Chapter 12 Notes on Factor Markets: PDF

Chapter 12: The factor markets: the labour market  CHAPTER OUTLINE LEARNING OUTCOMES 12.1 INTRODUCTION 12.2 THE LABOUR MARKET VERSUS THE GOODS MARKET 12.3 A PERFECTLY COMPETITIVE LABOUR MARKET 12.4 IMPERFECT LABOUR MARKETS 12.5 WAGE DIFFERENTIALS FACTO...

Chapter 12: The factor markets: the labour market  CHAPTER OUTLINE LEARNING OUTCOMES 12.1 INTRODUCTION 12.2 THE LABOUR MARKET VERSUS THE GOODS MARKET 12.3 A PERFECTLY COMPETITIVE LABOUR MARKET 12.4 IMPERFECT LABOUR MARKETS 12.5 WAGE DIFFERENTIALS FACTOR MARKETS IMPORTANT CONCEPTS Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LEARNING OUTCOMES Once you have studied this chapter you should be able to identify the main differences between the labour market and the goods market explain the main determinants of the supply of labour explain how the demand for labour is derived explain how a perfectly competitive labour market functions analyse various labour market imperfections discuss the desirability of minimum wages explain why wages differ Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  12.1 INTRODUCTION Figure 12-1 The interaction between households and firms in the labour market (Textbook page 208) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  INTRODUCTION Labour is an important factor of production. The cost of labour is the largest cost factor in the economy. Changes in the cost of labour therefore have a significant impact on cost and price trends in the economy. The cost of labour depends on the wages and salaries paid to workers and on the productivity of labour. Productivity (or quality) of labour is an important determinant of the cost of labour. Wages and salaries do not only represent costs. They are also an important demand factor as they are the main source of household income and they therefore influence the demand for goods and services. Creation of jobs arguably the most important objective of economic policy. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: identify the main differences between the labour market and the goods market 12.2 THE LABOUR MARKET VERSUS THE GOODS MARKET See Box 12-1 Some basic concepts relating to the remuneration of labour (Textbook page 209) Differences between labour market and goods market Non-monetary factors important Labour services are not transferable Labour is rented not sold Non-economic considerations Trade unions, employees’ associations, collective bargaining and government intervention Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: identify the main differences between the labour THE LABOUR MARKET VERSUS THE GOODS MARKET market and the goods market Long-term contracts Heterogeneous Variety of labour markets, segmented market Non-wage benefits Remuneration is affected by a number of factors which are not directly related to labour market conditions See Box 12-1 SOME BASIC CONCEPTS RELATING TO THE REMUNERATION OF LABOUR (Textbook page 209) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions 12.3 A PERFECTLY COMPETITIVE LABOUR MARKET Requirements for perfect competition Large number of buyers and sellers Homogeneous labour Completely mobile No government intervention Perfect knowledge Perfect competition in the goods market Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive A PERFECTLY COMPETITIVE LABOUR MARKET labour market functions Equilibrium in the labour market Quantity demanded = quantity supplied Figure 12-2 Equilibrium in a perfectly competitive labour market (Textbook page 210) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain the main determinants of the supply of labour Quantity of labour The individual supply of labour supplied eventually decreases as wage Backward-bending supply curve rate increases Figure 12-3 The individual supply of labour Maximum quantity of (Textbook page 211) labour supplied Wage rate Quantity of 30 1 2 3 4 5 RESET labour supplied increases as Eric’s work hours wage rates increase Eric’s supply schedule 32 Eric’s wage rate Quantity of labour Weekly wage (Rands per hour) (hours per week) At wage rates higher than R50 an hour, Eric Eric At Baloyi cana work wagefewer has of rate tohours, decide R50 per andhow hour, toearn still hedivide is at his willing least C R70 40 R2 800 Eric is willing toand work at rates higher time to between work R2 250The a45 hours week. work per This leisure. week, gives himfor a At more an weekly hourly free B R50 45 R2 250 that higher R10 the an hour. rate, the longer he is rate wage of time and R10 of R2 or 250less, possibly (R50 he× is not 45). morehemoney. willing This is to work sufficient willing For R30 toanwork… hour, is willing to work R30 32 R960 at for all, Eric E.g. At32asto R70wage enjoy an rates a hour, are not reasonable he is sufficient willingstandard to worktoof40 cover his hours a week transport A R10 0 R0 living, hours, for R2800having while still perand other costs. enough week. leisure time. