BECN 300 Chapter 8 and 9 Fall 2024 PDF

Chapter 8 Labour Market Decisions of Households: The Supply of Labour © 2006 by Nelson, a division of Thomson Canada Limited. 1 In chapter 8 you will learn: 1. What is: Human capital, normal good, income effect, substitution effect, reservation w...

Chapter 8 Labour Market Decisions of Households: The Supply of Labour © 2006 by Nelson, a division of Thomson Canada Limited. 1 In chapter 8 you will learn: 1. What is: Human capital, normal good, income effect, substitution effect, reservation wage rate, marginal tax rate, economic rent, and a demogrant? 2. What factors influence an individual’s decision to participate in the labour force, to supply or not to supply labour? 3. How the individual’s labour supply curve is derived, and how the market supply curve for labour in an occupation is derived? 4. What is the difference between a change in supply and a change in quantity supplied? © 2006 by Nelson, a division of Thomson Canada Limited. 2 In chapter 8 you will learn: 5. The conditions under which an individual’s labour supply curve might bends backwards. 6. How to state and apply the wage rate elasticity of labour supply in different occupations. 7. How to use the income effect and the substitution effects to analyze the work disincentives associated with non-employment income 8. About the impact of immigration and emigration on the supply curve for labour in different occupations, and why workers migrate. © 2006 by Nelson, a division of Thomson Canada Limited. 3 Human Capital: Human resources considered in terms of their contributions to the economy, as in skills, education, etc. The supply of labour is considered to be human capital Recall other factors of production: Land, capital, and entrepreneurship © 2006 by Nelson, a division of Thomson Canada Limited. 4 The Work/Leisure Tradeoff: Individuals can only do two things with their time: Work for pay, or enjoy leisure Recall, an opportunity cost is what you give up to get the next best alternative. The opportunity cost of work is leisure, you give up leisure to work. Generally, leisure can be treated as a normal good that people desire, more money they have the more © 2006 by Nelson, a division of Thomson Canada Limited. 5 Leisure Activities: Leisure activities include: 1.Nonmarket work such as household chores; 2.Consumption time such as enjoying purchases of food, entertainment, made in the marketplace 3.Idleness such as rest and relaxation © 2006 by Nelson, a division of Thomson Canada Limited. 6 The Demand For Leisure: Depends on income and wealth Generally demand for leisure increases as income increases reflecting leisure as a normal good Substitution effect (supply): Leisure and work hours are substituted for each other as the wage rate changes, people work more. This causes a positive effect on the supply. Income effect (supply): The change in hours caused by a change in income: Negative effect on supply © 2006 by Nelson, a division of Thomson Canada Limited. 7 Demand For Leisure: Substitution Effect: As the wage rate increases the price of leisure (what you give up) increases, the individual will demand fewer leisure hours and will be encouraged to have less leisure time and to work more hours: A Positive impact on the decision to work Income Effect: Increases in income allows an individual to purchase more leisure. The increased income encourages the individual to work fewer hours and purchase more leisure hours. A Negative impact on the decision to work All of this assumes the individual can work as many hours or as few as he or she desires. © 2006 by Nelson, a division of Thomson Canada Limited. 8 Factors that influence the Decision to Work: 1. Age – Lifecycle issues 2. Reservation wage rate – the lowest wage rate an individual is willing to work for 3. Mandatory retirement 4. Fertility and family size 5. Investment in education 6. Non – Employment Income – Access to income from source other than a paid job © 2006 by Nelson, a division of Thomson Canada Limited. 9 Factors that influence the Decision to Work: Types of Non-Employment Income i. Inheritance ii. Demogrant: A lump sum payment to an individual based on membership in a particular demographic group iii. Welfare Benefits iv. Employment Insurance v. Subsidized daycare © 2006 by Nelson, a division of Thomson Canada Limited. 10 The Individual Labour Supply Curve: Labour supply curve: a graph showing the number of hours of work offered in relation to the wage rate At low wages, individuals are not willing to offer many hours of work As wages increase the opportunity cost of not working increases © 2006 by Nelson, a division of Thomson Canada Limited. 