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Introduction to microeconomics Chapter 12 Labour Markets

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Discounting (see separate presentation on web site)

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Selling human labour is not like selling other goods. Workers rent their labour services. Supply and demand are still the key analytic tools. Supply and demand together determine equilibrium wage and quantity. Shifts in the labour supply and labour demand curves are analogous to shifts in output markets. LO1: Marginal Productivity and Wage in Competitive Labour Markets Labour Markets Equilibrium 2012 McGraw-Hill Ryerson Limited Ch12 -3

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Marginal product of labour - MPL The additional output a firm gets by employing one additional unit of labour. It is the benefit in output from hiring one more worker. Value of marginal product of labour - VMP The dollar value of the additional output a firm gets by employing one additional unit of labour. It is the dollar value benefit from hiring one more worker. General rule: a workers pay in long-run equilibrium will be equal to his or her VMP the net contribution he or she makes to the employers revenue. LO1: Marginal Productivity and Wage in Competitive Labour Markets Ch12 -4 Wage and Salary Determination 2012 McGraw-Hill Ryerson Limited

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People differ in their skills and abilities, and because those skills and abilities change over time, an individual workers quality cannot be graded easily. The true output of individuals is often difficult to observe directly, particularly if they work as part of a team. Firms and workers often have incentives of their own to not reveal true information. Firms end up paying a wage that reflects what they expect a typical workers level of output to be, given those observable characteristics. LO1: Marginal Productivity and Wage in Competitive Labour Markets Ch12 -5 Imperfect Information in Labour Market 2012 McGraw-Hill Ryerson Limited

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LO1: Marginal Productivity and Wage in Competitive Labour Markets Abitibi hires workers in a competitive labour market at a wage of $350/week observationally equivalent We assume here that all workers are of the same type or observationally equivalent. EXAMPLE 12.2: How many workers will Abitibi hire? (Part 1) 2012 McGraw-Hill Ryerson Limited Ch12 -6 Law of diminishing returns VMP = MP P VMP>W VMP

Ch12 -9 EXAMPLE 12.4: How many workers will Abitibi hire? (Part 3) 2012 McGraw-Hill Ryerson Limited VMP>W VMP

Bluenose is the only employer on the market, cutting board sells for $30 each. Ch12 -15 EXAMPLE 12.5: How many workers will Bluenose hire? (Part 4) 2012 McGraw-Hill Ryerson Limited VMP>MLC VMP