E/S ch3

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Chapter 3 The Demand for Labor (other issues)
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Outline

• Labor Demand with non competitive product market
• Monopsony
• The Effects of Payroll Taxation

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Marginal Products more

• Marginal Product MPL change in output (?Q)
  produced by a change in labor, holding capital
  constant MPL ?Q/ ?L (constant capital)
• Marginal Revenue MR
• If product market is competitive (firm is price
  taker) MRP
• If firm has market power in the good market MRltP
• Marginal Revenue Product MRPL
• If product market is competitive MRPLMPLP
• If firm has market power MRPLMPLMR

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Labour Demand if Product Market is Non Competitive

• A Monopolist trying to maximize profits with a
  competitive labour market
• MRPLMRMPLW
• Wage rate paid by monopolists are not necessarily
  different from competitive markets, even though
  employment level is..

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Monopsony in the Labour Market

• Only one firm is the buyer of labour in the
  market
• E.g. large firms in small town (coal mining town)
• Rathen than begin wage taker, monopsonit face
  upward sloping labour supply
• Competitive Firm the cost of hiring an extra
  worker (from 1 to 2) is the wage rate
• Monopsonist When hiring the second worker, the
  firm must pay a higher wage to all workers

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Monopsonist

• Upward sloping Supply
• If it hires 2 worker the wage rate is 7 per
  worker (total 14)
• If it hires 3rd workers the wage rate is 7.5 per
  worker
• For a Monopsonist hiring the third worker costs
  7.5322.5 but 22.5-148.5!
• Key Aspect marginal expense of labor exceeds the
  wage MELgtW
• Profit Maximization
• MRPLMEL

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The Effects of Monopsony
Figure 3.4
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The Monopsonists Short-Run Response to a
Leftward Shift in Labor Supply Employment Falls
and Wage Increases
Figure 3.5
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Minimum Wage Effects under Monopsony Both Wages
and Employment Can Increase in the Short Run
Figure 3.6
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The Effects of Employer Payroll Taxes

• Who Bears the burden of a payroll tax?
• Let us consider a social insurance tax paid by
  the employer.
• The party making the payment is not necessarily
  the one that bears the burden of the tax!
• With Payroll Taxes, Employer wage costs are
  larger than what employees received (a tax wedge)

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A Tax Wedge

• Suppose tax is fixed amount X per hour, rathern
  than proportional
• Plot Labor demand against wage that employees
  receive
• Without tax the wage employer pay is the same as
  wage employees receive
• After the tax is imposed, the wage costgt wage
  received
• .the labor demand shifts down, with a fixed
  shift equal to X

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The Market Demand Curve and Effects of an
Employer-Financed Payroll Tax
Figure 3.7
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Burden of payroll tax

• New equilibrium has lower employment and lower
  wage after tax wage
• Employees bear a burden in the form of lower wage
  rates and lower employment
• .but the wage does not fall by the full amount
  of the tax, so that employers also bear some of
  the tax
• ..unless labor supply is perfectly vertical.

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Payroll Tax with a Vertical Supply Curve
Figure 3.8
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What the data say?

• How do individuals respond to payroll taxes?
• Is employment reduced?
• How is the slope of the labor supply in real life
  labor markets?
• .difficult to say, but most empirical studies
  tend to find that in the long run labor supply
  (for prime age males) is vertical, and workers
  bear the entire burden of the tax
• In other words, the tax transaltes into lower
  wages with little effects on total labor costs

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Are Payroll Taxes Responsible for European
Unemployment?

• Various social programs social security
  contributions, health, unemployment benefits..
• are financed by payroll taxes
• Facts
• Payroll taxes are a large part of earnings
• They are generally larger in Europe than in the
  US
• So they may be potentially responsible for
  unemployment
• Indeed, these taxes raised as unemployed
  increased.
• But overall evidence is mixed (micro evidence
  versus macro facts)
• The case of Denmark particularly interesting

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Microeconomics Overview

• Isoquants combination of labor and capital that
  produce some level of output
• they have negative slopes (labor and capital are
  substitutes)
• they are convex (step slope ay low labor and
  almost flat when labor is high)
• MRTS (Marginal Rate of Technical Substitution)
• MRTS(?K/ ?L)Q fixed

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A Production Function
Figure 3A.1
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Demand for Labor Short-Run

• Capital is fixed in the short run
• Slope of the isoquant at a given K decreases as
  output grows
• .each successive labor hour hired generates
  progressively smaller increments in output (by
  assumption, see labels isoquants)

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The Decline Marginal Productivity of Labor
Figure 3A.2
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Cost Minimization in the Production of Q (Wage
10 per Hour Price of a Unit of Capital 20)
Figure 3A.3
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Cost Minimization in the Production of Q (Wage
20 per Hour Price of a Unit of Capital 20)
Figure 3A.4
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The Substitution and Scale Effects of a Wage
Increase
Figure 3A.5