Demands and Supplies of Labor: Graphical Insights and Market Equilibrium

1. Chapter Objectives • Graph and describe both the value-of-marginal-product curve and the marginal-revenue-product curve. 2. Discuss the factors that will cause the demand curve for labour to shift and determinants of its elasticity. 3. Describe graphically how wages are determined and how unions try to increase them. 4. Discuss the various barriers to labour-market mobility. 5. Define equalizing differences.

2. Analyzing Resource Markets The lower loop is where households represent the supply side of the market and businesses represent the demand side.

3. Labour: Demand and Supply The Demand for Labour Derived demand is the demand for a resource based on the demand for the good or service that the resource helps to produce. The demand for the resource depends on the productivity of that resource (i.e. education, training, the quality of resources that labour may work with). (Cont.)

4. The Demand for Labour (Continued) The productivity of each worker is represented by the marginal product of labour. In the short-run, productivity depends on the law of diminishing returns. After a certain point, the addition to total output brought on by hiring one more worker becomes less and less. This is because each additional worker has less fixed resources to work with.

5. The Demand for Labour (Continued) Value of Marginal Product (VMP) = Price x Marginal Product

6. The Demand for Labour (Continued) VMP curve represents the demand curve for labour under perfect competition when there is no change in the output price.

7. The Demand for Labour (Continued) Under perfect competition a firm will continue to hire workers until the wage paid for the last worker is equal to the VMP or: Wage Rate = Value of Marginal Product This assumes that the wage rate paid does not change regardless of how many workers are hired.

8. The Demand for Labour (Continued) If a firm operates in an imperfectly competitive market than the price of the product changes as more is produced. In this situation, the labour demand curve is determined by: Marginal-Revenue Product (MRP) = Marginal Revenue x Marginal Product

9. The Demand for Labour (Continued) The firm will hire more workers until: Wage Rate = Marginal-Revenue Product To find an overall demand curve for a specific type of labour, the labour demand curves for individual firms are added up.

10. Changes in the Demand for Labour • What factors are held constant when drawing the demand curve for labour? • The price of the product • The productivity of the worker • The price of a complement to labour, or the price of its substitute A change in any of the above factors will shift the curve.

11. Wage-Rate Determination If a firm can hire as many workers as it wants without a change in the wage rate than the labour supply curve is perfectly elastic. If a firm has to increase a wage rate to attract more workers than the labour supply curve is upward sloping. A monopsony is a situation in which there is only one firm that hires a specific type of worker (Cont.)

12. Wage-Rate Determination (Continued) The extra cost of hiring one more worker is known as the marginal-resource cost (MRC).

13. Wage-Rate Determination (Continued) The firm will hire the number of workers where MRP = MRC and pays a wage rate as determined by the supply curve.

14. Equilibrium in the Labour Market The interaction of the market-demand curve and market-supply curve determines the equilibrium wage rate.

15. The Elasticity of Demand for Labour The more elastic the demand for labour, the more it is likely that employers will respond to changes in wage rates in terms of the number of workers demanded. Knowledge of the elasticity of demand for labour is an important aspect in union/management negotiations. Minimum wage legislation will result in a greater decrease in employment if the demand for labour is elastic. (Cont.)

16. The Elasticity of Demand for Labour (Continued) The elasticity of demand for labour will be more elastic: • the more elastic the demand for the product; • the greater the number of substitutes for labour; • the more elastic the demand for substitutes for labour; • over the long run; • the greater the percentage of total cost that labour cost is; • the gradual the slope of the marginal-product curve.

17. The Backward-Bending Supply Curve The theory behind the supply curve can be summarized as the work-leisure trade-off. An increase in the wage rate increases the opportunity cost of leisure. Based on the substitution effect, households will choose to work more and reduce their consumption of leisure. An increase in the wage rate results in an increase in one’s income. Based on the income effect, households will choose to work less and increase their consumption of leisure. (Cont.)

18. The Backward-Bending Supply Curve (Continued) The income and substitution effects work in opposite directions. At low wage rates the substitution effect dominates as individuals believe that their income is not high enough to buy more leisure. At higher wage rates the income effect dominates as individuals choose more leisure over work.

