ew macro 5

8/9/2019 EW Macro 5

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Copyright 2006 – Biz/ed

The Labour Market

The Supply and Demand

for Labour

8/9/2019 EW Macro 5


8/9/2019 EW Macro 5




The Labour Market

• At higher agerates the demand

for labour ill beless than at loerage rates

• $eason linked to

Marginal%rodu!ti"ityTheory

The demand for labour is highly dependent on theprodu!ti"ity of the orker – the more the orkeradds to re"enue& the higher the demand'

opyright iSto!k'!om

8/9/2019 EW Macro 5




Marginal $e"enue %rodu!ti"ity

• %roducti#ity refer& to the amou!t producedper worker per period of time

• M$% * the addition to total re"enue (T$) re!ei"edfrom the sale of an additional unit

of output– +orker instrumental in produ!ing that output

• 'argi!al %hy&ical %roduct ('%%) – theaddition to total produ!t as a result of theemployment of one additional unit of labour

• '*% + '%% , %• ,f a good sells for -.'// and a orker produ!es

0// per day& the M$% of that unitof labour is -0// per day

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The Labour MarketMarginal %rodu!ti"ity Theory

+age $ate

1umber #mployed

M$% * M%% x %

A$%

The law of diminishing returns would

suggest that as successive units of

labour are employed, the addition to

total product will rise at first but then

decline. The MRP represents the value

added to total output by successive

workers.

The ARP is the average revenue product –

the average value added to total output

through hiring successive workers. The

MRP curve intersects the MRP curve at its

highest point.

8/9/2019 EW Macro 5




The Labour Market+age $ate (- per hour)

1umber #mployed

M$% * M%% x %

A$%

n a competitive labour market, the

individual firm is not big enough to

influence the wage rate. The

marginal cost of labour is a hori!ontal

line at the e"isting market wage rate.

ML2'2/

3/

4'//

#mploying the $%th unit of labour costs

the firm &'.'% per hour but that labour

adds &(.%% per hour to total revenue

through their work. t is worth

employing that e"tra unit of labour.

5'4/

3.

The $)st unit of labour adds slightly less

to total revenue *&+.(% but still costs

&'.'% and so is worth employing. There

will thus be an incentive for the firm to

continue to employ additional units of

labour until the MRP - age rate

/or the employer to be persuaded to

employ additional workers, therefore, the

wage rate must be lower to compensate

for the fact that the e"tra worker adds

less to total revenue than the previous

one and to sell e"tra units, the firm must

accept a lower price.

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The MRP curve therefore represents

the demand curve for labour

illustrating the derived demand

relationship.

+age $ate (- per hour)

1umber #mployed

DL

./

4

6

./ .2 .7

There is an inverse relationship between

the wage rate and the number of people

employed by the firm.

The Labour Market

8/9/2019 EW Macro 5




The Labour Market

• -he Supply of abour

• The amount of people offering

their labour at different agerates'– ,n"ol"es an opportunity !ost – ork

"' leisure

–+age rate must be suffi!ientto o"er!ome the opportunity !ostof leisure

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The Labour Market

• !come effect of a ri&e i! wage&:– As ages rise& people feel better off and therefore

may not feel a need to ork as many hours

• Sub&titutio! effect of a ri&e i! wage&:– As ages rise& the opportunity !ost of leisure rises

(the !ost of e"ery extra hour taken in leisure rises)'As ages rise& the substitution effe!t may lead tomore hours being orked'

• The net effe!t depends on the relati"e strengthof the in!ome and substitution effe!ts

8/9/2019 EW Macro 5




The Labour Market

• The elasti!ity of supply of labourdepends upon

• eographical mobility of labour:

– The illingness of people to mo"e– The !ost and a"ailability of housing

in different areas– The extent of so!ial& !ultural and family ties– The amount of information a"ailable to

orkers about 8obs in other areas– The !ost of re9lo!ation– Anxiety of the idea of re9lo!ation

8/9/2019 EW Macro 5




The Labour Market

• 1ccupatio!al 'obility ofabour:

–La!k of information of a"ailable 8obsin other o!!upations

–#xtent and :uality of remunerationpa!kages

–#xtent of skills and :ualifi!ationsto do the 8ob

–Anxiety at !hanging 8obs

8/9/2019 EW Macro 5





1umber of ;ours +orked

SL

2

./ An inelastic supply of labour –

a substantial rise in the wage rate

only brings forth a small increase

in the amount of people willing

and able to do such work.

The reason may be the number

with those particular skills and

0ualifications, the time it takes to get

those skills, geographical immobility

etc.

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1umber of ;ours +orked(per eek)

SL

2

2'2/

02 62

f the supply of labour is elastic, a

small rise in the wage rate is sufficient

to encourage more people to offer

their labour. 1eographical and

occupational mobility are likely to be

high and there is likely to be many

substitutes.

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1umber employed

DL

SL

5'//

<.

The market wage rate for a

particular occupation

therefore will occur at the

intersection of the demand

and supply of labour.

The wage rate will alter if

there is a shift in either or

both the demand and supply

of labour.

DL.

<3

4'2/

A rise in the demand for labour

would force up the wage rate as

there would be e"cess demand

for labour.

#x!ess Demand

8/9/2019 EW Macro 5





1umber employed

DL

SL

5'//

<. <3

SL.

#x!ess Supply

An increase in the supply of

labour would lead to a fall

in the wage rate as there

would be an e"cess supply

of labour.

2'//

8/9/2019 EW Macro 5




The Labour Market

• co!omic *e!t The "alue of the ageearned o"er and abo"e that ne!essaryto keep a fa!tor in its !urrentemployment

8/9/2019 EW Macro 5




#!onomi! $ent+age $ate (- per hour)

1umber of hours orked

SL

The supply of labour !ur"eshos the relationship beteenthe age rate and the numberof people offering their labour interms of the number of hoursorked'

At a age rate of -5'// perhour& employees are illing tooffer <. hours' Some in themarket are not illing to orkfor any less than that and someould be illing to ork for lessthan -2'//'

The area under the supply

!ur"e is referred to as the"-ra!&fer ar!i!g&$ of thefa!tor'

5'//

<.

Transfer

#arnings

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SL

5'//

<.<3

6'//

2ome individuals would have been

prepared to work 3$ hours for &4.%%

per hour.

Assume that &+.%% per hour is the

current market wage rate for this

factor.

DL

Those individuals earn &+.%% per hour –

they therefore earn an amount in e"cess

than they were prepared to offer their

services for – this is termed ‘Economic

Rent’.

#!onomi!

$ent

The total value of economic rent is shown

by the yellow shaded triangle.

8/9/2019 EW Macro 5



Copyright 2006 Biz/ed



SL

+.

<.

DL

The total earnings of the factor is

the wage rate " the hours worked

indicated by the grey rectangle.

These earnings are made up of

an element of transfer earnings

and an element of economic rent.+3

#!onomi! $ent

The lower the elasticity of supply

of labour, the greater the economic

rent – think about this in relation

to soccer stars5

Total =a!tor #arnings

SL.

ew macro 5

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