Labour Marginal Physical Product (MPP) of Labour The ... 1.pdf · Marginal Physical Product (MPP)...

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Labour

TherewardtoLabourasafactorofproduc;onisthewage.

MarginalPhysicalProduct(MPP)ofLabour

Aswecanseefromthegraphabove,theMPPcurveslopesupwardsatlowlevelsofoutputandthenstartstoslopedownwards.

1) TheMPPcurveslopesupwardsini;allyduetothebenefitsfromincreasedspecialisa;onoflabour.Asmoreworkersarehired,eachworkerconcentratesonperformingonespecifictaskonlyandassuch,increaseshisabilitytoperformthattask.Therefore,asextraworkersarehired,theMPPrises.

2) TheMPPcurveslopesdownwardsduetotheLawofDiminishingMarginalReturns.Asmorestaffisemployed,eachstaffmemberhas

Labour:isallhumaneffort,otherthanenterprise,whichisusedintheproduc;onofgoodsandservices.

TheMarginalPhysicalProductofLabour(MPPL):istheextraoutputgeneratedwhenanaddi;onalunitofLabourisemployed.

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MPPL

MPP

Quan;tyofLabour


lessaccesstocapitalortheysimplygetineachother’swayandassuchaddi;onalworkerswouldbelessproduc;ve.AfallinMPP.

MarginalRevenueProduct(MRP)ofLabour

TheMRPcurveofLabourisexactlythesameshapeastheMPPcurve.ThisisbecausetheMRPcurveisMPPXMR.Itslopesupwardsini;allyduetothebenefitsfromincreasedspecialisa;onoflabourandthenslopesdownwardsduetotheLawofDiminishingMarginalReturns.ExactlyliketheMPPcurve.

Aswealreadyknowfromprevioushandouts,theMRPcurveofanyfactorofproduc;onisitsdemandcurve.ThisisalsotrueforLabour.Butmorespecifically,itisthedownwardslopingpartoftheMRPcurvethatisthedemandcurveforlabour.

SeeGraphOverleaf

TheMarginalRevenueProductofLabour(MRPL):theextrarevenueearnedwhenanaddi;onalunitoflabourisemployed

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MRPL

MRP

Quan;tyofLabour


TheDemandCurveforLabour

AtwageW1,thereisquan;tyQ1ofLabourDemanded.

AtwageW2,thereisquan;tyQ2ofLabourDemanded.

WecanseethatthedemandcurveforLabourisdownwardslopingfromleWtoright.Thuswecansaythatthehigherthewagerate,thelowerthedemandforLabour(otherthingsbeingequal).

Anincreaseinwagerateslessenstheprofitabilitytotheemployeroftakingonaddi;onalworkers.ThereforeifthewagerateincreasesfromW1toW2,thequan;tyofLabourdemandedfallsfromQ1toQ2.

AswagesrisethedemandforLabourfalls.

AswagesfallsthedemandforLabourrises.

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Wage(€)

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W1

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TheDemandforLabour

1) TheWageRate:Ifthewageratetheworkerisseekingishigherthantherevenuethattheworkergeneratesthenthisworkerwillnotbedemanded.

2) DemandforOutput:Ifdemandforthefirm’soutputincreasesthenthismayleadtoanincreaseddemandforlabour.

3) PriceofOtherFactorsofProducCon(includingcapital):Priortoemployingmorelabourthefirmwouldcomparethecostoftheaddi;onallabourwiththatofotherfactorsofproduc;onavailabletodeterminewhichisthemostcompe;;ve.

4) StateSubsidies:Ifthestatewerepayingsubsidiesforthehiringofaddi;onallabourthenthiswouldmakelabourmorecompe;;veandincreasedemand.

5) TaxaConRatesontheFirm’sProfits:Iftheprofitabilityofafirmisreducedbyhighertaxoncompanies'profitsthenthismayaffectafirm’sdecisiontohireaddi;onallabour.

