MICROECONOMICS STUDY UNIT 11 PRESCRIBED BOOK CHAPTER 14

Transcription

1 MICROECONOMICS STUDY UNIT 11 LABOUR MARKET [ARBEIDSMARK] PRESCRIBED BOOK CHAPTER 14

2 SOME STUDY OBJECTIVES Identify major differences between labour market and goods market. Explain the determinants of labour supply Explain how labour demand is derived Explain what can cause the market supply and demand curves of labour to shift Illustrate graphically equilibrium in a perfectly competitive labour market and changes in such equilibrium Discuss the role of trade unions Explain and illustrate government imposition of a minimum wage in a perfectly competitive labour market 2

3 LABOUR MARKET vs. GOODS MARKET [ARBEIDSMARK VS. DIE GOEDEREMARK] Supply (household skills) vs. Demand (Employers) Nominal vs real wage see Box 14-1 [nominale vs reële loon] Difference between labour market & other markets: Non-monetary factors e.g. location of employment, working conditions are very important in labour market. Labour services are not transferable to other people. Labour services are rented and not sold. Labour market can be affected by non-economic considerations e.g. discrimination, loyalty, fairness, justice, equity etc.. [continued on next slide] 3

4 LABOUR MARKET vs. GOODS MARKET (2) Trade unions, employees associations, collective bargaining [kollektiewe bedinging] & government intervention Labour is heterogeneous and can not be classified as standard There are a variety of labour markets. The market can be segmented. The remuneration does not consist of wages only but of nonwage benefits e.g. medical aid, vehicle allowance, housing,etc. Remuneration of labour is affected by a number of factors which are not directly related to labour market conditions e.g. taxation, views as to what constitutes a living wage. 4

5 REQUIREMENTS FOR A PERFECTLY COMPETITIVE LABOUR MARKET [VOLMAAK MEDEDINGENDE ARBEIDSMARK] Large number of buyers (employers) & sellers (employees) No one can influence price (wage) price (i.e. wage) takers Labour must be homogeneous identical skills Workers must be completely mobile entry & exit free No government intervention All participants have perfect knowledge of market conditions Perfect competition in the goods market employers cannot pass higher labour costs on to consumers in higher prices Very restrictive no labour market exactly like this BUT useful starting point for analysis of labour market! 5

6 Figure 14-1 Equilibrium in a perfectly competitive labour market Chapter 14 The labour market Van Schaik Publishers 6

7 SUPPLY OF LABOUR Total (market) supply of labour Definition of labour force/economic active population. Include employed and unemployed people Include the formal and informal sector Size of labour force determined by size and growth of population and the propensity to participate in the labour force as reflected by the labour force participation rate. 7

8 SUPPLY OF LABOUR NB: Individual labour supply not prescribed for examination; market supply is prescribed Individual supply of labour (for information only) - determine the microeconomics of the labour market by examining the individual supply of labour and the market supply. Backward bending individual supply curve ascribed to Substitution effect - W Working hours Income effect - W Working hours 8

9 Wage rate MARKET SUPPLY LABOUR [MARKAANBOD VAN ARBEID] S L Quantity of labour 9

10 Figure 14-3 The market supply of labour Chapter 14 The labour market Van Schaik Publishers 10

11 SUPPLY OF LABOUR Market supply of labour will shift entirely because of: A change in population due to a change in birth or death rates. A change in the labour force participation rate (e.g. new workers) A change in migration Trade union action HIV/AIDS Wages in other occupations Non-monetary aspects 11

12 Wage rate DECREASE IN THE MARKET SUPPLY - LABOUR 80 S L S L Quantity of labour 12

13 Wage rate INCREASE IN THE MARKET SUPPLY - LABOUR 80 S L S L Quantity of labour 13

14 DEMAND FOR LABOUR (INDIVIDUAL FIRM) Derived demand curve - Employ labour if there is a demand for goods and services Marginal benefit vs marginal cost of employing extra worker! Employ labour if MRP> w(age) [grensinkomsteproduk>loon] Law of diminishing returns - Labour employed output decrease Marginal physical product (MPP) [marginale fisiese produk] is the change in output levels when employing additional worker(s) 14

15 Figure 14-4 A perfectly competitive labour market Chapter 14 The labour market Van Schaik Publishers 15

16 DEMAND FOR LABOUR Marginal physical product (MPP) indicate physical value to employ additional labourer. MRP determine the monetary value of an additional worker: MRP = MPP x P MRP > wage - employ worker MRP < wage - do not employ worker Equilibrium (i.e. maximum profit) when - marginal benefit = marginal cost - MRP = w 16

17 MARGINAL REVENUE PRODUCT OF LABOUR Quantity of labourers Total Product MPP ΔTP Price MRP MPP x P

18 MRP, WAGE RATE DEMAND FOR LABOUR D L NUMBER OF WORKERS 18

19 Figure 14-5 The individual firm s demand for labour Chapter 14 The labour market Van Schaik Publishers 19

20 MRP, WAGE RATE Equilibrium condition for a firm that operates in a perfect competitive labour market (MRP = Wage) Wage rate is R D L = MRP E MRP=W= S L NUMBER OF WORKERS 20

21 Figure 14-6 The equilibrium position of a firm operating in a perfectly competitive labour market Chapter 14 The labour market Van Schaik Publishers 21

