Robin Naylor, Department of Economics, Warwick

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Factor markets: The Labour market

Topic 4 Lecture 18

Robin Naylor, Department of Economics, Warwick

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In previous material (running through Topics 2 and 3) we have focused on the question: “What determines the firm’s choice of output?”

We now ask the question is: “What determines the firm’s demand for labour?”

[The two questions are clearly related – because if we know the firm’s chosen output, the level of labour demand should follow from the production function, which links labour employed to output produced.]

Our answer to this question is that the profit-maximising firm will employ labour up to the level at which the addition to the firm’s total revenue (from the sale of the extra units produced when the firm takes on an extra unit of labour) is just equal to the addition to the firm’s total costs incurred by employing the extra unit of labour.

I.e., the profit-maximising employment rule is to employ an amount of Labour such that:

Marginal Revenue Product of Labour = Marginal Cost of Labour.

Topic 4 Lecture 18

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Marginal Revenue Product of Labour = Marginal Cost of Labour.

What is the Marginal Revenue Product of Labour (MRPL)?

What is the Marginal Cost of Labour (MCL)?

If the product market is perfectly competitive, then:MRPL = ?

If the labour market is perfectly competitive, then:MCL = ?

Robin Naylor, Department of Economics, Warwick

4

Topic 4 Lecture 18

Marginal Revenue Product of Labour = Marginal Cost of Labour.

What is the Marginal Revenue Product of Labour (MRPL)?

What is the Marginal Cost of Labour (MCL)?

If the product market is perfectly competitive, then:MRPL = (MPPL) multiplied by (competitive market product price, p)

If the labour market is perfectly competitive, then:MCL = unit cost of an extra unit of labour = wage rate

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Consider the Marginal Revenue Product of Labour (MRPL)

L

MRPL

p.MPPL=MRPL

What does this assume?

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Consider the Marginal Cost of Labour (MCL)

L

MCL

Ls = w = MCL

What does this assume?

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Consider MCL and MRPL together

L

MCL

Ls = w = MCL

What is the firm’s chosen level of employment? Why?

MRPL

MRPL

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Consider MCL and MRPL together

L

MCL

Ls = w = MCL

What happens to the firm’s chosen level of employment if the competitive wage shifts up?

MRPL

MRPL

L*

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

Consider MCL and MRPL together

L

MCL

Ls = w = MCL

MRPL

MRPL

L*

Ls = w2 = MCL2

L*2

What do you conclude about the firm’s demand for labour?

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls = w = MCL

MRPL

MRPL

We have assumed perfect competition in both product and labour markets.

How is the analysis different for a monopolist?

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls = w = MCL

MRPL

MRPL

We have assumed perfect competition in both product and labour markets.

How is the analysis different for a monopolist?

The answer is that product price is higher, but now falls as X (and hence L) increase. What does this do to the MRPL curve of the monopolist?

MRPL (monopoly)

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls = w = MCL

MRPL

MRPL

We have assumed perfect competition in both product and labour markets.

How is the analysis different for a monopsonist?

Consider the next slide . . .

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

How is the analysis different for a monopsonist?

L1 L1+1

dw

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

How is the analysis different for a monopsonist?

L1 L1+1

dw

dw.L1

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

How is the analysis different for a monopsonist?

L1 L1+1

dw

dw.L1

MCL

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL=Ld, in a perfectly competitive labour market

What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony)

LC

wC

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL=Ld, in a perfectly competitive labour market

What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony)

wmin

LCLREG

wC

wmin

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

What happens with the introduction of a Minimum Wage (MWL) under a monopsonist?

MCL

LCLM

wM

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

What happens with the introduction of a Minimum Wage (MWL) under a monopsonist?

MCL

LCLM

wMwmin

The minimum wage is introduced

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

What happens to the Labour Supply curve with the introduction of a Minimum Wage (MWL) under a monopsonist?

MCL

LCLM

wMwmin

The labour supply curve is unaffected in this region . . .

. . . but is affected in this region

LCRIT

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

What happens to the MCL curve with a Minimum Wage (MWL) under a monopsonist?

MCL

LCLM

wMwmin

The MCL curve is unaffected in this region . . .

. . . but is affected in this region

LCRIT

Robin Naylor, Department of Economics, Warwick

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Topic 4 Lecture 18

L

MCL

Ls

MRPL

MRPL

What happens to the Monopsonist’s chosen employment level with the introduction of a Minimum Wage (MWL)?

MCL

LCLM

wMwmin

LCRIT

For L<LCRIT, how does MRPL compare with MCL? And therefore . . . ?

For L>LCRIT, how does MRPL compare with MCL? And therefore . . . ?

What do you conclude happens to employment with the introduction of a Minimum Wage under Monopsony?

Robin Naylor, Department of Economics, Warwick

Topic 3: Lecture 18

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Now read B&B 4th Ed., pp. 475-479, 400-408, 409-412.

You might also consult:

• Frank, Chapters 14-15

• Estrin, Laidler and Dietrich, Chapter 18

• Morgan, Katz and Rosen, Chapter 10.2