Covers market equilibrium, equalizing differentials and the factors that affect the occupations we choose.

1. Labour Market
Equilibrium, Equalizing
Differentials &
Occupational Choice
Labour Economics | ECN 4100 | Group 3

2. Presentation focuses on 3 aspects in the
Labour Market
• Market Equilibrium of Labour
Review of demand and supply
Market Equilibrium in perfect and imperfect market
• Equalizing Differentials
• Occupational Choice

3. REVIEW OF DEMAND
• Demand for labour describes the
amount of demand for
labour that an economy or firm
is willing to employ at a given
point in time.
• Movements along the curve are
due to changes in the wage rate.
• Shifts in the curve are caused by:
Demand for output
Technological Advancement

4. REVIEW OF SUPPLY
• Labour supply is the total hours
that workers wish to work at a
given wage rate. Individuals seek
to maximize their well-being by
consuming goods and having
leisure.
• Movements along curve is due
to wages changes
• Shifts in the curve are caused by:
Number of workers

5. LABOUR MARKET EQUILIBRIUM
The labour market is in equilibrium when
supply of labour equals demand for labour;
In equilibrium, all persons who are looking
for work at the going wage can find a job.
Since workers prefer to work when wages
are high, and firms prefer to hire when
wages are low. Labour market equilibrium
“balances out” the conflicting desires of
workers and firms and determines the wage
and employment observed in the labour
market. The wage rate at which demand
equals supply is the market-clearing wage.

6. CHANGES IN LABOUR EQUILIBRIUM
Movements along the demand and supply curves are caused
by changes in the wage rate demanded and supplied by
labour and firms. However these changes in the rate cause
shifts of the demand and supply curves at every wage rate.
Whenever this happens, the original equilibrium rate will no
longer equate demand with supply, and wage will adjust to
bring about a return to equilibrium.

7. CHANGES IN LABOUR EQUILIBRIUM
SHIFTS IN THE DEMAND CURVE
• Demand can either shift inwards or
outwards depending on the determinants.
• The price of the product
• Demand for the product
• Labour productivity- An increase in labour
productivity will shift the demand curve to
the right, and increase employment (Q to
Q1) and increase the wage rate wage rate
(W to W1).

8. CHANGES IN LABOUR EQUILIBRIUM
SHIFTS IN THE SUPPLY CURVE
• Labour Participation rates.
• Demographic factors, such as migration,
and changes in the age structure of the
population.
• Qualifications and skills required.
• Trade Union activities
• The length of education and training.

9. CHANGES IN LABOUR EQUILIBRIUM
SHIFTS IN THE SUPPLY CURVE
An increase in people's preference for work
will shift the supply curve to the right, and
increase employment (Q to Q1) but it would
also reduce the wage rate (W to W1).
Similarly, an increase in the net advantages
of work will shift the supply curve to the
right.

10. CHANGES IN LABOUR EQUILIBRIUM
SHIFTS IN THE SUPPLY CURVE
If a trade union withdraws labour through
a strike, the supply curve of labour will
shift to the left, and the wage rate rises.
However, the level of employment falls,
from Q to Q1.

11. LABOUR EQUILIBRIUM IN THE PERFECTLY
COMPETITIVE MARKET

12. LABOUR EQUILIBRIUM IN THE PERFECTLY
COMPETITIVE MARKET
• In a perfectly competitive labour market, the wage rate is determined
in the industry, rather than by the individual firm, each firm is a wage
taker. This means that the actual equilibrium wage rate will be set in
the market, and the supply of labour to the individual firm is perfectly
elastic at the market rate as shown in graph (a). Under perfect
competition, a labourer will get wage equal to its marginal revenue
productivity in the long run.

13. SHORT RUN LABOUR EQUILIBRIUM
• Supernormal profits: this is where Average Rate of Production is greater than the
prevailing wage rate.

14. SHORT RUN LABOUR EQUILIBRIUM
• Normal profits: this is where the
Average Rate of Production (ARP) is
equal to the prevailing wage rate (W)
• Losses: Average Rate of Production
(ARP) is less than the prevailing wage
rate (W)

15. LONG RUN LABOUR EQUILIBRIUM
In the long run, a firm earns normal profit. A firm will be in equilibrium
where Average Rate of Production (ARP) is equal to Marginal Rate of
Production (MRP). When firm employs OX labourer ARP is equal to
MRP.

16. LABOUR EQUILIBRIUM IN THE IMPERFECT
MARKET
a) Perfect Competition in Product Market and Monopsony in
Labour Market:
• When there is a single buyer of labour in the market, monopsony is
said to exist in the labour market. If there is an increase in
monopolist’s demand for labour, wage rate will follow the same path
which in turn tends to increase the average and marginal wage rate.
Since wages are less than marginal revenue productivity, it means that
the monopolist exploits labour. Thus, in the equilibrium the
monopolist earns supernormal profits.
• Therefore, it can be concluded that imperfect competition in the
labour market results in the exploitation of labour.

17. LABOUR EQUILIBRIUM IN THE IMPERFECT
MARKET

18. LABOUR EQUILIBRIUM IN THE IMPERFECT
MARKET
(b) Monopoly in Product Market Monopsony in Labour Market:
• Where there exist a monopoly in product market and monopsony in
labour market then there is difference between marginal revenue
product (MRP) and value of marginal product (VMP).
• Monopoly in the product market and monopsony in the factor market
leads to the double exploitation of labour, i.e., monopolistic
exploitation and monopsonistic exploitation.