6) PayrollTaxes:Iftherateofpersonaltaxa;onincreasesthenlabourmayseekahigherwagerateandthismakeslabourlesscompe;;ve.SimilarlyiftherateofPRSIonlabourincreasesthisisanaddi;onalcostforthefirm,whichmayreducetheirdemandforlabour.

7) AvailabilityofTechnology:Afirm’sdemandforlabourwillbeaffectedbytheavailabilityofnewtechnologies,par;cularlyifithelpstoreducecosts.

8) TradeUnionInvolvement:Ifaworkerisamemberoftradeunionthenthefirmmaynotemploythisworker.Thisappliespar;cularlytosomefirmsinIreland,whichoperatewithouttheinvolvementoftradeunions.

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TheElasCcityoftheDemandforLabour

Theelas;cityofdemandforlabourdependsonthefollowing.

1) TheElasCcityofFactorSubsCtuCon:Theeasieritisforajobtobecarriedoutbyamachine,themorejobswillbelost.Thisisbecausemachineswillbesubs;tutedforlabourwhichisusuallyaresultofrisingwages.Howeversomejobscannotbeperformedbymachines,thereforeaswagesincreasesomeworkerswills;llcon;nuetobeemployedatthehigherwage.

2) TheElasCcityofSupplyofotherFactorsofProducCon:IfthesupplyofotherFactorsofProduc;onisrela;velyinelas;c,thenitwouldbecomeincreasinglydifficulttoreplaceLabourwithotherFactorsofProduc;on.So,eventhoughwagesarerising,thefirmisleWwithlieleop;onbuttocon;nuehiringlabourasthequan;tyofotherFactorsofProduc;onarenoteasilyincreased.

3) TheElasCcityofDemandfortheFinishedGood:IfthePriceElas;cityofDemand(PED)ofthegoodbeingproducedislow(i.e.thegoodisinelas;c),thenanincreaseinwagescanbepassedrela;velyeasilytotheconsumer.However,ifthegoodbeingproducedhasahighPED(i.e.thegoodiselas;c),producersmayseektofindlessLabourintensivemethodsofproducingthegoodasLabourcostsrise.

4) TheRaCoofLabourcoststoTotalCosts:IftheLabourcostsembodiedintheproduc;onofthegoodorserviceareasmallpropor;onofthetotalproduc;oncost,thenanincreaseinLabourcostswouldhavearela;velysmallimpactonthetotalcost.Inthiscasetheelas;cityofdemandforLabourwouldbylow(i.e.rela;velyunresponsivetochangesinwagerates).However,ifLabourcostsrepresentalargepropor;onoftotalcosts,anincreaseinLabourcostswouldhavealargeeffectontotalcostsandassuchtheelas;cityofdemandforLabourwouldbequitehigh(i.e.quiteresponsivetochangesinwagerates).

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EconomicConsequencesofanIncreaseintheDemandforLabour

1) PressureonWageLevelstoRise:Employerswillbeforcedtoincreasewagelevelsinordertoaeractworkersintothoseareaswhereshortagesareoccurring.

2) LossofServices:Whereworkersarenotavailableitwillresultineitheradeteriora;onofservicesinthoseareasoratotallossofcertainservices.

3) LossofInvestment:Indigenousandforeignentrepreneursmayseesuchshortagesoflabourasadeterrenttoinves;ngandstar;ngabusiness.

4) InflaConaryPressures:Ifwagelevelsincreasesuchincreasesmaybepassedontothefinalconsumerintheformofhigherprices.

5) ImmigraCon:ShortagesoflabourintheIrishlabourmarketarereportedinterna;onally.FAShasaeemptedtoen;ceforeignworkerstoIreland.Thenumberofapplica;onsforrefugees’statushasalsoincreased.

6) DifficultyinKeepingWorkersinSomeSectors:Withlabourshortagesandtheaerac;venessofhigherpayinalterna;veemploymentscertainsectorsfinditincreasinglydifficulttoaeractworkerse.g.inthehotel,catering,tourismindustries.Mayrequirestateinterven;onforthere-trainingofworkerstofillsectorswithvacancies.

