Chapter Eleven
The Labour Market
Supply and Demand at Work
Example: The Market for Haircuts
What determines the price of a haircut? It is determined by supply and
demand. The intersection of demand and supply determines it [Equilibrium].
Demand (curve) reflects the decisions of customers with respect to the price of
the haircut. Supply (curve) reflects the decisions of the hair salons with respect
to price.
What determines the wages paid to the hair stylist? Again, it is supply and
demand. In the hair stylists' labour market, this is where people can buy or sell
an hour of the hair stylists’ time.
In the labour market, the roles change. It is not like a usual market, instead of
businesses being suppliers and ordinary people being the demanders, it is the
people (workers) that supply, and businesses are the demanders. The
workers are suppliers looking to sell their labour for the highest wage they can
get. The businesses on the other hand are on the demand side, looking to hire
the best workers at the lowest price possible.
What is bought or sold in a labour market? The labour market buys and
sells the worker’s time. Wage is the price of labour; the usual quantity axis now
tracks the hours of work.
Switch in the Labour Market
Supply
As a worker, you are on the supply side of the labour market. You are looking to
sell your labour. The higher the wage, the more hours you're willing to work. This
is the definition of the Law of Supply: As wages rise, the quantity of labour
supplied rises. The labour supply curve slopes upward.
Demand
Businesses demand labour; they are on the demand side of the labour market.
The lower the wage, the cheaper it is to buy labour. In the labour market, the law
of demand states that when it is cheaper, the quantity demanded rises. The
labour demand curve slopes downward.
Labour Demand: Thinking Like an Employer
What Wages Do You Pay Your Workers?
In a competitive labour market, employers pay the market wage. As an employer
in a perfect labour market, there is a prevailing market wage that an employer
pays to hire workers. If the employer pays less than the market wage, they will
not be able to hire anyone. The employees will go and work for the competition.
The wage is paid when the market is perfectly competitive.
How many workers do employers hire?
Managers in a perfectly competitive market must figure out how many workers
they should hire. They do this by looking into the core principles of economics.
Looking at how many, we generally use the marginal principle. Using the
, marginal principle, we break down this big decision of how many into smaller
marginal choices. Hence, the relevant question here is whether to hire one more
worker. The cost-benefit principle says to hire one more worker only if the
extra worker yields a marginal benefit greater than the marginal cost incurred. A
marginal cost and benefits should be figured out to be able to hire one more
worker. In this case, the marginal cost is the additional wage that is paid to the
new worker. The marginal benefit is the extra revenue the employer gets from
the extra stuff that the extra worker will produce. This is called Marginal
Revenue Product.
Marginal Revenue Product – This measures the marginal revenue from hiring
an additional worker. The marginal revenue product equals to the marginal
product of labour multiplied by the price of that product. MRP = MP X P
Marginal Product of Labour (MP): The extra production that occurs from
hiring an extra worker.
The Rational Rule for Employers
The rational rule for employers is to hire an additional worker if their marginal
revenue product is greater than or equal to the wage. In other words, hire
another worker if the marginal benefit exceeds or equals the marginal cost.
Therefore, hire additional workers until Wages = Marginal Revenue Product.
The Rational Rule for Employers in Competitive Markets
If wages are equal to marginal revenue product, then your labour demand
is your marginal revenue product labour. The labour demand curve
summarises the wage at which you will buy each quantity of labour. The wage
you are willing to buy each quantity of labour for is informed by the extra
revenue from the extra stuff the worker produced. This is why the labour demand
curve, and the marginal revenue product are the same thing.
The Independent Principle and Shifting Labour Demand
The independence principle says that everything is connected. An employer's
best hiring decision depends on factors beyond wages. It also depends on
outcomes in other markets. When economic conditions change, so might the
hiring decisions of employers.
The four factors that shift the market labour demand curve:
1. Changes in demand for your product
The labour market is different. Workers are hired because they are an
input in the production of the employer's goods and services. The
business’ demand for workers is a result of the demand that customers
have for a product.
Derived Demand: This is when the demand for an input is derived from
the demand for the stuff that the input produces.
According to the hair scenario: Suppose demand for haircuts increases
and causes the price of haircuts to rise from R20 to R30. This can cause an
increase in the labour demand curve for hair stylists. It shifts to the
right.
