10. Imperfect competition labour market, supply of the labour force

1. 10. Imperfect competition labour market, supply of the labour force

2. Contents • imperfect competition LM features • optimal volume of labour force in the SR • optimal volume of labour force in the LR • wage discrimination • individual supply of labour • market supply of labour • labour unions and their market power • bilateral monopoly on the LM

3. Imperfect competition LM features • limited number of firms demanding the labour force • monopsony – only 1 firm demanding the LF • oligopsony – a few firms demanding the LF • monopsonistic competition – many firms demanding the LF • firms are „price makers“ – ability to influence the wage rate • individual LFS function – positive slope

4. Individual LFS function wage rate – below the MFCL function w MFCL AFCL = sL = w L if AFCL=a +b.L, pak TFCL=(a +b.L).L=a.L + b.L2, and MFCL=δTFCL/δL=a+2b.L MFCL function increases twofold to the AFCL

5. Optimal volume of LF in the SR modified golden rule: MRPL = MFCL w MFCL firm saves due to imperfect competition LM w1 AFCL = sL = w w* MRPL L* L Firm recruits L* for wage rate w*, although it would be willing to pay the wage rate w1

6. Demand for labour function: ↑of MRPL ... is not possible to derive: the MRPL curve does not represent a direct relationship between L and w w MFCL AFCL = sL = w w*' w* MRPL' MRPL L* L*' L Increased demand on the output market induced the increase of MR and shift of MRPL upwards – LFS demanded and wage rate increase

7. Demand for labour function: ↑MFCL, AFCL The increase of taxation on labour leads to the shift of AFCL and MFCL upwards: firm´s equlibria do not lie on the MRPL function MFCL' w MFCL AFCL' = sL' = w' w*' AFCL = sL = w w* MRPL L*' L* L

8. Minimal wage impacts w MFCL wmin wmin AFCL = sL = w w* MRPL L* L wmin = as the new function of MFCL (the firm must recruit additional unit of LFS for a constant wage the firm still endeavours the maximal economic profit: MFCL = MRPL → whe minimal wage increases the employment (in this case) wmin minimal wage too high – employment decreases in comparison to the case of no wage regulation

9. Optimal volume of LFS in the LR • isoquant analysis – optimal combination of L and K: MPL/w = MPK/r ... or: • MRPL/w = MRPK/r ... but this is valid only for perfect competition input market (because MFCL=w a MFCK=r) • for whatever type of competition for optimal volume of inuts in the LR stands: MRPL/MFCL = MRPK/MFCK

10. Wage discrimination • similar to the third stage of price discrimination on the output market • assumption: firm is able to divide the LM on at least two segments (two LFS functions) • different wage elasticities of LFS • different wages to the equal LF • i.e.: gender wage discrimination

11. Wage discrimination MFCL1 sL1 w MFCL2 MFCL sL2 w2 w1 MRPL L1 L2 L* L The firm recruits L* The more elastic LFS works for the wage rate w2, while the less elastic LFS works for the (lower) wage rate w1

12. Labour force supply Individual labour force supply: until now: as a LFS to the specific firm, but since now: as the individual consumer´s willingness to work Consumer picks of the two „goods“: CONSUMPTION (C) vs. LEISURE TIME (H)

13. Choice of leisure time and consumption • CONSUMPTION – as a result of the previous work (L) → C = w . L • TIME (24 hrs/day) – can be „spent“ for working time or leisure time → L + H = 24 → C = w (24 - H) ... consumer´s budget line • consumer´s total utility: U = f(C,H) • optimal choice of consumption and leisure time at the tangent of BL and IC, so if: • MRS = w, or δU/δH/δU/δC = w

14. Consumption vs. leisure time C 24.w C* U=f(C,H) C=w(24-H) H* 24 hrs H Consumer´s equilibrium lies at spot (H*, C*) – the consumer works 24 – H* hrs