22 DEMAND FOR LABOUR Factors causing a shift in labour demand curve: A change in number of firms A change in the price of the product - change the MRP and therefore labour employed A change in MPP (or productivity) as it affects MRP A change in the prices of the other factors of production Profit of firms International trade A new substitute for labour ATM s, Computers 22

23 WAGE RATE EQUILIBRIUM IN A PERFECT COMPETITIVE LABOUR MARKET (QD = QS) D L S L E QD=QS QUANTITY OF LABOUR 23

24 Changes in the equilibrium wage rate Reason: An increase in the demand for the firm s product D1 W S0 E 1 W 1 W 0 E D0 N 0 N 1 No of Workers 24

25 Changes in the equilibrium wage rate Reason: Decrease in MPP of workers D1 W S0 E 1 W 1 W 0 E D0 N 0 N 1 No of Workers 25

26 Changes in the equilibrium wage rate Reason: Impact of HIV/AIDS on labour supply S1 W S0 E 1 W 1 W 0 E D0 N 1 N 0 No of Workers 26

27 Changes in the Equilibrium wage rate Reason: Impact if salaries in other occupations are lower than in the industry below 27

28 Figure 14-7 Changes in labour market equilibrium Chapter 14 The labour market Van Schaik Publishers 28

29 Imperfect labour markets [Onvolmaakte arbeidsmarkte] Reasons for the existence of imperfect labour markets are: Trade unions organise workers If there is only one buyer of workers in the market Labour is heterogeneous Labour is not completely mobile Labour market is sometimes segmented and workers cannot move between segments freely Government intervention through minimum wages and other legislation Employers and employees have imperfect knowledge of the market. 29

30 Imperfect labour markets Trade unions can increase wages in three possible ways: Restriction of labour supply [Beperking van die arbeidsaanbod] Increase the demand for the firm s product Negotiate a wage rate for members which is higher than equilibrium wage rate 30

31 Trade unions: Restriction of labour supply S1 W S0 E 1 W 1 W 0 E D0 N 1 N 0 No of Workers 31

32 Trade unions: Increase in the demand for the firm s product D1 W S0 E 1 W 1 W 0 E D0 N 0 N 1 No of Workers 32

33 Figure 14-8 Ways in which a trade union can attempt to increase the wage rate Chapter 14 The labour market Van Schaik Publishers 33

34 Wage Trade unions: Minimum wages e Quantity of Labourers 34

35 EXAMINATION QUESTION [CAN BE CONVERTED TO MCQ FORMAT] Illustrate how certain trade unions can control the supply of skilled labour in specific trades (or professions) by restricting membership. 35

36 Make use of the set of axes in the diagram below to illustrate how certain trade unions can control the supply of skilled labour in specific trades (or professions) by restricting membership. Label all axes and curves and clearly indicate any possible change in direction S1 W S0 E 1 W 1 W 0 E D0 N 1 N 0 No of Workers 36

37 Complete the table [MCQs CAN BE BASED ON THIS] Number of workers Total product Average product Marginal product

38 Complete the table Number of workers Total product Average product Marginal product

39 Complete the table Number of workers Total product Average product Marginal product

40 Complete the table Number of workers Total product Average product Marginal product

41 Complete the table Number of workers Total product Average product Marginal product

42 ALSO STUDY: Government intervention in the labour market: - flexibility vs stability - RSA government (official) position intermediate regulated flexibility Minimum wages: social reasons vs. economic forces result: higher prices / unemployment A minimum wage in a perfectly competitive market including Figure (NB) Prescribed book 4 th edition pp

43 Figure The impact of the imposition of a minimum wage in a perfectly competitive labour market Chapter 14 The labour market Van Schaik Publishers 43

44 [ANOTHER VIEW - FOR INFORMATION:] AND IN SOUTH AFRICA? During the past 5 years (up to 2012): - Nominal unit labour cost increased by 8,7% per year ( 2,2% above inflation). - Labour productivity increased by 1,6% per year. During the 2008 Great Recession many overseas workers/unions asked their employers to scale down to a 4 day working week and only pay 80% of salaries, to avoid retrenchments. In SA unions were as usual striking for wage increases, double the CPI. Nett jobs lost! And we want to create employment???? 44

45 Which one of the features below is unique to the labour market? [1] Non-monetary factors are not important in the labour market. [2] In the labour market, labour is traded on a daily basis at the best wage. [3] Labour cannot be classified or standardised. [4] Labour services are transferrable to other people. 45

46 Which one of the features below is unique to the labour market? [1] Non-monetary factors are not important in the labour market. [2] In the labour market, labour is traded on a daily basis at the best wage. [3] Labour cannot be classified or standardised. [4] Labour services are transferrable to other people. 46

47 The real wage is defined as [1] the amount of money that is to be paid to a worker at a specific point in time. [2] the quantity of goods and services that can be purchased with the money wage. [3] the amount of money actually earned during a specific period, including bonuses. [4] the actual amount of money received by a worker per hour, day, week, month or year. 47

48 The real wage is defined as [1] the amount of money that is to be paid to a worker at a specific point in time. [2] the quantity of goods and services that can be purchased with the money wage. [3] the amount of money actually earned during a specific period, including bonuses. [4] the actual amount of money received by a worker per hour, day, week, month or year. 48