Chapter 15 - Labour Markets Flashcards
Is Labour more elastic or inelastic in the long run?
In the LR, labour = more elastic
- this is because capital is variable in the long run therefore firms can repond more through changes in capital
Value of Marginal Product (VMP)
definition = the value, at current market price, of the extra output produced by an additional unit of input
VMP(L) = P * MP (L)
What point should perfectly competitive firms hire till?
Hiring rule is to employ extra labour until W = MRP(L)
W = MRPL = MR MPL = P MPL
thus W/P = MPL
Marginal Revenue Product (MRP)
definition = the amount by which total revenue increases with the employment of an additional unit of output
MRP (L) = ∆ TR/ ∆ L
Difference between VMP and MRP
They both represent the addition to TR from additional unit of labour
MRP = takes into account the sale. of additional output requires a cut in price for imperfect competition
VMP = values the extra output at the existing product price (unaffected by variations in the PC’s output)
How does labour employment change with W and MRP(l) relationship?
If W< MRP then firms can hire more workers
If W > MRP then the firm would do best to cut back on labour
Demand for Labour (PC and Monopolist)
For PC: SR demand for labour is downward sloping due to diminishing returns
- the more the firm hires labour, lower MRP and VMP
For Monopolist: also downward sloping demand curve, same reason.
- MR curve is also downward sloping (difference w/ PC)
- Monopolist’s LR demand for labour will be more elastic than his SR demand
Giffen Good (definition)
Giffen good is typically a strongly inferior good for which there are attractive but higher priced substitutes
Compensating Wage Differentials
Where unpleasant jobs are paid at a premium to compensate for the unpleasantness
- Risk takers = higher wage
- Risk averted = lower wage
Both costs of safety and benefits are viewed differently by different people
- The right job for given worker depends on how he feels about the trade-off between risk and material goods
- doesn’t mean these jobs are the best paid, just means ceteris paribus (holding education, skills and job requirements constant) the more dangerous and unpleasant jobs will pay more
Monopsony (definition)
A firm that is the sole buyer of labour in its market
- L and W (hires) where MR = MFC
Costs for Monopsony
- AFC, TFC, MFC
AFC: supply curve for an input
- tells the average payment per worker necessary to achieve any given level of employment
- upward sloping
TFC: Total cost of a given level of employment
- The product of the employment level of an input and its average factor cost
MFC: the amount by which total factor cost changes with the employment of an additional unit of input
- MFC = ∆TFC/∆L
- MFC is always twice as steep as AFC
How do firms use MRPL as an indicator for employment?
If MRPL is negative with an additional unit of labour firms will not hire, no matter what the wage is, as this would decrease profits
Statistical Discrimination (definition and main points)
Using information on the individual’s group membership as a signal on their productivity.
- Firms are unable to obtain perfect information about an individual’s productivity
- Theory of competitive labour markets tells us that workers will be paid the vapes of their respective MP (but not easy to observe)
- on avg uni graduate earns > high school graduate
Example question of Monposonist (sole buyer) setting wage rate and hiring labour… steps
Hires where MRPL = MFC
If given Demand Curve, Supply Curve, and SR PF:
- MR is twice as steep as demand curve to can derive that
- MFC is twice as steep as supply curve can also derive that
- Using PF can find MPL
MRPL = MR * MPL
- remember to substitute production function into MRPL to get it in terms of L (and not Q)
then equate MRPL to MFC to get L and W values
Union Question example
1) Without a union
Labour demand = Labour supply
2) Wage rate in a union where objective is maximising economic rent!
(this is equivalent to maximising profits so MR = MC)
- use Ld curve to find MR, rearrange in terms of W = and is twice as steep
- For MC, rearrange Ls in terms of w
- Equate MR = MC to find L and W
3) Wage rate in a union that maximises aggregate wages of all workers hired
(this is equivalent to maximising TR, MR = 0)
- Aggregate wages = w*L
- use Ld rearranged in terms of W and multiply by L
- To maximise take derivative and equate to 0
- input L value into w (Ld rearranged) again to find W value
