Labour Economics

1. Labor Demand curve for Perfect Competition and Labor Demand for Labor for Imperfect Competition

* Table 1.1 Demand for Labor: Firm selling in a Perfectly Competitive Product Market Units of Labor | TP | MP | Product Price, P | Total Revenue, TR | MRP (TR/L) | VMP (MP*P) | 4 | 16 | | $2 | $32 | | | 5 | 28 | 12 | 2 | 56 | $24 | $24 | 6 | 37 | 9 | 2 | 74 | 18 | 18 | 7 | 43 | 6 | 2 | 86 | 12 | 12 | 8 | 46 | 3 | 2 | 92 | 6 | 6 | 9 | 48 | 2 | 2 | 96 | 4 | 4 |

* X- Axis represents the wage rate and the Y- axis represents the quantity of labor demanded for the given wage rate. MRP curve is the Firms Short Run Demand Curve. Under Perfect competition in the product market, MRP=VMP and the demand curve is downward sloping, because of diminishing marginalproductivity.

* Table 1.2 Demand for Labor: Firm Selling in an Imperfectly Competitive Product Market

Units of Labor, L | TP | MP | Product Price, P | Total Revenue, TR | MRP (TR/L) | VMP (MP*P) | 4 | 16 | | $2.70 | 43.20 | | | 5 | 28 | 12 | 2.50 | 70 | $26.80 | $30 | 6 | 37 | 9 | 2.30 | 85.10 | 15.10 | 20.70 | 7 | 43 | 6 | 2.20 | 94.60 | 9.50 | 13.20 | 8 | 46 | 3 | 2.10 | 96.60 | 2 | 6.30 | 9 | 47 | 1 | 2.00 | 94 | -2.60 | 2 |

* X- Axis represents the wage rate and the Y- axis represents the quantity of labor demanded. Under Imperfect Competition in the product market, the firm’s demand curve will slope downward because marginal product diminishes as more units of labor are added and because the firm must reduce the product price on the units of output as more output is produced. MRP (=MR*MP) for the imperfect competitor is less than the VMP (=P*MP) at all levels of employment beyond the first unit.

* Labor Demand Curve in Perfect competition as well as in Imperfect competition is similar where the Demand Curve is downward sloping in both situations, because of Diminishing Marginal Return. But price differs in two situations where in Perfect Competition firms are price takers where as in Imperfect competition firms are price makers. In perfect competition price is fixed for every level of employment and they do not have the power to influence it. But in the Imperfect competition a single firm has the full power to influence, and change its prices.

1. 2. I. Plant Data for a Perfectly Competitive firm at the Wage Rate $ 400 in the year 2009 L | MPL | Price=MR | MRPL=MR*MPL | W | TC | MWC | 0 | … | $10 | … | $400 | 0 | …. | 1 | 80 | 10 | $800 | 400 | 400 | 400 | 2 | 70 | 10 | 700 | 400 | 800 | 400 | 3 | 60 | 10 | 600 | 400 | 1200 | 400 | 4 | 50 | 10 | 500 | 400 | 1600 | 400 | 5 | 40 | 10 | 400 | 400 | 2000 | 400 |

* Total Cost= Labor*Wage * Marginal Wage Cost = TC/L * Equilibrium number of worker is 5 * Total Wage Bill = Wage * No. of workers
5*400=$2000

II. Plant Data for a Perfectly Competitive firm at the Wage Rage $ 650 in the year 2010 L | MPL | Price=MR | MRPL=MR*MPL | W | TC | MWC | 0 | … | $10 | … | $650 | 0 | …. | 1 | 80 | 10 | $800 | 650 | 650 | 650 | 2 | 70 | 10 | 700 | 650 | 1300 | 650 | 3 | 60 | 10 | 600 | 650 | 1950 | 650 | 4 | 50 | 10 | 500 | 650 | 2600 | 650 | 5 | 40 | 10 | 400 | 650 | 3250 | 650 |

* Total Cost= Labor*Wage * Marginal Wage Cost = TC/L * Equilibrium number of worker is 2 * Total Wage Bill = Wage * No. of workers
2*650=$1300

* In a Perfectly Competitive market Profit Maximizing output can be achieved where MRP=MWC, but in this situation there is no point where MRP=MWC. MRP is higher than the MWC till the second worker. As their main aim is to maximize profit, firms will hire additional workers as long as each worker adds more to revenue than the cost. If the firm hires the third worker, the firm would be at loss where MWC (Marginal Wage Cost) will be higher than the MRP (Marginal Revenue Product). This means that the cost of the firm is higher than its Revenue, so the firm would prefer labor 2 as their equilibrium number of worker.

III. Total Wage Bill=No. of Labor * Wage Rate
Total Wage Bill for the Year 2009 = 5*400 = 2000
Total Wage Bill for the Year 2010 = 2*650 = 1300
With an increasing wage rate the firm expects that total wage bill to increase too, but in this situation total wage bill is decreasing because the demand for labor is elastic. Wage bill is moving in positive direction, where wage rate increases from $400 to $650, but wage bill is decreasing from 2000 to 1300 units.
Wage Elasticity of Labor =% Change in Quantity Demanded / % Change in Wage (%∆ Q ∕ %∆W)
% ∆ in Q= 5-2 / 5*100
%∆ in W= 400-650/400*100
60% /62%
=0.96%
Wage elasticity of demand for labor is elastic.

