Labor Economıcs (ENG) — Ünite 4 Soru-Cevap

A perfectly competitive labor market has similar assumptions to that of a perfectly competitive goods market.

• As in the goods market, in the labor market there are many firms, but this time they are competing to hire a specific type of labor for identical jobs.
• There are many workers and they are homogenous i.e., identical.
• Neither firms nor workers have the market power to determine the wage, they are wage-takers.
• Workers and firms have perfect information.

Workers are completely mobile across firms.

The supply curve represents the total number of employees (or employee hours) allocated to the market by individuals at any given wage.

The demand curve, on the other hand, represents the total number of employees (or employee hours) that firms want to hire at that wage.

When supply equals demand, equilibrium is reached, resulting in a competitive wage w^* and employment E^*. This wage level is also called the market-clearing wage.

AC_E is the per-employee wage cost and can be calculated by dividing the total wage cost (TC_E) by the total number of workers. MC_E is the extra cost (change in TC_E) of hiring an additional worker.

When there is perfect competition in the goods market, Marginal Revenue Product (MRP) is equal to the value of the marginal product (VMP), which is MP^*P. (the marginal product of labor multiplied by the price of output).This is because the marginal product (MR) is equal to the price (P) of the output.

While hiring an additional worker, the firm simply compares the extra benefit and the extra cost of the worker. If the extra benefit is greater than the cost (MRP>w), it will hire an additional worker. However, if the cost is higher, i.e., w>MRP, it will not hire. So, to maximize profit, the firm will hire workers until the MRP=w=MCE condition is satisfied.

As a general rule, as a result of a shift in labor demand, both wage and employment move in the same direction, i.e., they either both increase or decrease. Different than the shift in labor demand, as a result of a shift in labor supply, equilibrium wage and equilibrium employment levels move in opposite directions.

A labor market is efficient when labor is allocated efficiently. Efficient allocation is realized when workers are hired in such a way that the total production in the economy is maximized. In other words, the value of marginal product of labor (VMP) should be the same in all alternative employments.

VMP_A = VMP_B = VMP_C = …. = VMP_n=W

where A, B, C, …. n are the types of products that labor helps produce. The above equation states that workers are efficiently allocated when the values of the last workers hired for the production of all goods are equal to each other and equal to the wage (w) or the price of labor (P_E).

A major difference between perfect competition and monopoly is the demand curve for output faced by an individual firm. While a perfectly competitive firm has a perfectly elastic, horizontal demand curve for output (at the going market price), the demand curve of a monopolist is downward-sloping and is equal to the market demand curve for output.

Unlike a perfectly competitive labor market, the monopsonist can determine the wage by adjusting the number of workers it hires. In other words, it is a wage-setter. While a competitive firm can hire as many workers as it wants at the going market wage, a monopsonist needs to pay higher wages to hire more workers. Besides, additional cost of hiring an additional worker (MC_E) is greater than the wage paid to that worker in monopsonist. This is because monopsonist pays a higher wage to attract more workers, and this higher wage is paid to all workers and not just the last worker hired.

There are alternative ways for a union to increase labor demand. Firstly, it can increase labor demand by increasing labor productivity. Moreover, unions may increase labor demand by increasing demand for the goods they produce via lobbying. For instance, unions actively push legislation that would raise the amount of money the government spends buying the products they produce. Another way of increasing product demand is by putting political pressure on the government to increase the price of close substitutes through taxation or restricting the amount imported.

Unions can also increase wages by restricting labor supply. A typical example is reducing the number of qualified suppliers of labor. For instance, unions can deter entry into an occupation by forcing very long apprenticeship programs or by imposing occupational licensure requirements.

If the number of members of a union increases enough to cover a significant portion of the workers in an industry, it could gain control over the labor supply. This brings bargaining power since it can threaten the firms credibly with a strike.

The model is based on two key assumptions. The first one is, producing a new engineer takes time. The second one is, people have myopic expectations; they consider becoming engineers by only looking at the conditions in the engineering labor market at the time when they enter school (Freeman, 1976).

The introduction of the minimum wage aims to sustain a wage level that is needed to cover the bare necessities of life. It also protects workers from being exploited by employers, particularly disadvantaged groups like women, youth, and minorities.

The imposed minimum wage makes the monopsonist act like a wage-taker rather than a wage-setter. Different from the perfectly competitive market, imposing a minimum wage leads to higher employment levels and an increase in allocative efficiency. This is true for any minimum wage level, that lies between w₁ and w^* (P: 114, Figure 4.15).

We see that the effect of a payroll tax is the same, independent of who pays the tax. In both cases, workers earn less, the cost of an hour of labor increases for firms, and employment decreases.

An important consequence of the payroll tax is the inefficiency it creates in the labor market. This inefficiency is represented by the deadweight loss.

Another common public policy applied by the government is employment subsidies. Particularly during economic downturns, governments try to support labor markets to prevent unemployment. A typical subsidy program offers firms a tax credit. Similar to the case of the tax, although the subsidy is given to employers, its benefits are shared by workers and employers.

Another important area of direct government intervention in the labor market is mandated benefits. The government can mandate that firms provide particular benefits to their workers. The typical benefits are related to health and safety.