7) InabilitytoMaintainDevelopmentoftheState’sInfrastructure:Becauseoftheshortageofworkers,developingtheinfrastructureatthepacenecessarytosustaineconomicgrowthisnotpossibleandthismayaffectfutureinvestment.

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TheSupplyofLabour

ItisimportanttorealizethatwhenwearetalkingabouttheSupplyofLabour,wemeanthenumberofmanhoursthatwillbemadeavailableatagivenwagerate.

AboveweseethestandardLabourSupplycurve,(thereareexcep;onstothiswhichwewilldiscusslater).FromthegraphwecanseethatthesupplyofLabourisposi;velyrelatedtothewagerate.IfwagesrisefromW1toW2,thenthequan;tyofLaboursupplied(thenumberofmanhours)risesfromQ1toQ2.

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Wage(€)

Quan;tyofLabour

W1

W2

Q1 Q2

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TheSupplyofLabourDependson

1) TheSizeofthePopulaCon:Thelargerthepopula;onofacountry,themorelikelytheyaretohaveagreatersupplyofLabourastherearemorepeopleavailableforwork.Thesmallerthepopula;onthemorelikelyitistohaveasmallerlaboursupply.NOTE:Immigra;onandemigra;ontrendsaffectthesizeofthepopula;on.

Thelargerthepopula;onthegreatertheLabourForce

LabourForce=Employed+Unemployed

2) TheAverageLengthoftheWorkingWeekandHolidayEnCtlements:Themorehours,onaverage,thatpeopleworkinaweekthegreaterthesupplyoflabour.Thegreatertheamountofholidayen;tlementsgiventoeachworker,thelowerthesupplyofLabour.

3) ParCcipaConRate:Thehigherthepar;cipa;onrate,thegreaterthesupplyofLabour.Thelowerthepar;cipa;onratethelowerthesupplyofLabour.

TheParCcipaConRate

ThePar;cipa;onRateisinfluencedbythefollowing

1) TheAgeofReCrementandSchoolLeaving:Ifthere;rementageisraisedthenthePar;cipa;onRateisincreased.Similarly,iftheschoolleavingageisraised,thenthenumberofpeopleleavingschooltotakeupfullemploymentwouldfall,causingthePar;cipa;onRatetofall.

2) LawsandCultureregardingMarriedWomenintheWorkplace:Iftrendschangeortaxa;onlegisla;onisalteredwhichmakeitmoreaerac;veformarriedwomentore-enterorremainintheworkplacethenthePar;cipa;onRatewillincrease.

LabourForce:TheLabourforcecomprisesthosewhoareseekingwork(unemployed)andthosewhoarecurrentlyinwork(employed)

ParCcipaConRate:Thepar;cipa;onrateisthepropor;onofthepopula;onwhoareinthelabourforce.

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ParCcipaConRate =LabourForce

WorkingAgePopulaCon


3) TheStateoftheEconomy:Whentheeconomyishealthy,therearemorejobsavailable.Peoplewhomightotherwisenottakeupemployment,aremorelikelytotakeupemploymentwhichincreasesthePar;cipa;onRate.

DiscusstheFactorsthatInfluencetheSizeoftheIrishLabourForce

1) WagelevelswithintheEconomy:Higherwagelevelsactasanincen;veformorepeopletosupplylabour.However,wagereduc;onsreducethesupplyoflabour.

2) PopulaCon:Ireland’spopula;onhasincreasedwithmoreci;zenswithintheworking-agebracket.Thesizeofthelabourforceincreases,e.g.Irelandhasasmallerpopula;onthanFranceresul;nginasmallerlabourforce.

3) ParCcipaConRate:Thenumberofpeoplewillingtoworkwithinthe16-65agegroupshasincreased.Morewomenworking/peoplewhooncere;redarewillingtotakeuppart-;meemployment.