2. Changes in the price of capital
A decline in the price of capital (physical capital) can lead to either
increase or decrease in labour demand. This is because of two forces; the
The Labour Market
Supply and Demand at Work
Example: The Market for Haircuts
What determines the price of a haircut? It is determined by supply and
demand. The intersection of demand and supply determines it [Equilibrium].
Demand (curve) reflects the decisions of customers with respect to the price of
the haircut. Supply (curve) reflects the decisions of the hair salons with respect
to price.
What determines the wages paid to the hair stylist? Again, it is supply and
demand. In the hair stylists' labour market, this is where people can buy or sell
an hour of the hair stylists’ time.
In the labour market, the roles change. It is not like a usual market, instead of
businesses being suppliers and ordinary people being the demanders, it is the
people (workers) that supply, and businesses are the demanders. The
workers are suppliers looking to sell their labour for the highest wage they can
get. The businesses on the other hand are on the demand side, looking to hire
the best workers at the lowest price possible.
What is bought or sold in a labour market? The labour market buys and
sells the worker’s time. Wage is the price of labour; the usual quantity axis now
tracks the hours of work.
Switch in the Labour Market
Supply
As a worker, you are on the supply side of the labour market. You are looking to
sell your labour. The higher the wage, the more hours you're willing to work. This
is the definition of the Law of Supply: As wages rise, the quantity of labour
supplied rises. The labour supply curve slopes upward.
Demand
Businesses demand labour; they are on the demand side of the labour market.
The lower the wage, the cheaper it is to buy labour. In the labour market, the law
of demand states that when it is cheaper, the quantity demanded rises. The
labour demand curve slopes downward.
Labour Demand: Thinking Like an Employer
What Wages Do You Pay Your Workers?
In a competitive labour market, employers pay the market wage. As an employer
in a perfect labour market, there is a prevailing market wage that an employer
pays to hire workers. If the employer pays less than the market wage, they will
not be able to hire anyone. The employees will go and work for the competition.
The wage is paid when the market is perfectly competitive.
How many workers do employers hire?
Managers in a perfectly competitive market must figure out how many workers
they should hire. They do this by looking into the core principles of economics.
Looking at how many, we generally use the marginal principle. Using the
, marginal principle, we break down this big decision of how many into smaller
marginal choices. Hence, the relevant question here is whether to hire one more
worker. The cost-benefit principle says to hire one more worker only if the
extra worker yields a marginal benefit greater than the marginal cost incurred. A
marginal cost and benefits should be figured out to be able to hire one more
worker. In this case, the marginal cost is the additional wage that is paid to the
new worker. The marginal benefit is the extra revenue the employer gets from
the extra stuff that the extra worker will produce. This is called Marginal
Revenue Product.
Marginal Revenue Product – This measures the marginal revenue from hiring
an additional worker. The marginal revenue product equals to the marginal
product of labour multiplied by the price of that product. MRP = MP X P
Marginal Product of Labour (MP): The extra production that occurs from
hiring an extra worker.
The Rational Rule for Employers
The rational rule for employers is to hire an additional worker if their marginal
revenue product is greater than or equal to the wage. In other words, hire
another worker if the marginal benefit exceeds or equals the marginal cost.
Therefore, hire additional workers until Wages = Marginal Revenue Product.
The Rational Rule for Employers in Competitive Markets
If wages are equal to marginal revenue product, then your labour demand
is your marginal revenue product labour. The labour demand curve
summarises the wage at which you will buy each quantity of labour. The wage
you are willing to buy each quantity of labour for is informed by the extra
revenue from the extra stuff the worker produced. This is why the labour demand
curve, and the marginal revenue product are the same thing.
The Independent Principle and Shifting Labour Demand
The independence principle says that everything is connected. An employer's
best hiring decision depends on factors beyond wages. It also depends on
outcomes in other markets. When economic conditions change, so might the
hiring decisions of employers.
The four factors that shift the market labour demand curve:
1. Changes in demand for your product
The labour market is different. Workers are hired because they are an
input in the production of the employer's goods and services. The
business’ demand for workers is a result of the demand that customers
have for a product.
Derived Demand: This is when the demand for an input is derived from
the demand for the stuff that the input produces.
According to the hair scenario: Suppose demand for haircuts increases
and causes the price of haircuts to rise from R20 to R30. This can cause an
increase in the labour demand curve for hair stylists. It shifts to the
right.
2. Changes in the price of capital
A decline in the price of capital (physical capital) can lead to either
increase or decrease in labour demand. This is because of two forces; the