11 The Backward-Bending Supply Curve For Labour: At some point an individual may choose to purchase more leisure At this point the slope of the supply curve becomes negative The substitution effect dominates at low wage rates The income effect dominates at high wage rates © 2006 by Nelson, a division of Thomson Canada Limited. 12 The Backward-Bending Supply Curve For Labour: © 2006 by Nelson, a division of Thomson Canada Limited. 13 What is the Price of Leisure? E.g. per hour The hourly “Price of Leisure” is the wage rate per hour for the hour not worked. The Price of Leisure is an opportunity cost! © 2006 by Nelson, a division of Thomson Canada Limited. 14 The Wage rate Elasticity of Labour Supply Coefficient of wage rate elasticity of supply = (Percentage change in Quantity of labour supplied) /(Percentage change in the wage rate) © 2006 by Nelson, a division of Thomson Canada Limited. 15 Impact of Tax on the Decision to Work: Marginal tax rates influence work decisions As marginal tax rates increase there is a disincentive to work more hours Leisure is not as expensive as it would be without the tax © 2006 by Nelson, a division of Thomson Canada Limited. 16 The Backward-Bending Supply Curve For Labour: © 2006 by Nelson, a division of Thomson Canada Limited. 17 Market Supply Curve For Labour: Sum the individual supply curves for labour in a given occupation Generally the supply curve is an upwards sloping function Note that there can be a movement along a supply curve as well as shifts of the curve © 2006 by Nelson, a division of Thomson Canada Limited. 18 Changes in Supply: An increase in the supply of labour can occur for many reasons: 1. More people trained in the occupation 2. A lessening of barriers to the occupation No licensing required) 3. Increased immigration with skills in the occupation © 2006 by Nelson, a division of Thomson Canada Limited. 19 Changes in the Quantity Supplied of Labour: Note that a movement along the Supply curve represents a change in the quantity supplied, not a change in supply Since wages are on the vertical axis a change in wages cause a movement along the supply curve… A change in the quantity supplied © 2006 by Nelson, a division of Thomson Canada Limited. 20 The Impact of Migration on the Labour Supply Curve: © 2006 by Nelson, a division of Thomson Canada Limited. 21 Economic Rent = The amount above the reservation wage rate: Economic rent: A wage rate received in excess of the reservation wage rate © 2006 by Nelson, a division of Thomson Canada Limited. 22 Immigration and Emigration: Note that immigration increase the supply of labour in the occupation Emigration decrease the supply of labour Brain drain issue © 2006 by Nelson, a division of Thomson Canada Limited. 23 Migration: Decision to migrate depends on many factors: 1. Higher salaries 2. Lower tax rates 3. Exposure to leading edge technologies 4. Opportunities for personal growth 5. Family issues 6. Climate © 2006 by Nelson, a division of Thomson Canada Limited. 24 Summary:  Define and describe the following terms: normal good, income effect, substitution effect, reservation wage rate, marginal tax rate, economic rent, human capital, and demogrant  Discuss the factors that influence an individual’s decision to participate in the labour force  Derive the individual’s labour supply curve and the market supply curve for labour  Distinguish between a change in supply and a change in quantity supplied © 2006 by Nelson, a division of Thomson Canada Limited. 25 Summary:  Explain the conditions under which the individual labour supply curve bends backwards  Use income and substitution effects to analyze the work disincentives associated with sources of non-employment income  Explain the impact of immigration and emigration on the supply curve for labour  Discuss the factors that influence an individual’s decision to migrate © 2006 by Nelson, a division of Thomson Canada Limited. 26 Chapter 9 Labour Market Decisions of Firms (Micro) Demand for Labour © 2006 by Nelson, a division of Thomson Canada Limited. 27 In chapter 9 you will learn to: This chapter looks at Labour Economics from the Firm’s perspective 1. Define and describe each of the following terms: derived demand, law of diminishing returns, short run vs long run, marginal productivity of labour, marginal revenue product, scale effect, substitution effect (demand), and quasi-fixed labour costs © 2006 by Nelson, a division of Thomson Canada Limited. 