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The Labour Market
The Supply and Demand
for Labour
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The Labour Market
• At higher agerates the demand
for labour ill beless than at loerage rates
• $eason linked to
Marginal%rodu!ti"ityTheory
The demand for labour is highly dependent on theprodu!ti"ity of the orker – the more the orkeradds to re"enue& the higher the demand'
opyright iSto!k'!om
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Marginal $e"enue %rodu!ti"ity
• %roducti#ity refer& to the amou!t producedper worker per period of time
• M$% * the addition to total re"enue (T$) re!ei"edfrom the sale of an additional unit
of output– +orker instrumental in produ!ing that output
• 'argi!al %hy&ical %roduct ('%%) – theaddition to total produ!t as a result of theemployment of one additional unit of labour
• '*% + '%% , %• ,f a good sells for -.'// and a orker produ!es
0// per day& the M$% of that unitof labour is -0// per day
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The Labour MarketMarginal %rodu!ti"ity Theory
+age $ate
1umber #mployed
M$% * M%% x %
A$%
The law of diminishing returns would
suggest that as successive units of
labour are employed, the addition to
total product will rise at first but then
decline. The MRP represents the value
added to total output by successive
workers.
The ARP is the average revenue product –
the average value added to total output
through hiring successive workers. The
MRP curve intersects the MRP curve at its
highest point.
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The Labour Market+age $ate (- per hour)
1umber #mployed
M$% * M%% x %
A$%
n a competitive labour market, the
individual firm is not big enough to
influence the wage rate. The
marginal cost of labour is a hori!ontal
line at the e"isting market wage rate.
ML2'2/
3/
4'//
#mploying the $%th unit of labour costs
the firm &'.'% per hour but that labour
adds &(.%% per hour to total revenue
through their work. t is worth
employing that e"tra unit of labour.
5'4/
3.
The $)st unit of labour adds slightly less
to total revenue *&+.(% but still costs
&'.'% and so is worth employing. There
will thus be an incentive for the firm to
continue to employ additional units of
labour until the MRP - age rate
/or the employer to be persuaded to
employ additional workers, therefore, the
wage rate must be lower to compensate
for the fact that the e"tra worker adds
less to total revenue than the previous
one and to sell e"tra units, the firm must
accept a lower price.
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The MRP curve therefore represents
the demand curve for labour
illustrating the derived demand
relationship.
+age $ate (- per hour)
1umber #mployed
DL
./
4
6
./ .2 .7
There is an inverse relationship between
the wage rate and the number of people
employed by the firm.
The Labour Market
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The Labour Market
• -he Supply of abour
• The amount of people offering
their labour at different agerates'– ,n"ol"es an opportunity !ost – ork
"' leisure
–+age rate must be suffi!ientto o"er!ome the opportunity !ostof leisure
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The Labour Market
• !come effect of a ri&e i! wage&:– As ages rise& people feel better off and therefore
may not feel a need to ork as many hours
• Sub&titutio! effect of a ri&e i! wage&:– As ages rise& the opportunity !ost of leisure rises
(the !ost of e"ery extra hour taken in leisure rises)'As ages rise& the substitution effe!t may lead tomore hours being orked'
• The net effe!t depends on the relati"e strengthof the in!ome and substitution effe!ts
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The Labour Market
• The elasti!ity of supply of labourdepends upon
• eographical mobility of labour:
– The illingness of people to mo"e– The !ost and a"ailability of housing
in different areas– The extent of so!ial& !ultural and family ties– The amount of information a"ailable to
orkers about 8obs in other areas– The !ost of re9lo!ation– Anxiety of the idea of re9lo!ation
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The Labour Market
• 1ccupatio!al 'obility ofabour:
–La!k of information of a"ailable 8obsin other o!!upations
–#xtent and :uality of remunerationpa!kages
–#xtent of skills and :ualifi!ationsto do the 8ob
–Anxiety at !hanging 8obs
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The Labour Market+age $ate (- per hour)
1umber of ;ours +orked
SL
2
./ An inelastic supply of labour –
a substantial rise in the wage rate
only brings forth a small increase
in the amount of people willing
and able to do such work.
The reason may be the number
with those particular skills and
0ualifications, the time it takes to get
those skills, geographical immobility
etc.
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The Labour Market+age $ate (- per hour)
1umber of ;ours +orked(per eek)
SL
2
2'2/
02 62
f the supply of labour is elastic, a
small rise in the wage rate is sufficient
to encourage more people to offer
their labour. 1eographical and
occupational mobility are likely to be
high and there is likely to be many
substitutes.
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The Labour Market+age $ate (- per hour)
1umber employed
DL
SL
5'//
<.
The market wage rate for a
particular occupation
therefore will occur at the
intersection of the demand
and supply of labour.
The wage rate will alter if
there is a shift in either or
both the demand and supply
of labour.
DL.
<3
4'2/
A rise in the demand for labour
would force up the wage rate as
there would be e"cess demand
for labour.
#x!ess Demand
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The Labour Market+age $ate (- per hour)
1umber employed
DL
SL
5'//
<. <3
SL.
#x!ess Supply
An increase in the supply of
labour would lead to a fall
in the wage rate as there
would be an e"cess supply
of labour.
2'//
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The Labour Market
• co!omic *e!t The "alue of the ageearned o"er and abo"e that ne!essaryto keep a fa!tor in its !urrentemployment
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#!onomi! $ent+age $ate (- per hour)
1umber of hours orked
SL
The supply of labour !ur"eshos the relationship beteenthe age rate and the numberof people offering their labour interms of the number of hoursorked'
At a age rate of -5'// perhour& employees are illing tooffer <. hours' Some in themarket are not illing to orkfor any less than that and someould be illing to ork for lessthan -2'//'
The area under the supply
!ur"e is referred to as the"-ra!&fer ar!i!g&$ of thefa!tor'
5'//
<.
Transfer
#arnings
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#!onomi! $ent+age $ate (- per hour)
1umber of hours orked
SL
5'//
<.<3
6'//
2ome individuals would have been
prepared to work 3$ hours for &4.%%
per hour.
Assume that &+.%% per hour is the
current market wage rate for this
factor.
DL
Those individuals earn &+.%% per hour –
they therefore earn an amount in e"cess
than they were prepared to offer their
services for – this is termed ‘Economic
Rent’.
#!onomi!
$ent
The total value of economic rent is shown
by the yellow shaded triangle.
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#!onomi! $ent+age $ate (- per hour)
1umber of hours orked
SL
+.
<.
DL
The total earnings of the factor is
the wage rate " the hours worked
indicated by the grey rectangle.
These earnings are made up of
an element of transfer earnings
and an element of economic rent.+3
#!onomi! $ent
The lower the elasticity of supply
of labour, the greater the economic
rent – think about this in relation
to soccer stars5
Total =a!tor #arnings
SL.