Labour Market Equilibrium
1
 Competitive labour market:
 Labour demand
 Marginal revenue product
 Labour supply
 Marginal labour cost
 Reservation wage
 Market equilibrium
 State of rest
 If surplus
 Unemployment
 Downward pressure on wages
 If shortage
 Upward pressure on wages
 Comparative statics
 Sticky wages
2
 Monopsony:
 Recall a monopoly
 MR < P
 Inefficiently low output
 A monopsony = a single buyer
 A monopsony’s demand for labour = market demand
 A monopsony’s supply of labour = market supply
 Profit maximization
 max π = TR(L) – C(L)
 First order condition: MR = MC
 Marginal revenue product = marginal labour cost
 For a monopsony, MLC > reservation wage
 Equilibrium
 MRP = MLC
 Inefficiently low employment and wage
3
 Government in labour market:
 Minimum wage




Wage floor
Unemployment
“lousy” jobs (small surplus) lost
Most part-time workers are
 Youth
 Part-time
 Payroll tax
 Statutory incidence
 Economic incidence
 Determined by elasticities of demand and supply
 Independent of statutory incidence
 Wage rate subsidy




Can think as increase in demand (MRP) or decrease in cost
Targeted wage subsidies
Student summer jobs
Industry that “develops”
4
 Unions in labour market:
 Two ways to increase wages
 Increase demand for labour
 Decrease supply of labour
 Increase demand for labour
 “Buy Union Made” promotion campaign
 Improving union member productivity
 Subsidized training/education
 Featherbedding
 Are these guys featherbedding?
 Often difficult to define
5
 Unions in labour market:
 Supply of labour
 Industrial union







Members belong to an industry
CAW
CUPE
Any occupation
Fight for regulations / standards / minimum wage
Why join a union
Till the day I die
 Craft union
 Certain skill
 IBEW
 Restrict supply
 Entry barriers
 Certification/apprenticeship requirements
 Requirements to hire union member
 Closed shop agreements in contracts
6
 Unions in labour market:
 General agreement
 Unions raise wages
 Unions create unemployment
 But how much, empirically?
 Unclear for unemployment
 Likely 10 to 30% above no-union for wage
7
 Disequilibrium in labour market:
 Unemployment
 Job search
 Takes time and effort
 Expected marginal benefits of search
 Marginal cost of search
 Lost net wages
 Optimal duration
 EI and job search
 Sticky wages
 Labour contracts and long-term relationships
 Efficiency wages
 Heterogenous workers and job rationing
 Imperfect information and incentives against shirking
8