4) RatesofIncomeTaxwithintheEconomy:Inthepastareduc;oninincometaxratesactedasanincen;veforpeopletojointheworkforce.Inthe2009budgetthenew‘IncomeLevy’couldnowactasadisincen;vetoworkandnega;velyaffectthesizeofthelabourforce.

5) LabourMobility:TheworkforceinIrelandhasbecomemoreoccupa;onallymobile,therearelessbarriersinplacepreven;ngthemovementofworkers.WithEUenlargement,thefreemovementoflabourisincreasing.TherecentdownturnintheIrisheconomymayseemanyimmigrantsmovinghomeandanincreaseinemigra;onofIrishci;zens.

6) GovernmentPolicies:Thegovernmenthasmovedtoeaserestric;onsontheentryofimmigrantstoIrelandaimingtoliberaliseentryrequirementsintocertainoccupa;ons.E.g.pharmacies;hospitalconsultants.

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DifferentLabourSupplyCurves

TheLabourSupplycurveisgenerallyconsideredtobeupwardslopingfromleWtoright.Thismeansthatasthewagerateincreases,thenumberofhourssuppliedincreasesandviceversa.

However,thereareexcep;onstothiscurvewhichweshallnowtakealookat.

Inextremecases,ifwageratescon;nuetorise,workerswouldreducethenumberofhoursoflabourtheysupply.Thisisduetothefactthat,aswageratesreachveryhighlevels,workersachievealevelofwealththattheyarecomfortablewithandstarttoprefermoreleisure;metomoremoney.Thereforeaswageratescon;nuetorise,lesshoursofLabouraresupplied.Seegraphoverleaf.

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Wage(€)

Quan;tyofLabour

W1

W2

Q1 Q2

SL


TheBackwardBendingSupplyCurve

Aswecanseefromthegraphabove,ini;allyincreasesinthewageratecauseanincreaseinthequan;tyofLaboursupplied.HoweveraWeracertainpoint(W1),anyincreaseinwagescausesafallinthequan;tyofLaboursupplied.


Wage(€)! SL

W1

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Labour(Hours)


MinimumWageSupplyCurves

TradeUnionsexistinmanyLabourmarketsandhavebeensuccessfulinnego;a;ngaminimumwagefortheirmembers.Aminimumwageisanhourlyratebelowwhichnolabourwilllegallybesupplied.Wecanseefromthegraphbelowthat,atanywageratebelowtheminimumwage,(WMIN),noLabourissupplied.Thenattheminimumwage40hoursaresupplied.AnyincreaseintheLaboursuppliedaWerthe40hourswouldrequireincreasesinthewagerate(i.e.over;me).ThisiswhatcausesthesupplycurvetoslopeupwardsagainaWerthe40hours.

Aswecanseefromthegraphabove,thesupplyofLabourjumpsfrom0hoursto40hoursperweekoncetheminimumwage(WMIN)ispaid.Followingthat,ifthefirmwishesforitsemployeestoincreasethesupplyofLabour,theymustincreasethehourlywage(toWOT)forthoseextrahours.


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HowtheWageRateisDetermined

Likemostthingsineconomics,thewagerateisdeterminedbytheintersec;onoftheSupplycurveforLabourandtheDemandcurveforLabour.

Assaidbefore,theSupplycurveforLabourisusuallyupwardslopingfromleWtorightbecause

1) AnincreaseinwageswillencouragemorepeopletojointheLabourForce(increasedPar;cipa;onRate)

2) AnincreaseinwagesusuallyresultsinthosealreadyintheLabourForcesupplyingmoreLabour.

TheDemandCurveforLabour(MRPL)isdownwardslopingfromleWtorightbecause

1) TheLawofDiminishingReturns:thisstatesthatasextraunitsofavariablefactorofproduc;onareaddedtoasetsizedfixedfactorofproduc;on,eventuallyapointwillbereachedwhentheextraoutputcausedbythelastunitofthevariablefactoremployedbeginstodecline.

