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Introduction into Factor markets - the Labour market
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Labour Markets by Komilla Chadha
April 2012
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OverviewLabour Supply
Labour demand and the Monopsony model
Optimising hiring
Minimum Wage
Note the elasticity of demand for labour is the sensitivity of demand for labour for changes in output and demand for the goods and service it creates.
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Labour SupplyThe supply curve for labour is defined as the average factor cost curve.
It is better to increase a worker’s wage as you can see through a percentage then lumpsum as this translates into a shift of the budget constraint.
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Labour Supply - a few key conceptsThe total factor cost of labour can be defined as; average factor cost X employment level.
Marginal factor cost of labour is the cost of having one additional unit of labour. It is important to note that this ,graphically, is twice as steep the average factor cost curve.
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Labour demandLabour demand is derived as it is the result of the demand for a good or service that is created by labour inputs.
The SR demand is more inelastic as firms find themselves unable to run without labour but in the long run this is not so much they case especially with technological advanced.
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Labour demand: MonopolyMonopsony is a market structure where there is only one buyer e.g. the NHS is the only public sector healthcare organisation that recruits doctors.
I have a video on this please see: http://a2withkomilla.blogspot.co.uk/2010/12/monopsony.html
The fundamental outcome of such a market is that wages are much lower than normal and it depicts the need for a minimum wage to protect workers.
The optimal point of function is where MFC = demand because if MFC>demand then this shows they are incurring costs and should lay off some workers. If demand is > MFC then this implies there is still productivity to be increased and money to be made and they should hire more workers.
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Optimising hiringMarginal revenue of product is the amount of extra revenue received for an additional product, and this must be equal to wage for this to be an optimal rate as if revenue > wage, then there is scope to expand and is revenue< wage then a loss is being made.
More important though is the value of marginal product which is the value an additional unit of input would bring at current market price. It is calculated by marginal product of labour X price, it is a better calculation as it includes current market price. In order to optimise hiring this should be equal to wage for the same reason as why marginal revenue of product should be.
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Minimum wageThe notion of minimum wage was designed to stop firms from exploiting workers especially in cases of monopsony, so that workers and their incomes are protected. However, what is ironic is that minimum wage increases costs to firms thus results in unemployment as firms can’t hire as many workers.
Furthermore, it is largely influenced by the elasticity of demand for labour. If labour is elastic i.e. >1 incomes fall and <1 then they rise as firms are less likely to lay off workers.
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Thank you for watching
Please see my blog: http://musingswithkomilla.blogspot.c
o.uk/
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