28 In chapter 9 you will learn to: 1. Explain how the demand curve for a specific occupation shifts to a new position 2. Discuss the factors that influence the wage elasticity of demand 3. Discuss the factors that influence productivity in Canada 4. Discuss the types of quasi-fixed labour costs and how they affect the demand for labour © 2006 by Nelson, a division of Thomson Canada Limited. 29  The Firm’s Demand for Labour: Demand for labour is derived from the demand for final goods and services that require labour as an input Demand is also influenced by the productivity of labour improved through education and experience Demand is a function of the market’s perception of the value of the services (daycare v. baseball) © 2006 by Nelson, a division of Thomson Canada Limited. 30  The Firm’s Demand for Labour: Recall, increased in demand for a product increases the price of a product Increase in the price of a product increases the Marginal Revenue to the firm from selling that product Recall marginal revenue is the revenue from selling one more unit. © 2006 by Nelson, a division of Thomson Canada Limited. 31 The Demand Curve for Labour: The short run: A period when at least one factor of production cannot be changed The Law of Diminishing Returns (LDR) states that in the short run a point will be reached at which the extra contribution of the next worker to total output will be less than that of the previously hired worker The contribution of the next worker to total output is the Marginal Product of Labour (MPL) © 2006 by Nelson, a division of Thomson Canada Limited. 32 The Law of Diminishing Returns See Page 244 Total Product, TP 30 TP 20 10 0 1 2 3 4 5 6 7 8 9 Labour Marginal Product, MP Increasing Diminishing Negative Marginal Marginal Marginal 20 Returns Returns Returns 10 1 2 3 4 5 6 7 8 9 MPL © 2013 McGraw-Hill Ryerson Ltd. 33 Why the long run demand curve slopes down: In the long run all factors of production are variable Scale effect – Cost goes down as Quantity Demand increases, as you sell more So? (hire more if selling more) Substitution effect – You can substitute Capital (machinery) for Labour, make it cheaper and faster © 2006 by Nelson, a division of Thomson Canada Limited. 34 Scale Effect Economies Diseconomies Of Scale Of Scale Unit Cost Long-run Unit Cost Output © 2013 McGraw-Hill Chapter 7,LO4 35 Calculation of the Marginal Product of Labour: MPL = ∆TP/∆L © 2006 by Nelson, a division of Thomson Canada Limited. 36 Marginal Product of Labour goes up and then down due to LDR: LDR = The Law of Diminishing Return © 2006 by Nelson, a division of Thomson Canada Limited. 37 Figure 8-6 The Relationship between Productivity Curves and Cost Curves Production Curves AP MP Quantity of Labour MC AVC Cost Curves Quantity of Output 38 © 2013 McGraw-Hill Chapter 7,LO3 The Decision to Hire: The contribution of the next worker is the Marginal Product of Labour = MPL One can convert the contribution of each successive worker into dollars of revenue. – Many economic decisions are made at the “margin”: MR$ versus MC$ (wage rate) – Marginal Revenue (MR) is the addition to Total Revenue as a result of selling an extra unit of output – The additional contribution of the worker is the MPL x MR = Marginal Revenue Product (MRP) © 2006 by Nelson, a division of Thomson Canada Limited. 39 The Decision to Hire: Compare MR(Extra Revenue) to MC(Extra Cost)! If MR (Price) was constant (as in competitive markets) then the Demand for Labour is related only to the MPL x Selling Price of the Output In this case the Price of the Output = MR (constant in perfect competition) In imperfect competition the MR curve is a declining function Regardless, MPL x MR = MRP © 2006 by Nelson, a division of Thomson Canada Limited. 40 A Plot of the Marginal Revenue Product per Worker versus the Number of Workers is the Firms Demand Curve! (Price of Product is constant) © 2006 by Nelson, a division of Thomson Canada Limited. 41 Employer’s Decision Rule for Hiring: If wage rate › MRP, do not hire the person If wage rate ‹ MRP, hire the person If wage rate = MRP, the employer is indifferent about hiring the person, we need to watch that line! © 2006 by Nelson, a division of Thomson Canada Limited. 42 Wage Rate and Number of Workers (Labour Demand Curve): © 2006 by Nelson, a division of Thomson Canada Limited. 43 Shifts in the Demand Curve: In the long run all factors of production are variable Scale effect: The change in the number of employees hired as a result of changes in the amount sold Two reasons for Increases in Demand for Labour 1. The Demand for labour increases due to greater productivity of labour (Improvement in MPL) 2. Demand can also increase due to shifts in the Demand for the final goods or services thus increasing MR © 2006 by Nelson, a division of Thomson Canada Limited. 