19. The Backward-Bending Supply Curve (Continued)

20. The Impact of Labour Unions on Wage Rates • The main objective of unions is to increase wages for its members. This is accomplished by: • increasing the demand for its members, or • decreasing the supply of workers available. (Cont.)

21. Increasing the Demand for Labour Unions can advertise to promote a product. Unions can press the government to introduce tariffs and import quotas to increase the demand for domestically produced goods. Unions may negotiate make-work projects with employers, called featherbedding, to retain jobs for workers whose jobs have become redundant. Unions can increase labour productivity through training and skill development.

22. Influencing the Supply of Labour Craft unions that are made up of members who all possess a particular skill, such as electricians and plumbers. Industrial unions organize workers by industry; for example automobile, steel, and chemical. Each union uses different ways to reduce the labour supply, but whichever method is used they all lead to higher wages. (Cont.)

23. Influencing the Supply of Labour Craft unions that are made up of members who all possess a particular skill, such as electricians and plumbers. Industrial unions organize workers by industry; for example automobile, steel, and chemical. The ability to influence the supply of labour depends on the type of union in question. (Cont.)

24. Influencing the Supply of Labour (Continued) Craft unions can press employers to hire only union members, to insist on long apprenticeships, or make retirement compulsory.

25. Influencing the Supply of Labour (Continued) Industrial unions try to establish wage floors but this results in some unemployment.

26. Collective Bargaining in Canada This is the process whereby employees negotiate with an employer as a group, rather than individuals, about the terms of their employment. Legislation requires that an employer negotiates with a certified trade union or group of employees. Legislation permits compulsory union membership and the compulsory deduction of union dues.

27. Certification The process by which a labour union acquires the bargaining rights for a group of employees. If enough employees agree to join the union, the union can approach the Labour Relations Board about becoming the certified bargaining agent for the employees. If a vote is held, the union must get the support of just over 50 percent of the employees to represent the bargaining unit in negotiations. (Cont.)

28. Certification (Continued) A bargaining unit defines those jobs or positions represented in the collective agreement between the employer and the representative of the employees, the union. The certification process determines which employees are in the bargaining unit.

29. Negotiating a Collective Agreement If an agreement between the union and employer cannot be reached a strike occurs. A lockout occurs when the employer refuses to allow the employees to enter company premises until an agreement is reached. A conciliator attempts to persuade both sides to soften their positions before a strike or lockout occurs. Mediation, similar to conciliation, may also be used.

30. Contents of Collective Agreement Working conditions contained in collective agreements cannot conflict with minimum-employment standards contained in legislation. • Employer/employee agreements must contain three articles: • The union must be recognized as a bargaining agent; • No strike or lockout during the life of the agreement; • Any alleged violation of the agreement is settled by arbitration. (Cont.)

31. Contents of Collective Agreement (Continued) • Employer/employee agreements contain other articles: • Wage rates covered under agreement; • Standard hours of work are specified; • Overtime pay provisions; • Vacation with pay; • Rules by which seniority is determined.

32. Contents of Collective Agreement (Continued) • Employer/employee agreements contain other articles: • Grievance procedure is set out; • Union security is described with differences in closed-shop, union shop, and the use of rand formula; • Right of management are set out.

33. Wage Differentials Two occupations with different market conditions and wages. (Cont.)

34. Wage Differentials (Continued) If workers were free to move between occupations the equilibrium wage rate would be the same in both markets. Barriers that prevent workers from moving between occupations exist and are the main reason why wage differentials exist.

35. Wage Differentials (Continued) • Barriers to the mobility of workers are due to: • Lack of information • Skill or educational requirements • Geographic location • Discrimination • Labour unions • Professions’ right to self-regulate

36. Wage Differentials (Continued) Without barriers to mobility wage differentials would still exist. Certain jobs are more dangerous, unhealthy, dirty, involve unusual working hours, or have greater risk of unemployment. The attractive characteristics of a job, called the equalizing differences, may compensate for lower wages when that job is compared to other jobs.

37. Wage Differentials (Continued) Compensating wage differential is the increase in hourly wage necessary to attract employees to work under hazardous conditions.