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions The individual supply of labour LO: explain the main determinants of the supply of labour The backward-bending supply Income curve can be ascribed to two effect forces: Substitution effect – as wage rate increases, workers tend to work more hours Income effect – as a worker Substitution spends more on goods and effect services, his or her marginal utility of consumption decreases, and his or her demand for leisure increases Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain the main determinants of the supply of labour The market supply of labour Figure 12-4 The market supply of labour (Textbook page 212) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions The market supply of labour LO: explain the main determinants of the supply of labour Market supply will change if, for example: new workers enter the market the number of workers decreases as a result of the impact of HIV/Aids the wages that can be earned in other occupations change the non-monetary aspects of the occupation change Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how the demand for labour is derived An individual firm’s demand for labour Derived demand Compare marginal benefit to marginal cost Wage taker Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived Figure 12-5 A perfectly competitive labour market (Textbook page 213) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived How much labour will the firm employ at the given wage rate? Marginal benefit of employing additional units of labour Physical productivity of labour (MPP) Marginal revenue product (MRP) Firm’s marginal revenue equals price of product The law of diminishing returns implies that the marginal product of labour has a declining tendency MRP = MPP × MR (12.1) MRP = MPP × P (12.2) See Box 12-2 Imperfect competition in the product market and the demand for labour (Textbook page 214) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived MRP > Wage rate (w): employment expansion profitable MRP < w: results in loss Equilibrium (maximum profit): Marginal benefit = marginal cost MRP = w (12.3) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived Table 12-1 Calculation of the marginal revenue product of labour: an example (Textbook page 214) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived Figure 12-6 The individual firm’s demand for labour (Textbook page 215) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions An individual firm’s demand for labour LO: explain how the demand for labour is derived Figure 12-7 The equilibrium position of a firm operating in a perfectly competitive labour market (Textbook page 215) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions LO: explain how the demand for labour is derived The market demand for labour The market demand will shift if: The number of firms change The price of the product changes MPP (or productivity) changes A new substitute for labour becomes available The price of a substitute factor of production changes The price of a complementary factor of production changes Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how the demand for labour is derived Click on the number to reveal Changes in labour market equilibrium the graph. Click again to hide. Figure 12-8 Changes in labour market equilibrium (Textbook page 217) a The The initial initial equilibrium equilibrium isis illustrated illustrated byby the the intersection intersection ofof the the demand demand curve curve b (D (D00D D00)) and and the the supply curve (S00SS00).). The The equilibrium equilibrium wage wage rate rate is is w w00 and and the the equilibrium level equilibrium level of employment N of employment N00.. c InInIn(b) In (d) (a) the (c)the the supply supply of thedemand demand of for for labour labour labour labour decreases, increases, decreases, increases, illustrated illustrated illustratedby by byaaarightward leftward leftward shift shiftof shift ofthe of the the d supply supply demand demand curve curve curve curve to toto S14D2.The Sto3DSD324.The D.1The.Thewage wage rate rate equilibrium wage falls rate wage toincreases wrate 3 but the and toemployment w41 but level and of the the level level of employment fall to of employment increases w2employment and falls totoNto N2 respectively. 3 1N N. 4. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION A PERFECTLY COMPETITIVE LABOUR MARKET LO: explain how a perfectly competitive labour market functions Changes in labour market equilibrium LO: explain how the demand for labour is derived In all these cases, the magnitude of the changes in the wage rate and the level of employment will depend on the elasticities of demand and supply. For example, if the demand for labour decreases, the impact will depend on the elasticity of the supply of labour. The more inelastic the supply of labour, the greater the impact on the wage rate and the smaller the impact on the level of employment will be. Likewise, the impact of a change in the supply of labour will depend on the elasticity of the demand for labour. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions LO: analyse various labour market imperfections 12.4 IMPERFECT LABOUR MARKETS Reasons for imperfect labour markets Trade unions (act as monopolistic suppliers of labour) Monopsony Labour is heterogeneous Labour is not completely mobile Labour market is a segmented market Government intervention Imperfect knowledge Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Click on the number to reveal Trade unions the graph. Click again to hide. Figure 12-9 Ways in which a trade union can attempt to increase the wage rate (Textbook page 219) Trade unions can attempt to raise the wage a rate by (a) restricting supply, (b) enforcing a higher disequilibrium wage or (c) assisting firms to raise the demand for the product of b the industry. Part (c) illustrates a situation in which the c The unionrestriction succeedsof (insupply is illustrated conjunction with thein part Part(a) firms) inby (b) a leftward raising shift offor theademand illustrates situation the supplythe in the which curve unionto product S1Sthe of 1. industry. succeeds in raising This theresults in anto wage rate increase w2, whichin the derived is higher thandemand for labour the equilibrium (to D1D1As wage. ). The wage in (a), thisrate increases (toby is accompanied w3a) and the level of employment decline in employment also increases. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Monopsony Table 12-2 The cost and marginal revenue product of labour in a monopsonistic labour market (Textbook page 220) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Figure 12-10 Wage and employment determination in a monopsonistic labour market (Textbook page 221) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Bilateral monopoly The relative bargaining strength of the two parties is determined, inter alia, by: ratio of wage cost to total cost Changes in productivity The relationship between the wages paid in the industry and the wages paid elsewhere for similar work The nature of the product The price elasticity of the demand for the product The degree to which the union controls the supply of labour The level of unemployment The extent to which machinery can readily replace labour Increases in the cost of living The structure of the goods market Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Government intervention in the labour market Flexible labour market: A perfectly competitive labour market that can adjust instantaneously and fully to changes in demand and supply (e.g. adjust the size, compensation and working conditions of its workforce with speed and at low cost). In practice, most labour markets have some rigidities. Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections LO: discuss the desirability of minimum wages Minimum wages A Minimum wage in a perfectly competitive labour market Figure 12-11 The impact of the imposition of a minimum wage in a perfectly competitive labour market (Textbook page 224) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections LO: discuss the desirability of minimum wages A Minimum wage in a monopsonistic labour market Figure 12-12 The impact of the imposition of a minimum wage in a monopsonistic labour market (Textbook page 224) Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions IMPERECT LABOUR MARKETS LO: analyse various labour market imperfections Labour immobility and imperfect information Geographical immobility Occupational immobility Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  LO: explain how a perfectly competitive labour market functions LO: explain why wages differ 12.5 WAGE DIFFERENTIALS See Box 12-3 Other sources of inequality (Textbook page 226) Job-related differences Compensating wage differential Worker-related differences Investment in human capital Differences related to market structure Differences as a result of discrimination Discrimination Differences in productivity Productivity Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  FACTOR MARKETS Most important = labour market Other: Land Capital and interest Entrepreneurship and profit Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION  IMPORTANT CONCEPTS Wage rate Monopsony Earnings Collective bargaining Nominal wage Bilateral monopoly Real wage Flexible labour market Supply of labour Minimum wages Backward-bending supply curve Mobility of labour Demand for labour Wage differentials Derived demand Compensating wage differential Marginal physical product Investment in human capital Marginal revenue product Discrimination Marginal cost of labour Productivity Trade union Click to edit Master ECONOMICS FOR SOUTH AFRICAN STUDENTS title style CHAPTER 5: DEMAND AND SUPPLY IN ACTION