2) Companiesfacingadownwardslopingdemandcurvehavetolowerpriceinordertosellmoreoutput,representedbyadownwardslopingMRcurve.

NowthatweunderstandtheshapeofeachthedemandandsupplycurvesforLabour,wecandrawthembothonthesamegraph.



WageDeterminaConinaFreeMarket

Afreemarketisamarket(i.e.acombina;onofdemandandsupply)wheretherearenotradeunionrestric;ons,noemployerrestric;onsandnogovernmentrestric;ons.

Ifwearetryingtodeterminethewagerateinafreemarketwesimplyusethedemandandsupplycurvesthatwehavejustdiscussed.

Thegraphaboveshowshowthewagerateisdetermined.

IfW1istheprevailingwageratethenQ1manhoursoflabourwillbesuppliedbutQ2manhourswillbedemanded,resul;nginanexcessdemand(i.e.LabourShortages).ThiswilldrivethewagerateuptowardstheequilibriumwagerateWEQ.

IfW2istheprevailingwagerate,thenQ1willbedemandedandQ2willbesupplied,resul;nginanexcesssupplyofLabour(i.e.Unemployment).

TheEquilibriumwagerateisthewagethatensuresthatthedemandforLabourequalsthesupplyofLabour.JonathanTraynor�14

Wage(€)

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WagesinaMarketwithRestricCons(NotaFreeMarket)

MinimumWage

Assaidpreviously,atradeunionmaysuccessfullyargueforaminimumwageinordertotrytoprotectitsmembersinterests.

IftheminimumwageissetatWMIN,thennoLabourwillbesuppliedbelowthiswageandassuchthepor;onofthesupplycurveABnolongerapplies.

However,unbeknownsttomostpeople,minimumwagescauseunemployment.

ThisisbecausehigherwagesreducesthedemandforLabourandassuchtheemployerwillhirelessworkersthenhewouldhavebeenwillingtohireatawagebelowtheminimumwage.

Ifwelookatthegraphoverleaf,weseethatpeoplewouldbewillingtosupplyLabourataratebelowtheminimumwage,(representedbythepor;onofthegraphAB).Iftheminimumwagewasnotenforcedthequan;tyofLabourbothdemandedandsuppliedwouldbe,(thisisthequan;tyofLabourthatwouldemployedinafreemarket).Howeverbecauseoftheminimumwageonly(thequan;tydemandedduetotheminimumwage)isdemanded,resul;nginunemployment.JonathanTraynor�15

Wage(€)

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EconomicAdvantagesofReducingtheNaConalMinimumWage

1) LowerLabourCosts:Resul;ngincon;nuedproduc;onandreducedriskofbusinessclosure.

2) LowerSellingPrices:Withproduc;oncostsfallingthismayleadtolowerconsumerpricesandincreasedcompe;;on

3) IncreasedDemand:Thelowerwagerateleadingtolowerpricesmayleadtoincreaseddemandandhencegreaterdemandforworkers.Indigenousjobsareprotectede.g.jobsinthetourismsector.

4) InvestmentSCmulus:Reducedcostsmayleadtoincreasedinvestmentbyentrepreneurs/increasedforeigndirectinvestment.

5) ReducedRiskofRe-locaCon:Irishwagelevelsmayfallmoreintolinewithothercountriesandthismayresultinlessfirmsconsideringre-loca;ngtocountriesoutsideIreland.

EconomicDisadvantagesofReducingtheNaConalMinimumWage

1) ReducedStandardofLiving:Workerswillnowreceivelowerincomeandsotheirstandardoflivingwillfall

2) ReducedAggregateDemand:Lowerincomeswillreducespendingandsothedemandforgoodsandservicesmayfallresul;nginunemployment/lessVATreceipts.

3) ImpactonGeneralWageLevels:Thisreduc;onmayindicatetoemployersthatallwagelevelsshouldfallandthismayresultinapossiblereduc;oninstandardoflivingamongtheen;reworkforce.

