8.3 Labour market forces and government intervention

Demand tends to rise when product demand or price increases, worker productivity improves, or complementary capital becomes more effective. It falls when the wage exceeds the value of the worker’s marginal contribution.

If an extra worker produces 10 units and each sells for $5, marginal revenue product is$50 before considering other changes. A wage below that may make hiring worthwhile; a wage above it may not.

If output rises faster than total labour earnings, unit labour cost falls. If product demand rises, an employer may accept a higher negotiated wage without reducing employment because labour demand has shifted right.

State the changed variable before drawing. A wage rise usually reduces quantity of labour demanded; higher product demand can shift the whole curve right even if the wage is unchanged.

A café hiring fewer workers after the hourly wage rises is a movement. A festival that increases demand for meals shifts the café’s labour demand right.

As more labour works with fixed inputs, diminishing marginal returns usually reduce MPP and therefore MRP. At each employment level, MRP is the firm's marginal benefit from labour, so the downward MRP schedule is its demand curve for labour. Higher product price/demand or productivity shifts it right; a lower product value shifts it left.

For one worker, a higher wage has a substitution effect: leisure becomes more expensive, encouraging more work. It also has an income effect: the worker can reach a target income with fewer hours, encouraging leisure. At high wages, if the income effect becomes stronger, hours supplied fall as the wage rises and the individual supply curve bends backward.

Market supply usually slopes upward because a higher wage attracts additional people and hours, even if some individuals reduce hours. It is less elastic when scarce qualifications, long training or low mobility make entry slow, and more elastic when close alternative occupations and mobile workers are available.

Separate an individual’s response from a market-wide change. Better childcare or immigration can shift supply right; a wage rise changes quantity supplied along the existing curve unless it also changes another determinant.

A higher wage may attract more nurses along the curve. A new training programme increases the number qualified and can shift the market supply curve right.

The wage reflects the value of the marginal worker to firms and the opportunity cost of that worker’s time. A wage above equilibrium creates excess supply; a wage below it creates excess demand, assuming adjustment is possible.

If the market wage is set above the intersection, more people want jobs than firms want to hire, creating unemployment. A wage below the intersection leaves vacancies or unmet labour demand.

Suppose 10 cleaners earn $8 each, so total labour cost is$80. To hire an 11th, the employer must pay all 11 cleaners $8.50, making total cost$93.50. The marginal cost of the 11th cleaner is $93.50 −$80 = $13.50, not$8.50.

A moderate minimum wage above the monopsony wage can make labour available at the fixed legal wage over a range. MCL then equals that wage across the range, and employment can rise toward the competitive level while wages rise. If the floor is set too high, labour demanded falls and unemployment can increase. A union can similarly counterbalance employer power, depending on bargaining strength and productivity effects.

Evaluate the size and direction using the initial market structure, how far the wage is changed, demand and supply elasticities, substitution with capital, productivity, prices/profits, enforcement, coverage, time and possible non-wage rewards. A maximum wage below equilibrium may also cause shortages or payment through perks.

Compare like with like: hourly rates, overtime and annual earnings are different measures; real wages measure purchasing power, while net advantage includes non-money conditions. An occupation with pleasant conditions may pay less as compensation is unnecessary, whereas a hazardous job may pay more even with similar measured productivity.

MRP theory is useful but not a complete measurement rule. Individual productivity may be difficult to identify in teams or public services; executives may influence pay-setting, monopsony can underpay workers, and discrimination can persist. Differences in wage therefore need evidence about both labour markets, not one worker characteristic.

If an engineer receives $100,000 but the minimum needed to keep her in that job is$60,000, transfer earnings are $60,000 and economic rent is$40,000. Use the true reservation payment for the present use: it can reflect pay and non-pay preferences, so it need not equal the highest advertised alternative salary.

In a labour-market diagram at equilibrium wage W and employment L, each unit's point on the supply curve is its transfer earning. Total transfer earnings are the area under the supply curve from 0 to L. Total economic rent is the area above the supply curve but below the horizontal wage line, up to L. Their sum is the wage bill W × L.

A rise in demand usually raises wage and economic rent, especially when supply is inelastic. Supply often becomes more elastic in the long run as training, migration or occupational change becomes possible, so part of what was short-run economic rent can become long-run transfer earnings. A minimum wage can raise the rent of workers who remain employed but may reduce employment in a competitive market.