RESOURCE ALLOCATION: LABOUR
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Goal: determination of equilibrium price and
quantity in labour markets.
•
Price of labour = real wage (real wage is money
wage and all benefits)
We will analyze equilibrium price and quantity in
several market structures.
•
•
•
•
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Competitive labour market, and firm sells its output
into a competitive product market.
Competitive labour market, and firm sells its output
into an imperfectly competitive product market.
Non-competitive labour market, single buyer
(monopsony) of labour. Ignore output market.
Non-competitive labour market, monopoly seller of
labour. Ignore output market.
Non-competitive labour market,
monopoly/monopsony or bilateral monopoly, ignore
output market.
CAUTION!
MARGINAL RESOURCE COST (MRC) IS THE
SAME THING AS MARGINAL FACTOR COST (MFC)
HOW CAN A UNION INCREASE THE DEMAND FOR
LABOUR?
1.
Increase productivity (i.e., increase MPP)
2.
Increase demand for the product that the union
produces
a)
Directly (advertise the product)
3.
b)
Indirectly (exclude substitutes)
c)
Require the service through regulation
Alter the price of other inputs
HOW CAN A UNION REDUCE THE SUPPLY OF
LABOUR?
1.
2.
General
a)
Restrict immigration
b)
Restrict hours, work week, child labour
c)
Promote mandatory retirement at early age,
holidays, long vacations
Specific
a)
closed shop
b)
long apprenticeships
c)
high initiation fees
d)
restrict entry to union
e)
restrict access to necessary training
f)
restrict population of practitioners
IS MONOPSONY INEFFICIENT?
Demand = Marginal
Revenue Product
10k
The Market Value of the Output of 10,000 Workers in
this Industry
THE AREA UNDER THE MRP CURVE IS THE "VALUE" OF
THE OUTPUT PRODUCED BY THE RESOURCE (E.G.,
LABOUR)
Industry A
Industry B
MRC
S
S1
S2
$15
$13
9k
10k
20k 21k
When an input market goes from competitive to monopsony,
fewer workers are hired. Assume those workers migrate to
another industry (shifting the supply of labour in that market
from S1 to S2).
Industry A
$15
Industry B
C
B
D
A
A
$13
9k
10k
Value of Reduced
Output (A+B+C)
20k 21k
Value of Increased
Output (A+D)
(A+B+C) > (A+D)
The value of the lost production in Industry A is more than
the value of the increased production in Industry B.
Conclusion: society's welfare decreases!
WAGE DIFFERENTIALS
1.
2.
Noncompeting groups
a)
Ability
b)
Investing in human capital (e.g., education)
Compensating differences
a)
Non-monetary aspects of the job
i)
3.
Dirt, danger, temperature
Market imperfections
a)
Lack of job information
b)
Geographic immobilities
c)
Institutionnel immobilities (unions, gov't restraints)
d)
Sociological immobilities (discrimination)
PAY AND PERFORMANCE
The Principal/Agent Problem
Solutions
1. Piece rates
2. Commissions and royalties
3. Bonuses, stock options and profit sharing