EC306 Labour Economics. Chapter 7 Wages and Employment in a single labour market

Transcription

1 EC306 Labour Economics Chapter 7 Wages and Employment in a single labour market 1

2 Equilibrium in a single compe@@ve labour market Imperfect compe@@on Payroll taxes Monopsony Minimum wages 2

3 Firm s Demand Perfect compe++on in both the product and the labour markets Assump@ons: homogeneous type of labour price taker and wage taker Supply of labour is perfectly elas@c (horizontal) at the wage rate Firms can employ all the labour they need at the market wage rate Market wage rate is set by the aggregate labour market 3

4 Product and Labour Markets W W W S W 0 W 0 Wc S S 1 2 Wc Wc D=ΣD i N 0 1 N 1 N N 0 N 2 N 2 ΣN i N Firm 1 Firm 2 Aggregate Labour Market 4

5 Short Run vs. Long Run In the short run a firm (firms) may raise its (their) demand for addi@onal workers as demand for its (their) product increases. Given the upward sloping labour supply curve, the wage rate as well as employment will increase in short run. Short- run wage increases can be a market signal, resul@ng in increase in the labour force in long run (labour supply curve shizs to the right). 5

6 Labour supply in the Short Run and Long Run (Firm s perspec@ve) Wage S S W1 S S W c S 1 D1 D 0 Dynamic Monopsony Labour 6

7 Equilibrium in a Compe@@ve Market Characteris+cs of the long run equilibrium and the market- clearing model (neoclassical) for markets with homogeneous workers and homogeneous jobs, wages will be equalized across workers absences of involuntary unemployment no queues for jobs or ra@oning of jobs 7

8 In Reality The market- clearing model is not true Wages do not adjust quickly to clear the market Involuntary unemployment is frequent Large wage differen+als exist across homogeneous workers and jobs. However, the neoclassical model serves as a useful approxima@on of the market 8

9 Imperfect Monopoly Effects of hiring more labour marginal physical product of labour falls marginal revenue falls sells more output only by lowering the product price 9

10 Monopolist Versus Demand for Labour W* D C = ΣMPP N X P Q = Σ VMP N D M = MPP N X MR Q = MRP N 0 N M * N C * N 10

11 Product Market Structure and Departure Monopolist: from Market Wages earns higher profits and labour may be able to appropriate some of these profits may be less cost conscious and may yield to wage demands to public image pay higher wages to buy good image large firms pay higher wages 11

12 Oligopoly in the Product Market Few firms Similar products of one firm affects the others May depart from market wages because: Firms earn above normal profits, some of which may be captured by workers since larger firms may pay above- market wages 12

13 in the Product Market Many small firms with products giving the firm some in price secng Short- Run Earn Economic Profit Able to pay higher than the market wage Long- Run No Economic Profit Has to pay the market wage 13

14 Working with Supply and Demand the effects of a policy change on equilibrium Incidence of a unit payroll tax 14

15 Payroll Tax Tax levied on employers to the firm s payroll CPP/QPP Workers compensa@on Unemployment insurance Health insurance OZen considered job killers Unit tax example 15

16 The Effect of a Payroll Tax on Employment and Wages Effect of tax depends on elas@city of labour supply and demand D N S W 0 C A W 1 B T N D (W) N D (W + T) N 1 N 0 16

17 Monopsony A monopsony is a large firm rela@ve to the size of the labour market It influences the wage rate It can raise wages to ahract labour Will not lose all of its work force if wages are decreased Upward- sloping labour supply schedule 17

18 Monopsony Average cost is the wage rate Marginal cost is the new wage plus the cost of paying the higher wage to workers Marginal cost is higher than average cost Profit when MC = VMP 18

19 Monopsony Wage MC VMP M S=AC W C W M S M V M S 0 VMP N = MPP n P Q 0 N m N c Labour (N) 19

20 of a Monopsony Employment is lower than a compe@@ve situa@on Restricts employment because hiring addi@onal labour is costly Higher wages must be paid to intra- marginal workers 20

21 of Market Some of supply of labour Most firms have an element of monopsony power in short run Long run costly problems of recruitment, turnover and morale issues Examples of monopsony in long run: would be a one industry town in an isolated region if workers have specialized skills that are useful mainly in a specific firm 21

22 Perfect Wage workers receive higher wages when a monopsony raises the wage rate seller s surplus or economic rent Monopsonist may try to retain some of this seller s surplus by differen@a@ng it s work force 22

23 Perfect Wage Supply schedule equals to the average cost and marginal cost Does not have to pay workers any more than their wage Monopsonists may try to conceal higher wages or use nonwage mechanisms to ahract labour Chapter McGraw- Hill Ryerson Ltd. 23

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25 Minimum Wage Impact on Labour Market Adverse employment effect Firms employ less labour at a higher cost Higher wage encourages more people to seek work Magnitude of adverse employment effect depends on the elas@city of the demand for labour 25

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27 Recall DD 27

28 Card and Krueger (1994) 28

29 From Wikipedia Nobel laureate James M. Buchanan...no self- economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimum scien@fic content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp- following whores. Original source has not been confirmed!! 29

30 From Wikipedia Nobel laureate Paul Krugman... found no evidence that minimum wage increases in the range that the United States has experiences led to job losses. Their work has been ahacked because it seems to contradict Econ 101 and because it was ideologically disturbing to many. Yet it has stood up very well to repeated challenges, and new cases confirming its results keep coming in. Original source has not been confirmed!! 30

31 Minimum Wage Impact on Monopsony Minimum wage (or other form of price fixing) may increase employment: Reduces monopsony profits The magnitude of these effects depend on the extent to which the monopsony is associated with workers who are paid below minimum wage 31

32 Monopsony and Minimum Wage MC 1 MC VMP 0 S = AC W 1 W 0 VMP N 0 N 1 32

33 Minimum Wage Reduces employment in labour markets Increases employment in labour market Simple model of a compe@@ve labour market may not adequately describe the decisions of firms that rely on the lowest- wage workers 33

34 Reading and references Required BGLR Ch. Suggested Card and Krueger (1994) hhp://emlab.berkeley.edu/users/card/papers/ min- wage- ff- nj.pdf Notes make use of BGLR slides 34