44 The Market Demand for Labour: The overall Demand for labour in a given occupation can change due to: 1. Increase in demand for final goods and services… increases demand for labour to make these goods. 2. Change in the price of substitutes: Unionized carpenters get wage increase causes a demand for non-unionized carpenters. 3. Change in the price of complements: Price of steel drops, causes an increase in demand for steel workers © 2006 by Nelson, a division of Thomson Canada Limited. 45 Using Wage Elasticity of Labour Demand to predict changes in quantity demand for occupations. The change in quantity demanded in response to a change in the wage rate = Percentage change in quantity of workers demanded / Percentage change in the wage rate: Ed = %ΔQd / %ΔWR If the percentage change in quantity of workers demanded › percentage change in the wage rate this coefficient represents an elastic demand, Ed › 1.0 © 2006 by Nelson, a division of Thomson Canada Limited. 46 Wage Elasticity of Labour Demand: If the percentage change in quantity of workers demanded by firms ‹ percentage change in the wage rate this coefficient represents an inelastic demand Ed ‹ 1.0 Wage elasticity is expressed as an absolute value by convention (no minus sign) © 2006 by Nelson, a division of Thomson Canada Limited. 47 Wage Elasticity of Demand: Depends on the following: 1.Percentage of labour costs in total costs 2.Number of substitutes for labour 3.Price elasticity of the product or service © 2006 by Nelson, a division of Thomson Canada Limited. 48 Cross Elasticity of Demand: An increase in wages paid to one occupation can lead to changes in the quantity demanded for workers in another occupation If its an increase then it’s a substitution effect If it’s a decrease then it’s a complementary effect Coefficient for cross elasticity = percentage change in quantity demanded for occupation A ÷ percentage change in wage rate for occupation B © 2006 by Nelson, a division of Thomson Canada Limited. 49 Labour Productivity: Study Page 257 Labour productivity: The output per worker Gross Domestic Product: The value of all final goods and services produced in a year Production increases can occur when workers are more productive Incomes (GDP) increase as output increase © 2006 by Nelson, a division of Thomson Canada Limited. 50 Productivity Growth – Macro Influences: The economy as a whole: 1. The structure of the economy – Industrial composition: Manufacturing or Services? 2. Economic conditions – Recession or Expansion? 3. Government policies – Fiscal policies: Spending and Taxation © 2006 by Nelson, a division of Thomson Canada Limited. 51 Productivity Growth – Micro Influences: Individual business firms: 1. The scale of business operations – Large businesses are more productive 2. Management Techniques – Educated managers are better at motivating staff and using better tools and equipment leading to higher productivity © 2006 by Nelson, a division of Thomson Canada Limited. 52 Productivity Growth – Micro/Macro: A combination of Micro (Firms and individuals) and Macro (The economy as a whole) influences: 1. Quantity and Quality of Capital –Employees become more productive as the quality and quantity of the tools increase 2. The Labour Force –Characteristics of the labour force such as age, health, education and skill training affect productivity. © 2006 by Nelson, a division of Thomson Canada Limited. 53 Quasi-Fixed Labour Costs: Non-wage costs to hiring employees that are not related to the hours of work: 1. Hiring costs: Advertising, screening, record keeping, payroll etc. 2. Training: Materials and salaries of trainers 3. Opportunity costs: Lost production from those in training © 2006 by Nelson, a division of Thomson Canada Limited. 54 Summary:  Define and describe each of the following terms: derived demand, law of diminishing returns, short run, long run, marginal productivity of labour, marginal revenue product, scale effect, substitution effect (demand), and quasi- fixed labour costs  Explain how the firm’s demand curve for a specific occupation is derived © 2006 by Nelson, a division of Thomson Canada Limited. 55 Summary:  Explain how the demand curve for a specific occupation shifts to a new position  Discuss the factors that influence the wage elasticity of demand  Discuss the factors that influence productivity in Canada  Discuss the types of quasi-fixed labour costs and how they affect the demand for labour © 2006 by Nelson, a division of Thomson Canada Limited. 56