Lecture 7 - The economics of a common market for labour

Question 1

Explain the assumptions we make for the theory of wage rates

Answer 1

1- Goods are produced by combining labour and capital
2- Workers have identical skills
3- Capital is fixed in amount

Question 2

What is the marginal value productivity of labour (MVP)?

Answer 2

• Marginal value productivity of labour (MVP) is the amount by which output increases with each additional worker
• As more workers are employed, MVP falls because the available machinery etc is shared amongst more workers

Question 3

What wages do workers get paid in a perfectly competitive market?

Answer 3

• In a competitive market, employers hire workers only if they generate enough extra output to cover their cost
• wage rates = MVP of the marginal worker
• all other workers employed create more value than they cost to employ

Question 4

Which workers get paid higher wages?

Answer 4

The higher the MVP of workers, the higher the wages they get paid

Question 5

What are the consequences of forming a common market?

Answer 5

1- Migration of workers to the country with higher wages
2- Convergence of marginal productivity of workers and wage
3- Convergence of wage rates
4- Higher output in total in the CM but less in the country with lower MVP of workers and more in the country with higher MVP of workers
5- Income redistribution within countries

Question 6

Despite MVP, how else may wage rates also converge in a common market?

Answer 6

Free movement of capital:
- Firms relocate from areas with high wage rates to areas with low wage rates so wages fall in one country and rise in the other
Free trade:
- One country may require more labour in their production whereas the other may not so the demand for labour increases in the first country and so wages also increase

Question 7

Explain the workings of the common market for labour in the EU

Answer 7

• The Treaty of Rome commits member states to form a common market (CM), this includes free movement of capital and labour
  Free movement means:
• No restrictions on capital and labour crossing borders within the CM and no discrimination based on nationality of workers within the CM