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Labour Market Equilibrium

Labour Market Equilibrium. Competitive labour market: Labour demand Marginal revenue product Labour supply Marginal labour cost Reservation wage Market equilibrium State of rest If surplus Unemployment Downward pressure on wages If shortage Upward pressure on wages

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Labour Market Equilibrium

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  1. Labour Market Equilibrium

  2. Competitive labour market: • Labour demand • Marginal revenue product • Labour supply • Marginal labour cost • Reservation wage • Market equilibrium • State of rest • If surplus • Unemployment • Downward pressure on wages • If shortage • Upward pressure on wages • Comparative statics • Sticky wages

  3. Monopsony: • Recall a monopoly • MR < P • Inefficiently low output • A monopsony = a single buyer • A monopsony’s demand for labour = market demand • A monopsony’s supply of labour = market supply • Profit maximization • max π = TR(L) – C(L) • First order condition: MR = MC • Marginal revenue product = marginal labour cost • For a monopsony, MLC > reservation wage • Equilibrium • MRP = MLC • Inefficiently low employment and wage

  4. Government in labour market: • Minimum wage • Wage floor • Unemployment • “lousy” jobs (small surplus) lost • Most part-time workers are • Youth • Part-time • Payroll tax • Statutory incidence • Economic incidence • Determined by elasticities of demand and supply • Independent of statutory incidence • Wage rate subsidy • Can think as increase in demand (MRP) or decrease in cost • Targeted wage subsidies • Student summer jobs • Industry that “develops”

  5. Unions in labour market: • Two ways to increase wages • Increase demand for labour • Decrease supply of labour • Increase demand for labour • “Buy Union Made” promotion campaign • Improving union member productivity • Subsidized training/education • Featherbedding • Are these guys featherbedding? • Often difficult to define

  6. Unions in labour market: • Supply of labour • Industrial union • Members belong to an industry • CAW • CUPE • Any occupation • Fight for regulations / standards / minimum wage • Why join a union • Till the day I die • Craft union • Certain skill • IBEW • Restrict supply • Entry barriers • Certification/apprenticeship requirements • Requirements to hire union member • Closed shop agreements in contracts

  7. Unions in labour market: • General agreement • Unions raise wages • Unions create unemployment • But how much, empirically? • Unclear for unemployment • Likely 10 to 30% above no-union for wage

  8. Disequilibriumin labour market: • Unemployment • Job search • Takes time and effort • Expected marginal benefits of search • Marginal cost of search • Lost net wages • Optimal duration • EI and job search • Sticky wages • Labour contracts and long-term relationships • Efficiency wages • Heterogenous workers and job rationing • Imperfect information and incentives against shirking

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