The Labour Market Flashcards
What is a production technique?
Technique to minimise cost of particular output by knowing how much capital and labour to use -> by considering each output, constructs a total cost curve
What is the substitution and output effect when wage rises?
w rises
-> firms hire less L and more K (substituting more L with K) -> substitution effect (in LR where K can be adjusted as it’s a variable)
-> assuming K not as productive as L as in -> K & L are gross substitutes and power of L is greater than K, if 1 less labour requires 3 capital to cover labour productivity -> overall output falls bc firms hired less L -> output effect
What is the marginal product of labour?
MP_L shows the total output that can be produced when hiring the last unit of labour
What is the marginal value product of labour?
MVP_L is the total revenue the last unit of labour employed can bring to the firm by selling the outputs made by the labour
Output price x Marginal physical product
If price-taker (PC): MC of labour = wage rate
real wage = marginal physical product of labour
What is the minimum profit-maximising condition to hire labour?
Hiring labour until marginal cost of labour (MC_L) = marginal revenue product of labour (MRP_L)
What is the profit-maximising condition to hire labour?
MRP_L >= w
MP_L x P >= w
MP_L >= w / P
What’s the profit maximising condition to hire labour if the firm is a PC or monopoly?
- Perfect Competition:
Marginal Revenue Product of Labour = nominal wage
Marginal Product of Labour x Price (selling price per unit of output) = w
MP_L = w / P - Monopoly:
MRP_L = w
MP_L x Marginal Revenue = w
MP_L = w / P
Monopoly more concerned with MR because MR rises 2x fasster than price which is found on demand curve
What’s the short run and long run derivation of demand for labour?
when wages fall
SR: wage fall, hire more labour, L rises from A to B (L0 to L1) on same labour demand graph (MPL(K bar)) where K is fixed
LR: K becomes a variable, add more K to the same L -> labour productivity rises -> labour demand graph shifts out to MPL(K1) -> wage fall, hire more labour -> L rises from A to C (L0 to L2) on new labour demand graph (MPL(K1)) -> more K and L -> L overall productivity rises
Observation: L demand steeper in SR compared to LR L demand
Micro 3: when elasticity rises -> demand: flatter
Derive: SR wage (price of 1L) elasticity of demand < LR wage elasticity of demand
What is a monopsony?
A sole buyer of labour (employer) in the market
All labours will compete to be employed by monopsonist -> only labour willing to accept lower wages get hired
Monopsony able to pay lower wage under competition
What are the wages received by a worker under a competitive market and monopsony?
Competitive market: wages = Marginal Value Product of Labour
Monopsony: wages < MVP_L
What are the implications of minimum wage imposement?
Monopsony: increase employment from Lm to L1 and raise wage from $4 to $5 (min. wage imposed)
Competition: increase employment from Lm to L2 but wages fall to $5 (min. wage imposed)
Imposition of minimum wage is good because it raises employment regardless of whether there’s monopsony or competitive firms
What’s the substitution and income effect for men and women?
Substitution effect: rise in hourly real wage tends to increase supply of hours worked to earn more income by substituting away leisure hours
Income effect: rise in hourly real wage makes workers real income increase -> feel richer -> reduce supply of hours worked bc work is inferior (nobody likes to work)
Men: SE = IE (2 effects cancel each other out) -> almost vertical labour supply curve
Women: SE > IE -> rising labour supply curve
Is labour an economic good?
Firm/producer POV: yes because producers see labour as…
1. desirable because is an input to produce output that producer sells to make profit
2. limited in quantities bc each worker only has 24 labour hours per day
Workers POV: no because workers see labour as…
1. undersirable bc no one likes to work
2. limited in quantities bc each worker only has 24 hours per day
Bc everyone has different view on labour as an economic good -> labour is NOT an economic good
Is leisure an economic good?
Producers and workers see leisure as
1. desirable because everyone loves to relax
2. limited in quantities bc everyone can only have 24 hours of leisure per day
Leisure IS an economic good
What is the relationship between leisure and labour (efort/labour hours)?
Gross substitutes
Labour: residual of leisure bc if H: 24 hours a day, l: leisure hours and h: effort/labour hours -> H = l + h -> h = H - l (labour is the residual of leisure)
