Labour Market Equilibrium 1 Competitive labour market Labour

Labour Market Equilibrium 1

§ Competitive labour market: § Labour demand § Marginal revenue product § Labour supply § Marginal labour cost § Reservation wage § Market equilibrium § State of rest § If surplus § Unemployment § Downward pressure on wages § If shortage § Upward pressure on wages § Comparative statics § Sticky wages 2

§ Monopsony: § Recall a monopoly § MR < P § Inefficiently low output § A monopsony = a single buyer § A monopsony’s demand for labour = market demand § A monopsony’s supply of labour = market supply § Profit maximization § max π = TR(L) – C(L) § First order condition: MR = MC § Marginal revenue product = marginal labour cost § For a monopsony, MLC > reservation wage § Equilibrium § MRP = MLC § Inefficiently low employment and wage 3

§ Government in labour market: § Minimum wage § § Wage floor Unemployment “lousy” jobs (small surplus) lost Most part-time workers are § Youth § Part-time § Payroll tax § Statutory incidence § Economic incidence § Determined by elasticities of demand supply § Independent of statutory incidence § Wage rate subsidy § § Can think as increase in demand (MRP) or decrease in cost Targeted wage subsidies Student summer jobs Industry that “develops” 4

§ Unions in labour market: § Two ways to increase wages § Increase demand for labour § Decrease supply of labour § Increase demand for labour § “Buy Union Made” promotion campaign § Improving union member productivity § Subsidized training/education § Featherbedding § Are these guys featherbedding? § Often difficult to define 5

§ Unions in labour market: § Supply of labour § Industrial union § § § § Members belong to an industry CAW CUPE Any occupation Fight for regulations / standards / minimum wage Why join a union Till the day I die § Craft union § Certain skill § IBEW § Restrict supply § Entry barriers § Certification/apprenticeship requirements § Requirements to hire union member § Closed shop agreements in contracts 6

§ Unions in labour market: § General agreement § Unions raise wages § Unions create unemployment § But how much, empirically? § Unclear for unemployment § Likely 10 to 30% above no-union for wage 7

§ Disequilibrium in labour market: § Unemployment § Job search § Takes time and effort § Expected marginal benefits of search § Marginal cost of search § Lost net wages § Optimal duration § EI and job search § Sticky wages § Labour contracts and long-term relationships § Efficiency wages § Heterogenous workers and job rationing § Imperfect information and incentives against shirking 8