Labour Economics: Understanding Labour Demand and Supply - Prof. Abrisqueta, Apuntes de Derecho

¡Descarga Labour Economics: Understanding Labour Demand and Supply - Prof. Abrisqueta y más Apuntes en PDF de Derecho solo en Docsity! Labour Demand 4 - 2 Introduction • Firms hire workers because consumers want to purchase a variety of goods and services • Demand for workers is derived from the wants and desires of consumers • Central questions: how many workers are hired and what are they paid? 4 - 5 The Total Product, the Marginal Product, and the Average Product Curves 0 20 40 60 80 100 120 140 0 2 4 6 8 10 12 Number of Workers O u tp u t Total Product Curve 0 5 10 15 20 25 0 2 4 6 8 10 12 Number of Workers O u tp u t Average Product Marginal Product The total product curve gives the relationship between output and the number of workers hired by the firm (holding capital fixed). The marginal product curve gives the output produced by each additional worker, and the average product curve gives the output per worker. 4 - 6 Profit Maximization • Objective of the firm is to maximize profits • The profit function is: - Profits = pF(E) – wE - Total Revenue = pF(E) - Total Costs = wE - Perfectly competitive firm cannot influence prices of output or inputs 4 - 7 Hiring Decision • Value of Marginal Product (VMP) is the marginal product of labour times the dollar value of the output • This indicates the benefit derived from hiring an additional worker, holding capital constant • Value of Average Product is the dollar value of output per worker 4 - 10 22 18 8 9 12 Demand Curve for Labour VMPE Number of Workers VMPE Because marginal product eventually declines, the demand curve for labour is downward sloping. A drop in the wage from $22 to $18 increases the firm’s employment. An increase in the price of the output shifts the value of marginal product curve upward, and increases employment. 4 - 11 Maximizing Profits: a general rule • The profit, π, maximizing firm should produce up to the point where the cost of producing an additional unit of output (marginal cost) is equal to the revenue obtained from selling that output (marginal revenue) • Marginal Productivity Condition: this is the hiring rule, hire labour up to the point when the added value of marginal product equals the added cost of hiring the worker (i.e., the wage) 4 - 12 The Mathematics of Marginal Productivity Theory wpFE FOC wEEpFmax E d E   : : )(    1 1 )1( : OC )(           w p E F EEF d 4 - 15 The Effect of an Increase of Capital Copyright©2003 Southwestern/Thomson Learning Quantity of Labour 0 Wage  1 )1(         w pK E d Labor demand 4 - 16 The Employment Decision under the presence of payroll taxes • For a given payroll tax τ • Payroll taxes increases the gross wage paid by the firm wpFE FOC rKwEKEpFmax E d E )1(: : )1(),(         1 1 )1( )1( : OC )(            w pK E F EKEF d 4 - 17 The Effect of an Increase of Payroll taxes Copyright©2003 Southwestern/Thomson Learning Quantity of Labour 0 Wage    1 )1( )1(          w pK E d Labor demand 4 - 20 Factor Demand with Many Inputs • There are many different inputs - Skilled and unskilled labour - Old and young - Old and new machines • Cross-elasticity of factor demand - %∆Di%∆wj - If cross-elasticity is positive, the two inputs are said to be substitutes in production 4 - 21 The Demand Curve for a Factor of Production is Affected by the Prices of Other Inputs Price of input i Employment of input i D0 Price of input i Employment of input i D1 D0 D1 The labour demand curve for input i shifts when the price of another input changes. (a) If the price of a substitutable input rises, the demand curve for input i shifts up. (b) If the price of a complement rises, the demand curve for input i shifts down. (a) (b) 4 - 22 Adjustment Costs and Labour Demand • The expenditures that firms incur as they adjust the size of their workforce are called adjustment costs - Variable adjustment costs are associated with the number of workers the firm will hire and fire - Fixed adjustment costs do not depend on how many workers the firm is going to hire and fire