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Labour economics
This document provides an introduction to labour economics. It discusses key concepts such as labour demand and supply, and how they interact in the labour market to determine equilibrium wage and quantity. Labour demand comes from firms and is affected by the wage rate, capital costs and output prices. Firms will maximize profits by hiring workers up to the point where marginal revenue product equals marginal factor cost. Labour supply depends on wages as well as income and substitution effects. The interaction of labour demand and supply curves results in the equilibrium wage and employment level in the market. Monopsony and factors like unions, minimum wages can impact the wage-employment relationship. Unemployment may occur if demand shifts leftward resulting in a surplus of workers.
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Labour economics
- 1.
- 2. Introduction • Labour economicsis the study of the market for labour services in the economy • The actors in the labour market includes; Households Firms Government
- 3. • The interactionsbetween these players in the labour market determines; I. equilibrium price - the wage that workers receive II. equilibrium quantity - the amount of work that the people do in the economy
- 4. Labour Demand • Labourdemand is the need for employees and workers in particular job in given time • The demand for labour comes from the employees Factors affect for labour demand I. Wage rate II. Unit cost of capital III. Selling price of output
- 5. Profit maximization • Economicprofit = TR - TC • By adding a worker; TR TC • A firm will add more labor if; TR > TC
- 6. Marginal Revenue Production MPRis the additional revenue that results from the use of an additional unit of labor MRP = TR L
- 7. Assumptions of marginalrevenue productivity 1. Workers are homogeneous in terms of their ability and productivity 2. Trade unions have no impact on the available labour supply 3. Firms have no buying power when demanding workers 4. The physical productivity of each worker can be accurately and objectively measured 5. Workers can be hired at a constant wage rate
- 8. Marginal Factor Cost(MFC) • MFC is the additional cost associated with the use of an additional unit of labor MFC = TC L
- 9. MRP, MFC &Profit Maximization • A firm will use more labor if MRP > MFC • A firm will use less labor if MRP < MFC • A firm maximizes its profit at the level of labor use at which MRP = MFC
- 10. Labour Output (Q) MP price($) MRP ($) MFC ($) Hire or not 0 0 - 10 - 1 5 5 10 50 20 Hire 2 12 7 10 70 20 Hire 3 16 4 10 40 20 Hire 4 17 1 10 10 20 Not hire 5 15 -2 -- -- --
- 11. Derivation of MRPcurve MRP = TR L MRP = MR MP MR = TR MP = Q Q L MRP = TR = TR Q L Q L
- 12. Derivation of MRPcurve cont’ – MP curve MP Quantity of Labor
- 13. Derivation of MRPcurve cont’ – MR curve • Perfect Competition P = MR = AR MR Quantity of output
- 14. MRP curve MRP Quantity ofLabor MRP curve =Demand Curve
- 15. Law of Diminishingof Returns • Every additional unit of labor will yield a higher MR for a while • Eventually MR starts to increase at a decreasing rate • Then MRP = MFC • Finally MR decreases
- 16. Derivation of MFCcurve • In a perfectly competitive labor market, MFC = w RealWageRate Units of labour MFC = w
- 17. Short run LabourDemand Curve in a Perfectly Competitive Market RealWageRate L3L2L1 W Units of labour MFC = w
- 18. RealWageRate Units of labour MFC1 L3L2L1 MFC2 MFC3 W2 W1 W3 Shortrun Labour Demand Curve in a Perfectly Competitive Market
- 19. W2 Demand for LabourRealWageRate W3 W1 Unitsof labour L3L2L1 MRP curve =Demand Curve
- 20. RealWageRate Units of labour Shiftsin demand curve E0 W0 L0 D0 D1 D3 L2 L1 S W1 W2
- 21. Rightward shift ofdemand curve due to; Increase in labour productivity Higher demand for the final product Lower price of a substitute input (capital) Leftward shift of demand curve due to; Decrease in labour productivity Lower demand for the final product Higher price of a substitute input (capital)
- 22. Labour Supply • Supplyof labor is the total hours (adjusted for intensity of effort) that workers wish to work at a given real wage rate
- 23. Basic concepts: measuresand definitions • Employed (E) : if a person works for pay for more than one hour per week • Unemployed (U) : if a person must have used at least one active method to look for a job in the last four weeks or the person must be willing to start a job and able to take one up within two weeks if offered one
- 24. • Labour Force(LF) = employed(active) + Unemployed(active) • Individuals who are neither employed or unemployed called inactive or out of the labour force (NLF) • These include pensioners, students and those who serve in the military in the countries with compulsory draft • Working age population (P) = LF + NLF
- 25. • Unemployment rate= the ratio between the total number of unemployed and those in the labour force ur = U/LF • Labour market performance; lfpr = LF/P • Employment to population rate = ratio of total employment to total working age population epr = E/P
- 26. Supply Curve RealWageRate Units oflabour W3 W2 W1 L1 L2 L3 Supply Curve
- 27. Factor affecting onlabour supply Workers decide whether, to work or not to wor & time of work It depends on the income & leisure There are two effects on labour supply 1.Substitution effect 2.Income effect
- 28. Substitution effect IC2 IC1 No ofleisure hrs per period of time Income per period of time Y1 Y2 A B X0 YA YB XA XB
- 29. Income Effect IC2 IC1 No ofleisure hrs per period of time Income per period of time Y1 Y2 A B X YA YC YB XA XB XC C
- 30. • Higher wagesattract labours to work more • Because it makes more money • As the wage rate rises, there are two things going on… 1. Substitution effect Worker will offer himself for more hours The price of 'leisure' has become relatively expensive So the worker will substitute 'leisure' hours for 'work' hours It always have a positive relationship
- 31. 2. Income effect Higher wages lead to an increment of the individual's real income Some people continue to earn high amount of money But majority wants to spend more leisure time since they have enough money Demand for leisure starts to rise As a result, demand for working hours decreases
- 32. Backward bending supplycurve of labour RealWageRate W W 1 W2 XX1 X2 Substitution effect Income effect Units of labour
- 33. Market Equilibrium RealWageRate Units oflabour W0 L0 E0 Supply curve Demand curve
- 34. Monopsony • A labormarket in which there is only one firm demanding labor is called a monopsony • The single firm in the market is referred to as the monopsonist
- 35. Supply curve facinga monopsonist RealWageRate Units of labour MFC S A monopsony firm faces the entire market labor supply curve MFC > w
- 36. Wage & Employment determinationunder a monopsony RealWageRate MFC S MRP W0 Units of labour L0
- 37. Trade union ina monopsony RealWageRate Units of labour W0 L0 W1 L1 S MRP MFC
- 38. Trade union ina monopsony RealWageRate Units of labour W0 L0 W1 L1 MFC S MRP
- 39. Minimum wage ina monopsony RealWageRate Units of labour W0 L0 W1 L1 MFC S MRP
- 40. Unemployment RealWageRate Units of labour W0 L0 E0 S D1 W1 LS D2 E1 L D Surplus of workers (unemployment)
- 41. W0 L0 RealWageRate Units of labour W2 Ls D1 D2 E0 S LabourShortage L D Shortage L D
- 42. Group Members D.N.Nanayakkara UWU/EAG/11/0028 K.H.M.A.P. Kariyawasam UWU/EAG/11/0006
- 43.
Editor's Notes
- #24 A person who is not employed is not necessarily unemployed.