4) WorkersonLowerIncomesSufferMost:Ifthereduc;onisconfinedtothoseontheminimumwageratethentheburdenisnotbeingsharedequallywithintheworkforce,whichisnotequitable.

5) DiscourageEmployment:Thereduc;onmaynotencouragepeopletojointheworkforce/itmayleadtoagreaterpar;cipa;onintheblackeconomy.



RestricCngtheLabourSupply

Aswecanseefromthegraphbelow,thereisaninwardshiWinthesupplycurveofLabour.Thisiscausedbyeitheraprofession(doctors,lawyersoraccountants)oratradeunionac;velyreducingthesupplyofitsmembersinordertoincreasethewageearnedbythesemembers.Thisisanexampleofthetradeunionorprofessionac;nglikeamonopolyandserngthequan;tysupplied.Itisthemarketthatsetstheprice(i.e.thewage).

Aswecanseefromthegraphoverleaf,byrestric;ngthesupplyofLabour(fromS1toS2)aprofessionortradeunioncanincreasethewageofitsmembers(fromW1toW2).


Wage(€)

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Labour(Hours)

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ATradeUnionorProfessioncanachievetheseRestricConsby

1) Se[ngmoreDifficultExams:Manyprofessionslikeaccoun;ngandlawrequireallstudentstositprofessionalexams.IfTheLawSocietyofIrelandincreasedthedifficultyoftheseexamsthenlesspeoplewouldentertheprofession.

2) LimiCngPlacesatCollege:Inthe80’sthegovernmentlimitedthenumberofplacesincollegeformedicineinordertosavemoneyontheireduca;on.Thisuninten;onallyreducedthenumberofdoctorsinthecountryresul;ngineachofthemearningahigherwage.

3) LongerTrainingPeriods:InIrelandittakesaboutthreeandahalfyearsforanaccoun;ngstudenttobefullyqualified.Ifthistrainingperiodwasincreased,thesupplyofaccountantsinIrelandwouldfallresul;ngineachaccountantearningahigherwage.

Whentheprofessionortradeunionsetsthequan;tysuppliedratherthantheprice(thewagethattheyarewillingtoworkfor)thereisnounemploymentunliketheminimumwageexample.

TheEfficiencyofLabour

TheefficiencyofLabourdependsonthefollowing

1) EducaConorQualificaCons:Thebeeerthequalityofeduca;on,trainingorqualifica;onsaeainedbytheworkerthemoreefficientorproduc;vetheymaybe.

2) DegreeofSpecialisaCon:Byconcentra;ngonperformingasingletaskworkersbecomefasterandmoreskillfulandthereforearemoreefficient.

3) InnateTalentoftheWorker:Someworkersmaypossessinnate/naturaltalentsmakingthemhighlyefficient.

4) ClimaCcCondiCons:Ifaplaceofworkistoohotortoocoldthenthismayaffecttheworkersproduc;vity.

5) QualityoftheOtherFactors:Thebeeerthequalityoftheotherfactorswhichtheworkerusesthenthemoreefficienttheworker.

6) ManagementExperCse:Goodmanagerscangetthebestoutoftheirworkforce,leadingtoefficiencies,improvedstaffmo;va;on,leadingtoincreasedoutput.

7) AvailabilityofOtherFactors:Efficiencymaybeimprovediftheworkerhasagreaterquan;tyofotherfactorsofproduc;onavailableforuse.



8) CommitmentoftheWorker:ifworkersarehighlymo;vatedandcommieedtoworkthentheywilloperatemoreefficiently

9) LivingCondiConsoftheWorkforce:Ifworkersarehealthy,wellnourishedandhavedecentaccommoda;onthentheywillworkinamoreefficientmanner.

WhyaresomeJobsBe^erPaidthenOthers

1) MRP:ThemainreasonthatanyjobisbeeerpaidthanothersisthedifferenceineachworkersMRP.AworkersMRPisbasicallythevalueofwhattheworkerearnsforthefirm.ThehighertheworkersMRP,themorethefirmcanpayhim.E.g.Aninvestmentbankerearnsthebankmoremoneythanaclerk.

