© 2002 McGraw-Hill Ryerson Ltd.Chapter 7-1 Chapter Seven Wages and Employment in a Single Labour...
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Transcript of © 2002 McGraw-Hill Ryerson Ltd.Chapter 7-1 Chapter Seven Wages and Employment in a Single Labour...
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-1
Chapter Seven
Wages and Employment in a Single Labour
Market
Created by: Erica Morrill, M.Ed Fanshawe College
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-2
Chapter FocusEquilibrium in a single labour market Imperfect competitionPayroll taxesMonopsonyMinimum wage
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-3
Competitive Firm’s Demand
Assumptions : homogeneous type of labour price taker and wage taker
Supply is perfectly elastic (horizontal) at the wage rate
Firms can employ all the labour they need at the market wage rate
Market wage rate is set by the aggregate labour market
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-4
Figure 7.1 Competitive Product and Labour Markets
W
N
Wc
W
N
Wc
W
N
Wc
S
W0
W0
N01
N1 N02 N2 Ni
D=Di
S1S2
Firm 1 Firm 2 Aggregate Labour Market
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-5
Short-Run A firm may have to raise its wages to
attract additional workers dynamic monopsony
Short-run labour supply curve is upward sloping
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-6
Figure 7.2 The Labour Market in the Short Run and Long Run
Labour0
Wage
D
SS
S1
S’SSupply of workers increase depressing the high short run wage
D’
in demand leads to higher wages
WS
Wc
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-7
Short-run and Long-run Labour SupplyLong run
Temporary wage increases above norm are consistent with the firm being a competitive buyer of labour
Short-run wage increases can be a market signal ensures that market forces operate in the
longer run
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-8
Equilibrium in a Competitive MarketMarket-clearing model (neoclassical)
for markets with homogeneous workers and homogeneous jobs wages will be equalized across workers
absences of “involuntary unemployment” no queues for jobs or rationing of jobs
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-9
In Reality…. The market-clearing model is not entirely true
Wages do not adjust quickly to clear the market Involuntary unemployment is frequent Large wage differentials exist across
homogeneous workers and jobs.
However, it still serves as a useful approximation of market theory
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-10
Imperfect CompetitionMonopoly
is the industryEffects of hiring more labour
marginal physical product of labour falls marginal revenue falls Sells more output only by lowering the
product price
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-11
Figure 7.3 Monopolist Versus Competitive Demand for Labour
NNC*0
W*
NM*
DM = MPPN X MRQ= MRPN
DC = MPPN X PQ= VMPN
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-12
Product Market Structure and Departure from Market Wages
Monopolist earns higher profits and labour may be
able to appropriate some of these profits may be less cost conscious and may yield
to wage demands sensitive to public image pay higher wages
to buy good image large firms pay higher wages
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-13
Oligopoly in the Product Market Few firms Similar products Action of one firm affects the others May depart from Market wages because;
earn above normal profits which may be captured by workers
larger firms and may pay above-market wages for reasons related to size
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-14
Monopolistic Competition in the Product MarketMany small firms with differentiated
products giving the firm some discretion in price setting competitive in the labour market paying market wages no economic rents (high profits yielding
higher wages) no large size factors leading to higher
wages
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-15
Working with Supply and Demand
Simulating the effects of a policy change on equilibrium
Incidence of a unit payroll tax
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-16
Unit Payroll TaxTax levied on employersProportional to the firm’s payroll
CPP/QPP Workers’ compensation unemployment insurance health insurance
Often considered “job killers”
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-17
Figure 7.5 The Effect of a Payroll Tax on Employment and Wages
N0
W1
W0
A
T
NS
ND(W)
B
N1
ND(W+T)
C
D
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-18
Characteristics of a MonopsonyLarge relative to the size of the labour
market Influences wageRaises wages to attract labour Will not lose all of its work force if
decreases wagesUpward-sloping labour supply schedule
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-19
MonopsonyAverage cost is the wage rate Marginal cost is the new wage plus the
cost of paying the higher wage to existing workers
Marginal cost is higher than average cost
Profit Maximization when MC=VMP
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-20
Figure 7.6 Monopsony
Wage
0
VMPN=MPPnPQ
S=AC
MC
VM
NM
WMSM
WC
NC
S0
VMPM
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-21
Implications of a MonopsonyEmployment is lower than a competitive
situationRestricts employment because hiring
additional labour is costly Higher wages must be paid to
intramarginal workers
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-22
Characteristics of Monopsonists
Some inelasticity of supply of labour Most firms have an element of monopsony power in
short run Long run costly problems of recruitment, turnover
and morale issues Examples of monopsony in long run:
would be a one industry town in an isolated region if workers have specialized skills that are useful mainly in a
specific firm
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-23
Perfect Monopsonistic Wage Differentiation
Existing workers receive wages greater when a monopsony raises the wage rate seller’s surplus or economic rent
Monopsonist may try to retain some of this seller’s surplus by differentiating it’s work force
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-24
Perfect Monopsonistic Wage DifferentiationSupply schedule equal to the average
cost and marginal cost Does not have to pay existing workers
any more than their reservation wageMonopsonists may try to conceal higher
wages or use nonwage mechanisms to attract additional labour
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-25
Imperfect Monopsonistic Wage DifferentiationMonopsonists differentiate between
groups of workers different types of labour can be separated there are different supply elasticities
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-26
Minimum Wage Legislation: Impact on Competitive Labour Market
Adverse employment effect Firms employ less labour at a higher cost Higher wage encourages more people to
seek work Magnitude of adverse employment effect
depends on the elasticity of the demand for labour
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-27
Minimum Wage: Offsetting FactorsLabour could increase…
if there is exogenous increase in demand for output
if there is an increase in the demand for labour substitutes
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-28
Minimum Wage Legislation: Impact on Monopsony
minimum wage (or other form of price fixing) may increase employment
reduces monopsony profits depends on the extent to which
monopsony is associated with workers who are paid below minimum wage
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-29
Figure 7.9 Monopsony and Minimum Wage
MC
S=AC
VMP
N1N0
MC1
VMP0
W1
W0
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-30
Minimum Wage Reduces employment in competitive labour
markets Increases employment in monopsonistic
labour market Theory
Short-run effects are small Disemployment effects are higher in long-run
© 2002 McGraw-Hill Ryerson Ltd. Chapter 7-31
End of Chapter Seven