Labor Market Forces And Government Intervention (Copy)
8.3 Labour Market Forces and Government Intervention
8.3.1 Demand for Labour as a Derived Demand
- Labour demand depends on demand for goods/services it helps produce.
- If demand for final product rises → demand for labour rises.
8.3.2 Factors Affecting Demand for Labour
- Productivity of labour.
- Price of final product.
- Price of substitute factors (e.g., capital).
- Complementary inputs availability.
- Technology changes.
- Government policies (e.g., subsidies, taxes).
8.3.3 Shifts vs Movements Along Labour Demand Curve
- Movement along: Change in wage rate only.
- Shift: Change in non-wage factors (e.g., productivity, product demand).
8.3.4 Marginal Revenue Product (MRP) Theory
- Definition: Additional revenue earned from employing one extra unit of labour.
- Formula: MRP = MP × MR.
- In perfect competition: MRP = MP × Price.
- Derivation of Demand Curve: Downward-sloping MRP curve = firm’s demand for labour.
Example Table – MRP Calculation:
| Workers | MP (units) | Price ($) | MRP ($) |
|---|---|---|---|
| 1 | 10 | 5 | 50 |
| 2 | 8 | 5 | 40 |
| 3 | 6 | 5 | 30 |
8.3.5 Factors Affecting Labour Supply to a Firm or Occupation
- Wage factors: Higher wages → more supply (up to a point).
- Non-wage factors: Job satisfaction, working conditions, career prospects, location, training opportunities.
8.3.6 Shifts vs Movements Along Labour Supply Curve
- Movement along: Wage rate change.
- Shift: Changes in working conditions, population size, migration, qualifications, taxes/benefits.
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8.3.7 Wage Determination in Perfect Markets
- Equilibrium wage rate: Intersection of labour demand & supply curves.
- Equilibrium employment: Number of workers employed at equilibrium wage.
8.3.8 Wage Determination in Imperfect Markets
Trade Unions
- Bargain for higher wages and better conditions.
- May cause unemployment if wage set above equilibrium.
Government (Minimum Wage)
- Sets legal wage floor.
- If above equilibrium → possible unemployment.
Monopsony Employers
- Single buyer of labour → wage lower and employment less than in competitive market.
- Minimum wage can increase both wage and employment in monopsony.
8.3.9 Wage Differentials
- Differences in wages due to:
- Skill level and education.
- Experience.
- Job risk.
- Geographical location.
- Discrimination.
- Market power of employees/unions.
8.3.10 Transfer Earnings and Economic Rent
| Term | Definition | Determinants |
|---|---|---|
| Transfer Earnings | Minimum payment needed to keep a worker in current job. | Alternative wage in next best job. |
| Economic Rent | Payment above transfer earnings. | Scarcity of skill, market power, demand conditions. |
Example: Worker earns $500; could earn $400 elsewhere → Transfer earnings = $400; Economic rent = $100.