19. LABOUR EQUILIBRIUM IN THE IMPERFECT
MARKET

20. Equalizing
Differentials
Population(labour force status),Utility Curve, Risk Analysis,
Equalizing Differentials and Government & Trade Union's Role

21. LABOUR FORCE STATUS

22. Better example

23. 2 Main questions were asked in class
1. Who are the non-wage workers?
2. Where is the non-wage workers in the Labour Force Status?

24. Answers
The non-wage workers can be: self-employed, unemployed, retired,
discourage workers, Investors, farmers, with many more.
By definition 'non-wage earners' are persons who gain income from any
source other a job or earns an income other that their wage/ salary.
The non-wage workers can be a part of the labour and non-labour force
Their benefits either comes from interest, dividends, alimony, capital
gains, transfer payments, gifts, and prizes unemployment
compensation with others.

25. Labour Supply
Using the Utility Curve

26. UTILITY CURVE (Maximization)

27. NON-WAGE EARNERS
• Can they earn a higher utility curve?

28. Non-labour Income for Labour force (income
effect)

29. Can the non-labor force earn a higher utility
curve?
By theory a non-labor can experience a higher utility this is due to their
own utility curve. This means that if they gain higher income they gain
a higher utility.

30. Non Labor Force

31. RISK ANALYSIS
Risk is a event or state which can happen on site of the job.
It can be known or unknown. Know risk are risk that are told to the employee
upfront while unknown risk are long term risk during or after the job.
These risk can affect your health mentally, physically and emotionally.
Some example of risk are:
• Sanitation of office
• workplace injury
• Stress
• discrimination and bullying
• violence
• accidental death and retirement.

32. EQUALIZING DIFFERENTIALS
Compensating Wage Differential
• Theory of Equalizing Differential
• Hedonic Wage theory (Model)

33. Assumptions and Predictions
• Utility Maximization
• Worker Information
• Worker Mobility

34. What is Equalizing Differential?
It is a positive or negative amount by which the salary or payment for
a job is adjusted in accordance with the attractiveness of that job
for potential workers. Difficult, dangerous, or otherwise undesirable
jobs tend to pay more to help recruit and retain workers, while
employers are able to offer less overall money for more desirable jobs
that are preferred by job-seekers

35. Utility = f (wage, risk of injury)
The assumption for this model
• identical skills
• heterogeneity in tastes for
jobs(safe jobs versus risky jobs).
s=0, r=1.
Worker would prefer the risky job
if that job paid a wage of w''1
dollars. The worker is indifferent
between the two jobs if the risky
job pays w^ 1. The worker’s
reservation price is then given by
Δ w^ = w^1 - w0

36. Hedonic Wage Theory (Model)
Different workers have
different preferences for risk.
Worker A is very risk averse.
Worker C does not mind risk
as much.
The slope of an indifference
curve is the reservation price
a worker attaches to moving
to a slightly riskier job.

37. Isoprofit Curve
An isoprofit curve gives all the risk-wage
combinations
that yield the same level of profits to a
firm.
They are concave because production of
safety is subject to the law of diminishing
returns. Reducing risk of job injury is at
first relatively cheap, but becomes more
expensive the further risk is reduced.
Assume a competitive market, i.e. all firms
will have zero (economic) profit. All wage-
risk combinations of the different firms
will lie on their “zero-profit” isoprofit
curves.

38. Hedonic Wage Function
Figure 1 Figure 2

39. Hedonic Wage Function
A hedonic wage function reflect the relationship between wages and
job characteristics. It matches workers with different risk preferences
with firms that can provide jobs that match these different risk
preferences.

40. GOVERNMENT/ TRADE UNION'S ROLES
What are their roles in the Labor Market?
Government
To intervene in the labour market to reduce inequality and market failure can
take various forms.
• Minimum wages/living wages
• Maximum wages (rarely used)
• Legislation to prevent discrimination on the grounds of age, sex, religion.
• Legislation to support or regulate trade unions.
• Maximum working week
• Legislation on health and safety
• Behavioural nudges (e.g. encouraging workers to take pensions)
• Government provision of education and training schemes

41. Trade Union
To intervene in the Labor Market For better wages, working hours, and
working conditions.
This include negotiation of wages, work rules, complaint procedures,
rules governing hiring, firing and promotion of workers, benefits,
workplace safety and policies.

42. The effects of Government or Trade Union
We are going to highlight one example
• Increase in minimum wage

43. OCCUPATIONAL CHOICE
Positive facets of an occupation will increase the number of people willing
to supply their labor to that occupation; satisfying jobs will have a labor
supply and a correspondingly low equilibrium wage. In that particular labor
market, workers must pay a compensating wage differential, through lower
wages, in order to work in an attractive job. In a competitive labour
market, laborers choose the occupation with the highest total
compensation, ceteris paribus. This brings the wage down until the total
compensation for the occupation is on a par with that of other
occupations. If total compensation is too low in some occupation, then
people will leave that occupation until the wage raises enough to equalize
the total compensation.

44. REFERENCES
• Banerjee, Abhijit V. and Andrew F. Newman (1993). “Occupational Choice
and the Process of Development”, Journal of Political Economy, 101 (2):
274-298.
• Ehrenberg, R. G., (1988). Workers’ compensation, wages, and the risk of
injury [Electronic version]. In J. Burton (Ed.), New Perspectives on Workers’
Compensation (pp. 71-96). Ithaca, NY: Cornell University Press. Available at:
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1680&co
ntext=articles
• Gwartney, J.W et al. (2017). Macroeconomics: Private and Public Choice.
(16th Ed.). California: South-Western College.
• Lucas, R. (1978): “On the Size Distribution of Business Firms,” Bell Journal
of Economics, 9.
END OF PRESENTATION