1. 2. 3. I. Differences between Becker’s taste for Discrimination Model and Statistical Discrimination. * Becker’s Taste for Discrimination
The model examines the factors or “taste” for which the discriminator or the employer is willing to pay. According to this model employers discriminate employees by age group, by African Americans, and also sex. Employers are willing to pay more for their tastes in every area. Even though it is causing as extra cost for the employers they prefer choose to hire the employees who meets their tastes. Employers taste for discrimination model is based on the idea that the employees and the employers want to maintain physical or social distance from certain groups of workers. For example American employees or employers may not wish to work with the African workers so that the American workers will be ready to hire their group of workers at higher costs even though African workers may add more to production. * Statistical Discrimination
Statistical discriminations are a person is judged on the basis of the average characteristic of the group, or groups the person belongs to rather than upon the person’s personal characteristics. The judgment is true in the sense the group as a whole has such characteristics, but the judgment is incorrect with many individuals in the group. For example as an average female married workers use to quit their jobs after pregnancy, when choosing job applicants employers use to hire female unmarried workers having the thought that after marriage married females would have children and would interpret their work life, but the fact is these employers are making costly mistakes in hiring.

II. Discrimination Coefficient * Ww = Wb+ d
Discrimination Coefficient = Ww-Wb =18-13 = $5
The employers are using taste for discrimination model. Where the employer is ready to recruit white workers for higher wage rate than the black workers, but they are only allowed to pay $5 maximum as extra wage to get their taste group of workers. III. Index of Segregation

The index of segregation shows the percentage of women (men) who would have to change occupations for women to be distributed among occupations in the same proportion as men. The index of segregation by gender has fallen moderately over time in Maldives.

Determining the Index of Segregation (Hypothetical Data) for the Year 1996 in Maldives Column 1 Column 2 Occupation | Male | Female | Absolute Differences | Fishing | 60% | 30% | 30% | Tourism | 30 | 20 | 10 | Teaching | 10 | 50 | 40 | | 100% | 100% | 80% | Index of segregation = 80% / 2 = 40% or 0.40

As applied to sex discrimination, this index is designed to show the percentage of women who would have to change occupations for women to be distributed among occupations in the same proportion as men. Suppose the occupational distributions of male and female workers are shown in column 1 and 2. To make the distributions identical, either 40% of the total female workers would have to move from occupation Teaching (30% going to Fishing and 10% to Tourism) or 40% of the total of male workers would have to move to occupation Teaching (30% coming from Fishing and 10% coming from Tourism). Because 40% of the male or female employees have to change their occupations for males and females to get distributed in the same proportions among occupations, here the index of segregation is 40% for the year 1996.

The index of occupational segregation by gender in Maldives was 40% in 1996 as calculated in above and declined in 2002. More than half of the women in the Maldives would have to change occupations for women to be distributed in the same proportion as men. 4.
Column 1 and 2 indicates that the firm must increase their wage rate to attract more labor towards and away from alternative employment opportunities. Assuming that the firm cannot discriminate when hiring additional workers, it must pay the higher wage to all the workers, including those who demand for lower wages. This is calculated in column 3, where total wage cost (TWC) is shown. It is calculated where TWC= unit of labor times the wage rate, Next in column 4 (MWC) is calculated, for hiring extra unit of labor. Finally column 5 is where MRP is shown. Marginal Revenue Product curve is the short run demand for labor. Column1 | Column 2 | Column 3 | Column 4 | Column 5 | Units of Labor | (AWC) Wage | TWC | MWC | (VMP) MRP | 1 | $2 | 2 | $2 | $8 | 2 | 3 | 6 | 4 | 7 | 3 | 4 | 12 | 6 | 6 | 4 | 5 | 20 | 8 | 5 | 5 | 6 | 30 | 10 | 4 | 6 | 7 | 42 | 12 | 3 |

Equilibrium diagram for Monopsony Labor Market

Assuming the monopsonist tries to maximize profits, it will demand labor up to the point where MWC = MRP. The monopsonist equates MRP with its MWC at point a and chooses to hire Q1 units of labor. The firm thus pays a lower wage rate (Wi rather than Wc) and hires fewer units of labor (Q1) than firms in a competitive labor market. I. Monopsony market determines the equilibrium number of workers to hire by equating its marginal revenue product of labor with its marginal cost of labor. Equilibrium Employment of a Monopsony market lies where MRP=MWC, that is point a. II. Equilibrium Wage Rate for the monopsony market in this diagram is point e. Monopsony market use to hire fewer of workers at lower wage rate to maximize their profit.

III. The firm’s MWC lies above the SL. The Monopsonist equates its MRP with its MWC at point a and hire QM units of labor. To attract these workers, it need only pay WI. The firm thus pays a lower wage and hires fewer unit of labor than firms in a competitive labor market. This results efficiency loss or dead weight loss at point abc.