LABOUR DEMAND
Application: the effect of igration on domestic wages Case 1. Immigrants and nonigrants are perfect substitutes in production W S 0 S 1 Law of one price: all workers earn the same wage W 0 W 1 D Immigration increases supply of labour L 0 L 1 L Wage rate falls By how much? What does this depend on?
The elasticity of labour demand reduction in wage rate causes MC of output to decline. S curve in the product market shifts down, to the right Output increases scale effect P P o S 0 (W 0 ) S 1 (W 1 ) increase in output is bigger if product demand is more elastic D Scale effect (in labour market) is bigger...labour demand curve is more elastic Q 0 Q 1 Q 1 D Q
What else does elasticity of demand for labour depend on Elasticity of substitution between capital and labour The easier it is to substitute labour (which is now relatively inexpensive) for capital, the bigger the substitution effect and the bigger the increase in the quantity of labaour demanded
Application: the effect of igration on domestic wages Case 2. Immigrants and nonigrants are not perfect substitutes in production The price and employment of igrants and non-igrant labour are determined in separate markets (like labour and capital) W W 0 W 1 L 0 D L 1 S 0 S 1 L An increase in the supply drives down the wage of igrants. How does this affect the wages and employment of non-igrant labour?
Effect of a change in wage of igrants on quantity of non-igrant labour demanded. Wage of igrants falls Substitution effect: Hire more igrant labour Hire less non-igrant labour l non Cost = C 0, slope = -W 0 /W non Cost = C 1, slope = -W 1 /W non Scale effect: MC of production has fallen, so produce more output. Hire more igrant labour Hire more non-igrant labour Gross substitutes: subst>scale and demand for nonigrant labour falls l 0 non l 1 non l s non q=q 0 q=q 1 Gross complements: scale>subst and demand for non-igrant labor increases l 0 l s l 1 l
So far Looked at the firm s profit maximization problem in the short and long run Assumed so far that input and output markets are competitive Implies firms take all prices (p, w, r) as given What if they re not? Two cases: 1. The product market is not competitive (monopoly) n Firm can choose p 2. The labour market is not competitive (monopsony) n Firm can choose W
The demand for a firm s output The market demand curve slopes down, as usual The demand curve faced by a competitive firm does not slope down because we assume that there are lots of producers in the market, and each one is small relative the entire market When the product market is perfectly competitive, firms take the price of their output as given They can sell as much output as they want at the market price p* This means the firm faces a perfectly elastic (horizontal) demand curve for their output p p* p p* Market for the firm s output D S Q Demand for a competitive firm s output D Q
Monopoly We say a firm is a monopolist if they are the only producer in their market This means they face the market demand curve (downward sloping) instead of a perfectly elastic one They can only sell more output if they reduce price Why does this matter for labour demand?
Short-run profit maximization, case of monopoly _ max! = p(q)q! wl! r k l = p(q(l, k _ ))* q(l, k _ )! wl! r k _ FOC : p!q /!l + (!p /!q)(!q /!l)* q " w = 0 (p +!p /!q * q)*!q /!l = w mr * mp l = w
Monopoly e.g., suppose at p=$10 the firm can sell 9 units (total revenue=$90) but to sell 10 units they need to reduce price to $9.50 (total revenue=$95). Then the marginal revenue of the 10 th unit is 9.50 9*.50= $5 ð MR < p p Demand for a Monopolist s Output MR D Q
The monopolist s short run labour demand ð All else equal, monopolist s employ fewer workers than competitive firms Nominal Wage (W) W 3 Monopolist s labour demand = MRPL = MR x MPL Competitive firm s labour demand = MRPL = p x MPL W 2 ð BUT if they take wages as given, they pay the same wages as competitive firms W 1 L 3 L 2 L 1 L
The labour supply curve faced by the firm The market labour supply curve slopes up, as usual The labour supply curve faced by a competitive firm does not slope up because we assume that there are lots of employers in the market, and each one is small relative the entire market When the labour market is perfectly competitive, firms take wages as given They can hire as many workers as they want at the market wage W* This means the firm faces a perfectly elastic (horizontal) labour supply curve W W* W W* Labour Market D L S L Labour supply curve faced by a competitive firm L S L P x MPL L
Monopsony We say a firm is a monopsonist if they are the only employer in their labour market Examples? This means they face the market labour supply curve (upward sloping) instead of a perfectly elastic one (horizontal) They can only hire more workers if they pay a higher wage Why does this matter for labour demand?
Short-run profit maximization, case of monopsony _ max! = pq! w(l)l! r k l = pq(l, k _ )! w(l)l! r k _ FOC : p!q /!l " (w +!w /!l *l) = 0 p!q /!l = (w +!w /!l *l) p* mpl = mel
Monopsony In order to hire 1 more unit of labour, a monoposonist must increase the wage of every worker that they employ suppose you can hire 20 workers if W=$10/hr (total wage bill = $200/hr) but to hire 21 workers you need to pay W =$12/hr (total wage bill = $252/hr) this means the extra worker costs 12 + 2*20 = $52/hr! ð MEL > W
Monopsony wages and employment Profit maximization requires MRPL = MEL. How many workers does the monopsonist hire? What wage does the monopsonist pay? What is MRPL at this level of employment? What would wages and employment be if the market were competitive? How does this compare to the monopsony solution? W W c W m L m MEL L c S L P x MPL L