7 - Labour Market And Wage Determination Flashcards
What’s value of marginal product (VMP)
The value, at the current market price of the extra output produced by an additional unit of input (labour)
- How much value each unit of labour adds
E.g. 1 labour makes 20 units and sells each unit for £20. He makes £400 which is his value added
What’s the hiring rule for perfectly competitive firms
Keep hiring until, wage rate is equal to Value of marginal product (VMP)
- Marginal expense of labour is equal to marginal revenue of labour to profit maximise
VMPL formula
P x MPL = w
- Price of Output X Additional units of output produced by additional labour
- When VMPL > W no equilibrium means what
- When VMPL < W not equilibrium means what
- When VMP of Labour is greater than Wage then they add more value than they cost (Hire labour)
- When VMP of Labour is less than Wage then unit of labour adds less value than they cost (Fire labour)
In the short run what will happen to marginal product of labour, if you hire more labour
Marginal product of labour (MPL) will DECLINE in the short run if you hire more labour, as capital is fixed (diminishing returns)
- One input (capital or labour) is fixed in the short run
In the long-run what can firms do
Vary all its inputs (I.e. labour and capital)
- One of them does not have to be fixed like in the short run
What’s the main factor effecting labour demand
Elasticity
Is labour demand elastic or inelastic in the long run
Labour Demand is:
- Inelastic in the short run
- Elastic in the long run
Why is labour demand elastic in the long run
- This is because firms can substitute the services for labour for those of other inputs (capital)
- Both inputs are flexible in the long run
- If wage decreases, in the long-run, firms can switch from using capital to labour, as it’ll be cheaper for their production
- Me responsive to change in cost (wage)
Why is demand for labour inelastic in the short run
- It cannot substitute the services for labour for those of other inputs (capital) as capital is fixed
- Therefore, will have to remain hiring labour
- Less responsive to change in cost (wage)
What is price level in the labour market
Price level is NOT exogenous in the labour market, therefore VMPL depends on the output prices
What happens when wage decreases (graph in book)
- Hire more labour as its cheap, produce more output
- Price in the output market decrease as well
- VMPL curve shifts inwards
Imperfect competition (monopoly, monopolistic Comp, oligopoly)
What is marginal revenue product (MRP)
Amount by which total revenue increases with the employment of an additional unit of input
What 2 things are equal at the quantity of which imperfect competition markets hire to
When wage rate is equal to Marginal Revenue Product (MRP)
- Because we assume labour market is still perfectly competitive which is why it equals wage rate
For a firm in a non-competitive market (monopoly, monopolistic Comp, oligopoly) Marginal revenue product (MRP) diminishes as the quantity of labour employed increases, for 2 reasons:
1) Diminishing marginal product of labour
2) Decreasing marginal revenue
Why does Marginal revenue curve lie below demand curve
Firm has to lower the price to sell additional units of output
- In this case price does not equal marginal revenue
Formula for Marginal revenue product of labour (MRPL)
MR x MPL = wage rate
Different between Value of marginal product (VMP) and Marginal revenue product (MRP)
VMP and MRP mean similar things, however:
- VMP assumes perfect competition with perfectly competitive labour market.
- MRP assumes imperfect competition with perfectly competitive labour market
Labour supply
What are the 2 goods people have a choice between
- Income (Work) and leisure (play, sleep, eating, activities)
What’s the standard consumer choice problem
Individual is assumed to have preferences over the two goods that can be summarised in form of an indifference map
How can we model this decision-making (work or not to work)
- Indifference curve analysis
- Assume 7 days of 24 hours available
- Assume labour is homogenous and waged
What’s the substitution effect and income effect
- Substitution effect = As wages rise, a person works more and substitutes work for leisure as the opportunity cost of leisure rises = Mainly younger people
- Income effect = As wages rise, a person works less as their income has risen thus allowing them to spend more time on leisure = Mainly older people
What’s the main supply curve that shows the decision change when wage rate changes
Backward bending supply curve
- The first bit of the bend (bottom part) is substitution effect as they work more
- The second part (top part) is income effect as they work less
Why’s substitution effect always positive
Because it encourages people to work more
- Income effect can be positive or negative
Is market supply curve of labour upwards or downwards sloping and why
Upwards sloping because when wage increases in one category (industry), this doesn’t just change numbers of hours worked in that category (industry), but provides incentive to change number of hours in another category (industry)
- E.g. Price (wage) of hairdressers increases, provides incentive for people to train and change into that industry
What’s a monopsony
A market with just one buyer
- Single powerful buyer of a particular type of labour; for example the main buyer of the labour of doctor’s and nurses is the NHS
Why do monopsonist firms control labour market
As it has the market power to set the market wage rate
In a monopsony what does the marginal cost of labour (MCL) exceed
Marginal cost of labour exceeds the average cost of labour (the wage rate) for all levels of labour employed
What is the optimal level of employment for a monopsonist
Level which MFC and demand for labour are equal
What is Average factor cost (AFC)
Another name for an input supply curve
What is Total factor cost (TFC)
The product of the employment level of an input and its average factor cost.
- Number of employees x AFC
What is marginal factor cost (MFC)
Amount by which total factor cost changes with the employment of an additional unit of input
What do monopsonies have the power to do
They have the power to charge less and employ less because they are the single buyer of that input
What’s non-market discrimination
Different wages across various population groups - effects lower productivity before job applicants even contact the employer
What’s customer discrimination
The firms customers don’t wish to deal with minority employees
What’s employer discrimination
Wage differentials that arise from an arbitrary preference by the employer for one group of workers over another
What’s employee taste-based discrimination
Employees may not want to interact with people belonging to a certain group/s, which the employer considers during the hiring process
