3. Labour Demand Flashcards
How is the initial production function a very restricted view?
It doesn’t include: •many factors •many outputs •different types of workers •different wages •different quality of product
Profit max equation
Pi= pq- wE- rK
Short run definition
A period during which the firm can’t change K and there are a fixed number of firms
MPE
Marginal product of labour
VMPE
Value marginal product of labour (in monetary terms)
VAPE
Value average product of labour
Where does the firm employ labour?
Up to the point where VMPE=W and where VMPE is declining
Short run elasticity of demand equation
dSR= (change in E)/(change in W) x W/E
When is short run elasticity of labour demand inelastic and elastic?
- inelastic if |dSR|<1
* elastic if |dSR|>1
Long run
Where firms can vary capital and employment. It is also possible that other firms can enter the market
Isoquant properties
- Downward sloping
- Don’t intersect
- Higher isoquants have higher q
- Convex to the origin
What is the slope of an isoquant?
(Change in K)/(Change in E) = -MPE/MPK
What is the absolute value of an isoquant slope called?
The marginal technical rate of substitution
Describe the MRS between E and K
They are diminishing since they are convex
Equation of an isocost
K= c/r- WE/r
What is true with an interior solution for cost minimisation?
Slope of isoquant (MPE/MPK)= slope of isocost (W/r)
Does cost minimisation imply profit maximisation?
No, profit max requires W= p x MPE and r= p x MPK
What is the impact of wage reduction?
- the scale effect causes the firm to use more labour and capital
- the substitution effect causes the firm to use more labour
What is the impact of increasing wages?
- reduces labour
* can increase or decrease capital depending on the scale and substitution effect
Why is the elasticity of demand hard to estimate?
•we can’t just look at the relationship between wages and employment because they themselves are outcomes of supply and demand- there are many other unobserved variables
What does the magnitude of the substitution depend on?
The curvature of the isoquant
Equation for elasticity of substitution
Elasticity = ((%change in k)/L) /((%change in W)/r)
When is the elasticity of substitution positive?
Always because if w/r increase then K/L can’t fall
Values of elasticity of substitution for perfect substitutes and perfect compliments
- perfect substitutes ó= infinity
* perfect compliments ó=0
Labour demand is more elastic the greater…
- the elasticity of substitution
- the elasticity of demand for output
- labours share in total costs
- the supply elasticity of other factors of production
Predictions about unions
- they may resist new technology which allows greater substitution of capital and labour
- may resist competition in product markets
- unions that organise small groups of particular occupation may be more successful
- unions may attempt to increase the price of other inputs
How much of each input will a profit maximising firm use?
They will use each input up to the point where VMPi is equal to the price of that input
Equation for cross elasticity of demand
% change in xi/ % change in wj
Capital skill complementary hypothesis
- unskilled Labour and capital are substitutes
* skilled labour and capital are compliments
Relationship between technology and labour
- long term evidence is that technology doesn’t reduce employment
- technology substitutes and compliments labour
- there are short term effects with winners and losers
