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ECON 370 - Chapter 7 - Labour
Economics
Maggie Jones
Wages and Employment in a Single
Labour Market
I Chapter 7 puts the supply and demand of labour together toexamine equilibrium wages and employment
I We will start by assuming output markets and labour marketsare perfectly competitive
I Workers sell labour on an individual basis
I We begin with the single firm’s decision problem, then move tothe market–e.g. “occupation”, “industry”, “region”, etc.–thelevel of aggregation that determines wages
I We then examine the implication of relaxing the perfectcompetition assumption
The Competitive Firm’s Interaction
with the Market
Wage
Employment
Wage
Employment
Wage
Employment
The Competitive Firm’s Interaction
with the Market
I One problem with the previous analysis is that it assumes thatthe firm can actually get all the labour it needs at a given wage
I In the short run this may not always be the case (although inthe long run it is more realistic)
I E.g. the firm may have to raise wages in the short run toattract workers
Wage
Employment
Implications of Competitive Markets
I Wages are equalized across homogeneous workers andhomogeneous firms
I No involuntary unemployment
I No queues to work
In reality, we may have imperfect competition, imperfectinformation, risk and uncertainty, or a long-run relationshipbetween firms and workers
Imperfect Competition in the
Product Market
Imperfect Competition in the Product
Market
I If the industry is competitive in the product market, then theindustry demand for labour is obtained by aggregating alllabour demand curves
I If the firm is a monopolist in the product market, then theirlabour demand curve IS the industry labour demand curve
I Under perfect competition, the firm sets MPN × P = w∗,where w∗ is determined in the market (assumes MR = P
I The monopolist sets MPN ×MR = w∗I as monopolist expands output, MPN AND MR
Wage
Employment
Imperfect Competition in the Product
Market
I Note that there is no reason that the monopolist should affectthe market wage
I As long as there is a large number of other firms (possibly inother industries) drawing from the labour market, themonopolist will not affect wages
I Thus, the monopolist will continue to act as a wage-taker, aswas the case under competitive markets
Imperfect Competition in the Product
Market
I However, it doesn’t always appear to be the case thatmonopolists act as wage-takers
I monopolists may ear profits and workers may be part of aunion that collectively bargain for profits to be split amongemployees
I monopolists may be larger firms where monitoring is costly,and thus a “premium” is paid to workers to prevent shirking
Imperfect Competition in the
Labour Market
Imperfect Competition in the Labour
Market
I It may be the case that the firm is the only firm purchasinglabour in a given market
I In this case, the firm has market power in the labour market,in a similar way that we think about market power in aproduct market
I Monopsonists can be either perfectly discriminating ornon-discriminating
I perfectly discriminating = everyone paid reservation wageI non-discriminating = if you increase the wage to attract more
workers, you have to increase the wage of existing workers, too
Imperfect Competition in the Labour
Market
I Both types of monopsony result in an upward sloping laboursupply schedule
I Perfectly discriminating:I Average cost and marginal cost curves flatter
I Non-discriminating:I Average cost and marginal cost curves steeper
Example: Discriminating vs
Non-Discriminating
N w TCd TCnd ACd ACnd MCd MCnd
1 5
2 10
3 15
4 20
Wage
Employment
Imperfect Competition in the Labour
Market
I Firm will max profits by hiring labour until MC = MRPN
I discriminating monopsonist: wage determined by intersectionof AC and MRPN
I non-discriminating monopsonist: wage determined by point onAC curve that corresponds to N associated with intersectionof MC and MRPN
I difference between MRPN and w has been called measure ofmonopolistic exploitation
Working with Supply and Demand
Working with Supply and Demand
I We can use our tools of labour supply and demand is to“simulate” the effects of a policy change on equilibriumemployment and wages
I This requires a functional form for labour supply and demandI NS = f(W ;X)I ND = g(W ;X)
I W,NS, ND are endogenous variables (meaning they aredetermined by the system)
I Z,X are exogenous variables (meaning they are determinedoutside the system)
I Solving the system requires a market clearing condition,NS = ND, from which we can derive w∗ and N∗
Working with Supply and Demand