Topic 4 Lecture 18 Factor markets The Labour

Topic 4 Lecture 18 Factor markets: The Labour market Robin Naylor, Department of Economics, Warwick 1

Topic 4 Lecture 18 In previous material (running through Topics 2 and 3) we have focused on the question: “What determines the firm’s choice of output? ” We now ask the question is: “What determines the firm’s demand for labour? ” [The two questions are clearly related – because if we know the firm’s chosen output, the level of labour demand should follow from the production function, which links labour employed to output produced. ] Our answer to this question is that the profit-maximising firm will employ labour up to the level at which the addition to the firm’s total revenue (from the sale of the extra units produced when the firm takes on an extra unit of labour) is just equal to the addition to the firm’s total costs incurred by employing the extra unit of labour. I. e. , the profit-maximising employment rule is to employ an amount of Labour such that: Marginal Revenue Product of Labour = Marginal Cost of Labour. Robin Naylor, Department of Economics, Warwick 2

Topic 4 Lecture 18 Marginal Revenue Product of Labour = Marginal Cost of Labour. What is the Marginal Revenue Product of Labour (MRPL)? What is the Marginal Cost of Labour (MCL)? If the product market is perfectly competitive, then: MRPL = ? If the labour market is perfectly competitive, then: MCL = ? Robin Naylor, Department of Economics, Warwick 3

Topic 4 Lecture 18 Marginal Revenue Product of Labour = Marginal Cost of Labour. What is the Marginal Revenue Product of Labour (MRPL)? What is the Marginal Cost of Labour (MCL)? If the product market is perfectly competitive, then: MRPL = (MPPL) multiplied by (competitive market product price, p) If the labour market is perfectly competitive, then: MCL = unit cost of an extra unit of labour = wage rate Robin Naylor, Department of Economics, Warwick 4

Topic 4 Lecture 18 Consider the Marginal Revenue Product of Labour (MRPL) MRPL What does this assume? p. MPPL=MRPL L Robin Naylor, Department of Economics, Warwick 5

Topic 4 Lecture 18 Consider the Marginal Cost of Labour (MCL) MCL What does this assume? Ls = w = MCL L Robin Naylor, Department of Economics, Warwick 6

Topic 4 Lecture 18 Consider MCL and MRPL together MCL MRPL What is the firm’s chosen level of employment? Why? Ls = w = MCL MRPL L Robin Naylor, Department of Economics, Warwick 7

Topic 4 Lecture 18 Consider MCL and MRPL together MCL MRPL What happens to the firm’s chosen Ls = w = MCL level of employment if the competitive wage shifts up? MRPL L* Robin Naylor, Department of Economics, Warwick L 8

Topic 4 Lecture 18 Consider MCL and MRPL together MCL MRPL Ls = w 2 = MCL 2 Ls = w = MCL MRPL L*2 L* Robin Naylor, Department of Economics, Warwick L What do you conclude about the firm’s demand for labour? 9

Topic 4 Lecture 18 We have assumed perfect competition in both product and labour markets. MCL MRPL Ls = w = MCL MRPL How is the analysis different for a monopolist? Robin Naylor, Department of Economics, Warwick L 10

Topic 4 Lecture 18 We have assumed perfect competition in both product and labour markets. MCL MRPL Ls = w = MCL MRPL (monopoly) How is the analysis different for a monopolist? L The answer is that product price is higher, but now falls as X (and hence L) increase. What does this do to the MRPL curve of the monopolist? Robin Naylor, Department of Economics, Warwick 11

Topic 4 Lecture 18 We have assumed perfect competition in both product and labour markets. MCL MRPL Ls = w = MCL MRPL How is the analysis different for a monopsonist? L Consider the next slide. . . Robin Naylor, Department of Economics, Warwick 12

Topic 4 Lecture 18 How is the analysis different for a monopsonist? MCL MRPL Ls dw MRPL L 1+1 Robin Naylor, Department of Economics, Warwick L 13

Topic 4 Lecture 18 How is the analysis different for a monopsonist? MCL MRPL Ls dw. L 1 dw MRPL L 1+1 Robin Naylor, Department of Economics, Warwick L 14

Topic 4 Lecture 18 How is the analysis different for a monopsonist? MCL MRPL Ls dw. L 1 dw MRPL L 1+1 Robin Naylor, Department of Economics, Warwick L 15

Topic 4 Lecture 18 What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony) MCL MRPL Ls w. C MRPL=Ld, in a perfectly competitive labour market LC Robin Naylor, Department of Economics, Warwick L 16

Topic 4 Lecture 18 What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony) MCL MRPL Ls wmin w. C MRPL=Ld, in a perfectly competitive labour market LREG LC Robin Naylor, Department of Economics, Warwick L 17

Topic 4 Lecture 18 What happens with the introduction of a Minimum Wage (MWL) under a monopsonist? MCL MRPL Ls w. M MRPL LM LC Robin Naylor, Department of Economics, Warwick L 18

Topic 4 Lecture 18 What happens with the introduction of a Minimum Wage (MWL) under a monopsonist? MCL MRPL Ls The minimum wage is introduced wmin w. M MRPL LM LC Robin Naylor, Department of Economics, Warwick L 19

Topic 4 Lecture 18 What happens to the Labour Supply curve with the introduction of a Minimum Wage (MWL) under a monopsonist? The labour MCL supply curve is MCL unaffected in this region. . . MRPL Ls . . . but is affected in this region wmin w. M MRPL LM LC L LCRIT Robin Naylor, Department of Economics, Warwick 20

Topic 4 Lecture 18 What happens to the MCL curve with a Minimum Wage (MWL) under a monopsonist? The MCL curve is unaffected in this region. . . MCL MRPL Ls . . . but is affected in this region wmin w. M MRPL LM LC L LCRIT Robin Naylor, Department of Economics, Warwick 21

Topic 4 Lecture 18 What happens to the Monopsonist’s chosen employment level with the introduction of a Minimum Wage (MWL)? MCL MRPL Ls wmin w. M MRPL For L<LCRIT, how does MRPL compare with MCL? And therefore. . . ? LM For L>LCRIT, how does MRPL compare with MCL? And therefore. . . ? LC L LCRIT What do you conclude happens to employment with the introduction of a Minimum Wage under Monopsony? Robin Naylor, Department of 22 Economics, Warwick

Topic 3: Lecture 18 Now read B&B 4 th Ed. , pp. 475 -479, 400 -408, 409 -412. You might also consult: • Frank, Chapters 14 -15 • Estrin, Laidler and Dietrich, Chapter 18 • Morgan, Katz and Rosen, Chapter 10. 2 Robin Naylor, Department of Economics, Warwick 23