Lecture 7- Labour market and wage determination Flashcards
What is the competitive factor market?
They have many small buyers and sellers who act as price takers.
Where inputs ( factors) are supplied by sellers and purchased by firms to produce outputs.
The equilibrium is determined by the intersection of the factor and supply and factor demand curves
What are examples of factors in a competitive factor market?
Labour, land and capital
What is the value of marginal output (VMP)/ marginal revenue product of labour (MRPL)?
The additional revenue a firm earns from hiring one extra worker.
What is the hiring rule for perfectly competitive firms in a competitive factor market?
To choose that amount of labour for which wage rate if equal to VMP.
Explain the short run factor demand for labour.
In the short run:
1. The firms capital (K) is fixed
2. The firm can vary its labour input (L) to produce output (q).
The firms decision to hire one more worker depends upon the marginal revenue product of labour compared with the wage rate.
Give the formula for marginal revenue product of labour (MRPL)
MRPL= MR * MPL
Where:
MR= marginal revenue (The extra revenue for selling one more unit of output)
MPL= marginal product of labour (The extra output produced when hiring an additional worker.
What is the calculation of MRPL for a firm in a competitive market?
MR = P
Therefore:
MRPL= P * MPL
As the firm is a price taker in the output market.
This can also be called the value of the marginal product of labour (VMPL) because it represents the market value of the additional output produced by one worker.
Where does a firm in the short run factor of demand profit maximise?
Where:
The marginal revenue product of labour is equal to the wage rate.
MRPL = w
What are the consequences if MRPL is greater than the wage rate?
Hiring more workers increases profits because the additional revenue exceeds the additional cost.
What are the consequences if MRPL is less that the wage rate?
Reducing the workforce increases profits because the cost of labour exceeds the revenue generated.
What is long run labour demand and state the key features of it.
The long-run labour of demand curve reflects the quantity of labour a firm would employ when it can adjust all inputs, including both labour and capital, in response in wages.
Input substitution
Flatter Long-run demand curve due to the flexibility in adjusting capital and labour
Explain input substitution as a key feature of the Long-run demand curve for labour.
In the long-run, firms can substitute between labour and capital.
This substitution makes the long run labour demand more elastic than the short run because firms have more options to adjust their input mix.
Explain the flatter long run demand curve.
The flatter LRDC is because of the flexibility in adjusting capital and labour.
A small wage reduction leads to a larger increase in labour demand in the long run compared to the short run.
What is the market demand for labour?
The total quantity of labour that all firms in a particular market are willing to hire at different wage rates, holding other factors constant.
How is the market demand for labour found?
By summing up the individual labour demand of all firms in the market.
What is derived demand?
The demand for labour that arises from the demand for goods and services that labour helps to produce.
Explain the demand curve in the market demand for labour
It has derived demand and a downward sloping demand curve, showing an inverse relationship between wage rate and the quantity of labour demanded.
What factors do the responsiveness of labour demand to changes in wage depend on?
Availability of substitutes
Elasticity of demand for that firms output
Proportions of labour costs in total production costs.
How do you derive the market demand for labour?
Each firms demand for labour is based on the marginal product of labour (MRPL)
Therefore, find the marginal revenue product of labour by
MRPL= P * MPL
p= Market price of the output
MPL= Marginal product of labour
Profit maximising firms hire labour until MRPL = w
Therefore,
The market demand for labour at any given wage is the horizontal summation of the labour demand curves of all individual firms.
What are the 4 factors affecting market demand for labour?
Output price
Productivity
Cost of substitutes
Number of firms
Explain output price as a factor affecting market demand for labour
A rise in the price of the final product increases the MRPL, shifting the labour demand curve outwards.
Explain productivity as a factor affecting market demand for labour
Improvements in worker productivity, through training or improved technology increases the MPL, shifting the demand curve for labour outwards.
Explain how firms substitute between labour and other factors as a factor affecting market demand for labour.
If the cost of capital or other inputs rise, firms may substitute capital for those inputs, increasing labour demand.
Explain how the number of firms affects the market demand for labour
An increase in the number of firms in the market increases total labour demand, shifting the market demand curve outwards.
Explain the importance between leisure and income in the labour supply.
The choice for people is between income and leisure.
The wage rate determines how much income is earned per hour of labour.
How do you calculate total income?
Y= w * L+V
V= non labour income (benefits, inheritance)
L- leisure activities
w- wage rate
What are substitution effects in relation to labour supply?
A higher wage rate increases the opportunity cost of leisure.
Individuals may substitute leisure for labour, working more hours to take advantage of higher earnings.
What is the income effect in relation to labour supply?
A higher wage raises overall income, potentially reducing the need to work more hours.
Explain the Backward bending supply curve in relation to labour supply.
At a low wage level the substitution effect dominates.
As wage rises, the opportunity cost of leisure increases, so individuals are incentivised to work more house to earn additional income. This results in an increased labour supply with the higher wage.
However at a higher wage level: income effect dominates:
As wage increases and continues to rise, individuals achieve higher levels of income and may begin to value leisure more than additional income.
This results in the labour supply decreasing as the wage rate rises further.
What is a monopsony?
A market with just one buyer.
Government military equipment/ NHS
What are some key features of a monopsony?
Monopsonist firm controls the labour market because it has the market power to set the market wage rate.
The firms Marginal cost of labour (MCL) exceeds the wage rate for all levels of labour employed.
The optimum level of employment for a monopsonist is the level which marginal factor costs and the demand for labour are equal.
What are total factor costs?
The total expenses incurred by a firm to employ all the factors of production—such as labor, capital, land, and entrepreneurship—to produce goods or services.
What are marginal factor costs?
The amount by which total factor costs changes with the employment of an additional unit of input.
Explain the comparison between monopsony markets and competitive markets in labour markets.
The monopsony hires fewer workers and pays lower wages than the competitive market
This creates a deadweight loss to society.
What is discrimination in the labour market?
Wage differentials or unequal employment opportunities for workers.
Where does discrimination in the labour market arise?
From biases or preferences held by employers, customers or other employers.
These lead to inequality and distort market efficiency.
What are the 3 types of discrimination in the labour market?
Customer discrimination
Employer discrimination
Employee-taste discrimination
Explain customer discrimination in the labour market.
Customers may not want to interact with employers from certain demographci or minority groups.
Employers, seeking to maximise profits, might respond by hiring fewer workers from these groups or by paying them less.
The firm incurs a cost by restricting its pool of potential employees which would lower overall productivity.
Explain employer discrimination in the labour market.
Employers hold arbitary preferences for one group of workers over another, unrelated to productivity.
Employers may pay different wages to equally productive workers based on characteristics such as gender, race or ethnicity.
Employers face higher costs by not hiring the most qualified or cost effective employees.
Explain employee-taste discrimination in the labour market.
Employees are unwilling to work alongside people from certain groups.
Employers may prevent hiring minority workers or segregate workplaces to prevent conflicts.
This can limit workplace segmentation and limit diversity, reducing opportunities for skill-sharing and innovation.
