Introduction

Question 1

Perfect labor markets

Answer 1

Max utility by choosing:
-work or not to work (extensive margin)
-how long to work (hours)? (intensive margin)
-where to work? (occupational choice, employer, migration…)
-which skills to acquire? (education)
-how much effort to put into work? (on job, job search…)
-when to retire? (lifetime income)

Workers spend more time in activities yielding a higher payoff
Labour supply curve is downward sloping in wages

Question 2

Equilibrium in perfect labour markets

Answer 2

Aggregate total supply is maximised at the equilibrium (irrespective of its distribution between workers and employers)

Total surplus of marginal worker and job is zero:
-means marginal worker is indifferent between working and not working - no welfare loss
-for maginal employer, losing an employee is no big deal - no welfare loss

Question 3

Reservation wage

Answer 3

minimum wage that employee is willing to accept to start working

Question 4

Unemployment

Answer 4

no involuntary unemployment in perfect labour markets
For some it is optimal to work, for others it is optimal not to work - does not count as involuntary unemployment - it is the workers’ choice given their wage

Question 5

Source of imperfections (in imperfect labour markets)

Answer 5

Frictions
Information assymetries
Market power
Policies

Question 6

Frictions

Answer 6

Switching jobs is costly (search effort) —> grants employers some labour power (because employees do not want to be replaced)

Job destruction/ job loss
Labour market policies - job protection, legislation, unemployment benefits…

Question 7

Information asymmetries

Answer 7

Firms’, profits, productivity…
Workers skill, characteristics, effort…
Can lead to statistical discrimination

Question 8

Market power

Answer 8

Licensing, labour unions, patents, bargaining,…

Question 9

Policies

Answer 9

Licensing, job protection, social security (beneifts and taxes)

Question 10

Imperfect labour markets

Answer 10

Either the marginal employer or the marginal worker enjoys a surplus:
-losing/ destroying a job always involves welfare loss
-Aggregate total surplus is not maximised while the marginal surplus is positive - inefficiency

Wages do not equate the value of the job to the reservation wage - but decide how the surplus (rents) are split between employers and workers

Question 11

Institutions

Answer 11

Systems of laws, norms or conventions resulting from a collective choice and providing constraints or incentives altering individual choices over labour supply and pay

Introduce wedge between value of jobs for employers and workers’ reservation wage

Relative to perfect competition - move the market away from attainable welfare

Question 12

Why do people vote for these institutions?

Answer 12

Efficiency
Equity
Policy failures

Question 13

Efficiency

Answer 13

Labour markets are never perfect - institutions can help achieve the second best option

Question 14

Equity

Answer 14

Market outcomes might be undesirable as highly unequal - institutions can help redistribute market surplus in a more equitable way

Question 15

Policy failures

Answer 15

Certain groups manage to implement institutions maximizing their own benefits at the expense of everyone else

Question 16

Types of labour market institutions

Answer 16

1) Acting on prices (wage):
-taxes on labour
-minimum wages
-trade unions
-unemployment benefits (wage floor)

2) Acting on quantities (labour supply/ demand):
-Regulations on working hours
-Regulations on self-employment
-Immigrations policies
-Education policies
-Anti-discrimination policies
-Family policies
-Employment protection legislation