revenue product the average value added to total outputthrough hiring successive workers. TheMRP curve intersects the MRP curve at itshighest point.


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The Labour MarketWage Rate ( per hour)

Number Employed

MRP = MPP x P

ARP

In a competitive labour market, theindividual firm is not big enough toinfluence the wage rate. The marginalcost of labour is a horizontal line atthe existing market wage rate.

MCL 5.50

20

7.00

Employing the 20 th unit of labour coststhe firm 5.50 per hour but that labouradds 7.00 per hour to total revenuethrough their work. It is worthemploying that extra unit of labour.

6.70

21

The 21 st unit of labour adds slightly lessto total revenue (6.70) but still costs5.50 and so is worth employing. Therewill thus be an incentive for the firm tocontinue to employ additional units oflabour until the MRP = Wage rate

For the employer to be persuaded toemploy additional workers, therefore, thewage rate must be lower to compensatefor the fact that the extra worker adds lessto total revenue than the previous oneand to sell extra units, the firm mustaccept a lower price.


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The MRP curve therefore representsthe demand curve for labourillustrating the derived demandrelationship.

Wage Rate ( per hour)

Number Employed

DL

10

7

4

10 15 19

There is an inverse relationship betweenthe wage rate and the number of peopleemployed by the firm.

The Labour Market


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The Labour Market The Supply of Labour The amount of people offering

their labour at different wagerates.

Involves an opportunity cost workv. leisure

Wage rate must be sufficientto overcome the opportunity costof leisure


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The Labour Market Income effect of a rise in wages:

As wages rise, people feel better off and thereforemay not feel a need to work as many hours

Substitution effect of a rise in wages: As wages rise, the opportunity cost of leisure rises

(the cost of every extra hour taken in leisure rises).As wages rise, the substitution effect may lead tomore hours being worked.

The net effect depends on the relativestrength of the income and substitution effects


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The Labour Market The elasticity of supply of labour

depends upon: Geographical mobility of labour:

The willingness of people to move The cost and availability of housingin different areas

The extent of social, cultural and family ties The amount of information available to

workers about jobs in other areas The cost of re-location Anxiety of the idea of re-location


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Number of Hours Worked

S L

5

10 An inelastic supply of labour a substantial rise in the wage rateonly brings forth a small increasein the amount of people willingand able to do such work.

The reason may be the numberwith those particular skills andqualifications, the time it takes to getthose skills, geographical immobilityetc.


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Number of Hours Worked(per week)

S L

5

5.50

35 45

If the supply of labour is elastic, asmall rise in the wage rate is sufficientto encourage more people to offertheir labour. Geographical andoccupational mobility are likely to behigh and there is likely to be manysubstitutes.


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Number employed

DL

S L

6.00

Q1

The market wage rate for aparticular occupationtherefore will occur at theintersection of the demandand supply of labour.

The wage rate will alter ifthere is a shift in either orboth the demand and supplyof labour.

DL1

Q2

7.50

A rise in the demand for labourwould force up the wage rate asthere would be excess demandfor labour.

Excess Demand


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Number employed

DL

S L

6.00

Q1 Q2

S L1

Excess Supply

An increase in the supply oflabour would lead to a fallin the wage rate as therewould be an excess supplyof labour.

5.00


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The Labour Market Economic Rent The value of the

wage earned over and above thatnecessary to keep a factor in itscurrent employment


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Economic RentWage Rate ( per hour)

Number of hours worked

S L

The supply of labour curveshows the relationship betweenthe wage rate and the numberof people offering their labourin terms of the number of hoursworked.

At a wage rate of 6.00 perhour, employees are willing tooffer Q1 hours. Some in themarket are not willing to workfor any less than that and somewould be willing to work for lessthan 5.00.

The area under the supply

curve is referred to as theTransfer Earnings of thefactor.

6.00

Q1

TransferEarnings


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S L

6.00

Q1Q2

4.00

Some individuals would have beenprepared to work Q2 hours for 4.00per hour.

Assume that 6.00 per hour is thecurrent market wage rate for thisfactor.

DL

Those individuals earn 6.00 per hour they therefore earn an amount in excessthan they were prepared to offer theirservices for this is termed EconomicRent .

EconomicRent

The total value of economic rent is shownby the yellow shaded triangle.


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C i h 2006 Bi / d



S L

W1

Q1

DL

The total earnings of the factor isthe wage rate x the hours workedindicated by the grey rectangle.These earnings are made up of anelement of transfer earnings andan element of economic rent.

W2

EconomicRent

The lower the elasticity of supplyof labour, the greater the economicrent think about this in relationto soccer stars!

Total Factor Earnings

S L1

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Lab Market 1

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