Labor Market Equilibrium. 5EN355 Labor Economics VŠE

Transcription

1 Labor Market Equilibrium 5EN355 Labor Economics VŠE

2 Perfectly Competitive Labor Market Assumptions: Perfect Information: o All workers know relevant details about all jobs; o All employers know relevant details about all workers; Perfect mobility: workers can switch jobs costlessly, and all jobs are equally open to all applicants; Homogeneity: o workers are identically skilled (within a market); o firms offer identical working conditions;

3 Perfectly Competitive Labor Market Profit Maximization: firms choose wages so as to maximize profits; Many employers and workers: o No employer is large enough that its wage influences the market average; o No worker is important enough that his or her decision affects the overall employment level of a firm.

4 Equilibrium in a Single Competitive LM Equilibrium condition: L* S (w*)=l* D (w*) L* S (w*) is the optimal labor supply (of all workers) at the wage w*; L* D (w*) is the optimal labor demand (of all firms) at the wage w*.

5 Out of Equilibrium Case 1: Labor Surplus w > w* w: more people are willing to work than there are jobs: L* S (w) > L* D (w) Case 2: Labor Shortage w < w* w: too few people are willing to work: L* S (w) < L* D (w) some people will be unemployed; some work less hours than they would want to. some jobs are not filled; some workers are not willing to work more hours.

6 Reaching a Labor Market Equilibrium Case 1: Labor Surplus w>w*, L* S (w) > L* D (w) Ways: 1) The workers compete with each other; 2) The firm offers lower wage. Case 2: Labor Shortage w<w*, L* S (w) < L* D (w) Ways: 1)Firms compete with each other; 2)The workers ask for higher wage rate. w=w* L* S (w*)=l* D (w*) w=w* L* S (w*)=l* D (w*)

7 Competitive Eqm. across Labor Markets Setup: Northern Labor Market yields equilibrium wage rate w N and # of labor hours E N ; Southern Labor Market yields equilibrium wage rate w S and # of labor hours E S ; w N > w S

8 Competitive Eqm. across Labor Markets

9 Competitive Eqm. Across Skill Levels Setup: Labor Market for College Educated Workers yields equilibrium wage rate w C and # of labor hours E C ; Labor Market for Non-College Educated Workers yields equilibrium wage rate w NC and # of labor hours E NC ; w C > w NC What Do Workers and Firms in each Labor Market Do?

10 Competitive Eqm. Across Skill Levels What Do Workers and Firms in each Labor Market Do? Firms: Firms have incentive to substitute skilled labor for unskilled labor. L D (w C ) and w C ; L D (w NC ), w NC. Workers: Non-college educated will attend college. L S (w C ) shifts out and w C ; L S (w NC ) shifts in and w NC. Arbitrage: w* C =w* NC

11 Labor Market Frictions Mobility Costs; Search Costs; Cost of Human Capital Investment; Institutional Rules.

12 Policy Applications Payroll tax Employers pay Employees pay Analyzing immigration Analyzing imperfect markets Monopsony Monopoly

13 Policy Application: Payroll Taxes What happens to w and E if the government assesses a payroll tax on employers? D 0 ( ) D 1, w 0 ( ) w 1. Cost of hiring a worker from w 0 to w 1 +1

14 Policy Application: Payroll Taxes A tax assessed on workers? S 0 ( ) S 1, w 0 ( ) w 1. Actual after-tax wage from w 0 to w 1-1

15 Payroll Tax When Will the Payroll Tax Be Shifted Completely to Workers? D 0 ( ) D 1, w 0 ( ) w 0-1. The more inelastic supply curve, the greater fraction of the tax workers end up paying.

16 Deadweight Loss of Payroll Tax

17 Analyzing Immigration Influx of new workers to the market Affect the wage negatively Affect the wage positively

18 Policy Application: Immigration Short-Run Short Run: Immigrants and Natives are perfect substitutes S 0 ( ) S 1 N 0 N 1 and w 0 w 1 immigrants take jobs away

19 Policy Application: Immigration Short-Run Short Run: Immigrants and Natives are perfect complements

20 Immigration : LR impact Native employment is the SAME as it was prior to the immigrant influx. Production fn is CRS

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22 The Coweb Model LMs do not adjust quickly after supply and demand shifts! Assumptions: 1. It takes time to produce new specialist 2. Students choose their career based on the wage they observe at time they enter the school.

23 Noncompetitive Labor Market: Monopsony Monopsony is a market with one buyer a company town with one employer As the employer raises wages, some workers will join the labor market and work for the firm; Because there are no other firms workers will not disappear to another firm when wage lowers; some may return to non-labor market activities.

24 Perfectly Discriminating Monopsonist different workers get different wages: S=MC E π max : VMP E =MC E where VMP E = pmp E w monopsonic =w* E monopsonic =E* BUT: each worker gets paid his reservation wage

25 Nondiscriminating Monopsonist MC E > w π max : VMP E =MC E w monopsonic =w M < w* E monopsonic =E M < E* This leads to smaller output and lower wage than efficient level

26 Monopsony and the Minimum Wage Cases: w min w monopsonic w monopsonic w min w* w monopsonic w* w min

27 Homework Midterm: March 30 Required: Borjas, 5e: Ch. 1-4 Additional: Sample exam + suggested solutions to HWs 1 & 2.