Factor markets: The Labour market

1
Topic 4 Lecture 18
Factor markets The Labour market
2
Topic 4 Lecture 18
In previous material (running through Topics 2
and 3) we have focused on the question What
determines the firms choice of output? We now
ask the question is What determines the firms
demand for labour? The two questions are
clearly related because if we know the firms
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 firms 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 firms 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.
3
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
?
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
5
Topic 4 Lecture 18
Consider the Marginal Revenue Product of Labour
(MRPL)
MRPL
What does this assume?
p.MPPLMRPL
L
6
Topic 4 Lecture 18
Consider the Marginal Cost of Labour (MCL)
MCL
What does this assume?
Ls w MCL
L
7
Topic 4 Lecture 18
Consider MCL and MRPL together
What is the firms chosen level of employment?
Why?
MCL
MRPL
Ls w MCL
MRPL
L
8
Topic 4 Lecture 18
Consider MCL and MRPL together
MCL
MRPL
What happens to the firms chosen level of
employment if the competitive wage shifts up?
Ls w MCL
MRPL
L
L
9
Topic 4 Lecture 18
Consider MCL and MRPL together
MCL
MRPL
Ls w2 MCL2
Ls w MCL
What do you conclude about the firms demand for
labour?
MRPL
L
L
L2
10
Topic 4 Lecture 18
We have assumed perfect competition in both
product and labour markets.

MCL
MRPL
Ls w MCL
MRPL
L
How is the analysis different for a monopolist?
11
Topic 4 Lecture 18
We have assumed perfect competition in both
product and labour markets.

MCL
MRPL
Ls w MCL
MRPL
MRPL (monopoly)
L
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?
12
Topic 4 Lecture 18
We have assumed perfect competition in both
product and labour markets.

MCL
MRPL
Ls w MCL
MRPL
L
How is the analysis different for a
monopsonist? Consider the next slide . . .
13
Topic 4 Lecture 18
How is the analysis different for a monopsonist?

MCL
MRPL
Ls
dw
MRPL
L
L1
L11
14
Topic 4 Lecture 18
How is the analysis different for a monopsonist?

MCL
MRPL
Ls
dw.L1
dw
MRPL
L
L1
L11
15
Topic 4 Lecture 18
How is the analysis different for a monopsonist?

MCL
MCL
MRPL
Ls
dw.L1
dw
MRPL
L
L1
L11
16
Topic 4 Lecture 18
What happens with the introduction of a Minimum
Wage (MWL) under perfectly competitive markets?
(Then well contrast this with Monopsony)

MCL
MRPL
Ls
wC
MRPLLd, in a perfectly competitive labour market
LC
L
17
Topic 4 Lecture 18
What happens with the introduction of a Minimum
Wage (MWL) under perfectly competitive markets?
(Then well contrast this with Monopsony)

MCL
MRPL
Ls
wmin
wmin
wC
MRPLLd, in a perfectly competitive labour market
L
LC
LREG
18
Topic 4 Lecture 18
What happens with the introduction of a Minimum
Wage (MWL) under a monopsonist?

MCL
MCL
MRPL
Ls
wM
MRPL
L
LC
LM
19
Topic 4 Lecture 18
What happens with the introduction of a Minimum
Wage (MWL) under a monopsonist?

MCL
MCL
MRPL
Ls
The minimum wage is introduced
wmin
wM
MRPL
L
LC
LM
20
Topic 4 Lecture 18
What happens to the Labour Supply curve with the
introduction of a Minimum Wage (MWL) under a
monopsonist?

The labour supply curve is unaffected in this
region . . .
MCL
MCL
MRPL
Ls
. . . but is affected in this region
wmin
wM
MRPL
L
LC
LM
LCRIT
21
Topic 4 Lecture 18
What happens to the MCL curve with a Minimum Wage
(MWL) under a monopsonist?

The MCL curve is unaffected in this region . . .
MCL
MCL
MRPL
Ls
. . . but is affected in this region
wmin
wM
MRPL
L
LC
LM
LCRIT
22
Topic 4 Lecture 18
What happens to the Monopsonists chosen
employment level with the introduction of a
Minimum Wage (MWL)?

MCL
MCL
MRPL
Ls
wmin
wM
MRPL
For LltLCRIT, how does MRPL compare with MCL? And
therefore . . . ?
For LgtLCRIT, how does MRPL compare with MCL? And
therefore . . . ?
L
LC
LM
LCRIT
What do you conclude happens to employment with
the introduction of a Minimum Wage under
Monopsony?
23
Topic 3 Lecture 18

• Now read BB 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