15. Impact of the increase of wage rate – prevailing SE C SE: increase of „w“ motivates to work more hrs per day 24.w2 IE: increase of „w“ motivates to „consume“ more leisure time+more goods – demotivation to work 24.w1 C C2 B A U2 C1 U1 24 hrs H H1 H2 SE TE = SE + IE, direction of TE depends on which partial effect prevails IE TE If SE prevails: increase of wage rate leads to the higher willingness to work

16. Impact of the increase of wage rate – prevailing IE C SE: increase of „w“ motivates to work more hrs per day 24.w3 IE: increase of „w“ motivates to „consume“ more leisure time+more goods – demotivation to work 24.w2 C B C2 A C1 U2 U1 TE = SE + IE 24 hrs H H1 H2 SE IE TE If IE prevails: increase of wage rate leads to the lower willingness to work

17. Individual labour supply curve consists of two parts: • prevailing SE – labour supply increases with increasing wage rate • prevailing IE – labour supply decreases with increasing wage rate

18. Individual labour supply curve w (CZK/h) until the wage rate 2OO CZK/h SE prevails sL 300 if the wage rate breaks the 200 CZK/h level, IE prevails 200 100 6 7 9 L (h)

19. But: in reality – labour supply curve is positive sloped WHY? • it depends how the workers perceive the change of wage rate: temporary or everlasting change of „w“? • if temporary: probably the SE prevails – „I am willing to work more for a higher wage rate, because I expect a future decrease of wage rate“ (typical for the short run) • if everlasting: probably the IE prevails – „I am not willing to work more for a higher wage rate, because the present wage rate is enough“ (typical for the long run)

20. LR prevalence of the income effect Average total hours and real wages, 1870-2000 Source: Burda, Wyplosz (2003)

21. Market labour supply • in general: a horizontal sum of individual labour supply curves • but market LFS curve is always positive sloped (aggregate SE always prevails... why?) • ... because of the flows of LF among the labour markets

22. Increase of the wage rate and impact on the market LFS curve increase of the wage rate leads to the increase of willingness to work of existing workers w SL SL' w 2 + additional labour force enters the specific labour market → shift of LFS rightwards (i.e. if wage rate of brick-layers increases, new brick-layers enter the labour market) w 1 L 1 L 2 L 2´ L

23. Impact of increasing interest rate w SL SL' increase of interest rate increases the willingnes to save w 2 if households want to keep the constant volume of consumption, they must increase their willingnes to work – market LFS shifts rightwards w 1 L 1 L 1´ L 2 L 2´ L

24. Labour unions (LU) on the labour market we assume: demand for labour = demand for labour force united in the labour unions; LFS = supply of the labour force united in the labour unions LU pick of the level of wage rate and the level of employment several LU strategies: „hard line“ – preferring the wage rate before the employment „jobs first“ – preferring the employment before the wage rate average – average level of employment and wage rate

25. IC shapes upon several LU strategies w w hard line jobs first IC' IC' IC IC L L w average preference of employment and wage rate IC' IC L

26. Deriving the LU LFS curve w IC' SL IC E' w2 E w1 DL DL' L1 L2 L

27. Monopolistic power of LU • LU as the only subject on the supply side of the labour market • LU may upon the specific SL and DL follow different aims: maximizing the economic rent of LU members maximizing the total volume of wages of LU members maximizing the employment of LU members

28. Monopolistic power of LU average wage: AW = TW/L = w.L/w = w w (CZK/h) marginal wage:MW = δTW/δL = δ(w.L)/δL A w1 SL=min. w B w2 C w3 F G DL=AW=w L1 L2 L3 L (h) MW A: max. economic rent (area AFGw1) – L1 for w1 B: max. total volume of wages (TW) (area 0L2Bw2) – L2 for w2 C: max. employment – L3 for w3

29. Bilateral monopoly on the labour market w (CZK/h) MFCL w1 SL w2 DL=MRPL L1 L2 L (h) MW Monopoly (labour unions) derive their equilibrium from the intersection of MW and SL – LU equilibrium: L1 for w1 Monopsony derives its equilibrium from the intersection of MFCL and MRPL – monopsony equilibrium: L2 for w2 Final equilibrium depends on the power of both subjects