Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 14 Labour

Slide 2Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-1 The Competitive Firm’s Short-Run Demand for Labour When the wage rate is $12/labour-day and the output price is $2/unit (panel b), the perfectly competitive firm will hire 80 labour-days per day, the amount for which VMP L and the wage rate are the same.

Slide 3Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-2 Short- and Long-Run Demand Curves for Labour The demand for labour is more elastic in the long run because the firm has the opportunity to substitute labour for capital. In the short run, its only avenue of response is to increase output.

Slide 4Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-3 The Market Demand Curve for Labour When the wage rate falls from w 1 to w 2, each firm hires more labour and produces more output. The increase in output causes output price to fall, which reduces the value of labour’s marginal product. The market demand curve for labour is thus more steep than the horizontal summation of the individual demand curves.

Slide 5Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-4 The Optimal Choice of Leisure and Income The optimal amount of leisure is h* = 15 hours per day, which corresponds to a point of tangency between the budget constraint (B) and the indif-ference curve I 2. The corresponding amount of paid labour is 24 – h* = 9 hours per day, which yields a daily wage income of w 0 (24 – h*) = $90 per day.

Slide 6Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-5 Optimal Leisure Choices for Different Wage Rates When the hourly wage rises from $4 to $10, the optimal amount of leisure falls from 18 to 15 hr per day. But when the wage rises still further to $14, the optimal amount of leisure rises to 17 hr per day.

Slide 7Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-6 The Labour Supply Curve for the /th Worker For this worker, an increase in the wage rate elicits greater labour supply when the wage rate is less than $10 per hour, but smaller labour supply when the wage rate is above $10 per hour.

Slide 8Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-7 The Labour Supply Curve for a Worker Seeking a Target Level of Income The higher his hourly wage rate, the fewer hours Smith has to work to earn his daily target of $200.

Slide 9Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-8 When Leisure and Income Are Perfect Complements If income and leisure are perfect comple-ments in a 10-1 ratio, an individual will consume leisure at a point on the budget constraint that satisfies M = 10h.

Slide 10Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 14-9 An Increase in Demand by One Category of Employer The demand for economists to teach in business schools rises (centre panel), causing the total market demand curve for economists to rise (right panel). Employment at the new higher wage is determined by consulting the respective demand curves of the liberal arts sector (left panel) and business school sector (centre panel).

Slide 11Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE Average and Marginal Factor Cost When the supply curve (S) facing a monopsonist is upward sloping, the cost of hiring an additional unit of labour (MFC) is no longer merely the wage he must be paid. To that wage must be added the additional payment that must be made to existing workers (shaded rectangle).

Slide 12Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE The Profit- Maximizing Wage and Employment Levels for a Monopsonist At L*, the cost of ex- panding or contracting employment is exactly equal to the benefit. Both exceed the profit- maximizing wage of w*.

Slide 13Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE Comparing Monopsony and Competition in the Labour Market Because the monop-sonist takes into account the effect of employment expansions on wages paid to existing workers, it will employ less and pay less than the corresponding values under competition.

Slide 14Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A Statutory Minimum Wage The effect of the minimum wage is to reduce employment of unskilled labour from L 0 to D m, while increasing supply from L 0 to S m. The resulting difference, S m – D m, is the unemployment attributable to the minimum wage.

Slide 15Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE The Minimum Wage Law in the Case of Monopsony The effect of a minimum wage at w m is to make the monoposonist’s MFC curve horizontal in the region from 0 to L 1, which increases employment from L* to L m.

Slide 16Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE The Allocative Effects of Collective Bargaining Without collective bargaining, the same wage, w 0, prevails in each sector. With the union wage pegged at w U, employment falls in the union sector. The displaced workers seek employment in the nonunion sector, driving wages down there. The result is a reduction in national output.

Slide 17Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A Hypothetical Uniform Productivity Distribution The productivity values for members of this group are uniformly distributed between $10/hr and $30/hr. This means that the VMP of a person chosen at random from the group is equally likely to be any number from $10/hr to $30/hr. The average VMP for members of this group is $20/hr.

Slide 18Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE Productivity Distributions for Two Groups The VMP values of members of group A are uniformly distributed between $10/hr and $30/hr, while those of members of group B are uniformly distributed between $20/hr and $40/hr. If we know only the groups to which people belong, our best estimates of an individual’s VMP would be the average VMP for his or her group—$20/hr for group A, $30/hr for group B.

Slide 19Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 1

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Slide 22Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 12

Slide 23Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 14-1

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Slide 29Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 14-7

Slide 30Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 14-8