2) DifferentSkills:Theskillsaeachedtodifferentjobsvaryandpayiscommensuratewiththelevelofskillinvolved.E.g.Adoctorreceiveshigherpaythananurse.

3) Training:Workerswhoundergolongerperiodsoftrainingwillreceivehigherlevelsofpay.E.g.Anursewhotrainsandbecomesmorespecializedwillreceivehigherlevelsofpay.

4) EducaConalQualificaCons:Generallywagelevelsrecognizetheeduca;onalqualifica;onsachievedbytheworker.E.g.AteacherwithaMastersdegreereceivesahigherallowancethanateacherwithanhonoursdegree.

5) NatureandCondiConsoftheJob:Thesemayvarybetweenjobsandpaylevelswillreflectthis.E.g.Dangerousworkandunsociablehoursreceivehigherpaythanasafeninetofivejob.

6) NegoCaCngStrengthoftheWorkersTradeUnion:Ifaworkerisamemberofastrongtradeunion,thistradeunionmaysuccessfullyargueawageinlinewiththatworkersMRP.

7) TradiConA^achedtoCertainJobs:Ithasbeenpossibleforthoseinvolvedintheselfgoverningprofessionsi.e.thoseinthelegaloraccountancyprofessionstomaintainhighlevelsofpaybecauseofthetradi;onwhichisaeachedtothoseprofessions.

8) PossessionofInnateTalents:Somepeoplepossesscertaintalentsandhencemaybeabletoearnveryhighincomes.E.g.Sportsstars,actorsorsingers.

9) GenderBias:Despitelegisla;on,abiasexistsinthepaymentofwomenintheIrishworkforce.WomenworkersinIrelandearnroughly80%oftheirmalecounterparts.



MarginalCostofLabour

Ifthefirmwishestohiremorelabouritmustincreasethewageinordertoaeractmoreworkers.Butthefirmmustpayallworkersdoingthesameworkequalamounts.Therefore,thefirmstotalwagebill(TotalCostofLabour)increasesbynotjustthewageofthenewemployeebutalsobytheincreaseinwagesfortheworkersthatitwasalreadyemploying.

MethodforAnsweringQuesCons

1) YoucalculatetheTotalcostofLabourbeforetheextraworkerwashired.ThisisTotalCost1(TC1)

2) YoucalculatetheTotalCostofLabouraWertheextraworkerwashired.ThisisTotalCost2(TC2)

3) Youtaketheansweryougotinpoint1awayfromtheansweryougotinpoint2ANDTHISISYOURMarginalCostofLabour.

TC2-TC1=MCL

EXAMPLE1

Afirmwishestoaeractmorelabour.Inordertoincreaseitslabourforcefrom5to6employees,thefirmmustincreasetheweeklywageratefrom€400to€440peremployee.Calculatethefirm’smarginalcostoflabour.Showyourworkings.

ANSWER1

1) 5X€400=€2,000

2) 6X€440=€2,640

3) €2,640-€2,000=€640

4) MarginalCostofLabour=€640

EXAMPLE2

Afirmwishestoaeractmorelabour.Inordertoincreaseitslabourforcefrom7to8employeesthefirmmustincreasetheweeklywageratefrom€250to€300perworker.Calculatethefirm’smarginalcostoflabour.Showallyourworkings.

MarginalCostofLabour:Istheaddi;ontoTotalCostofLabourfromhiringoneextraworker.



ANSWER2

1) 7X€250=€1,750

2) 8X€300=€2,400

3) €2,400-€1,750=€650

4) MarginalCostofLabour=€650

NominalWagesV’sRealWages

Sofarthroughoutthishandoutwehavebeendiscussingwages,butmorespecificallywehavebeendiscussingwhatarecallednominalwages.

E.g.€1000perweek.

Nominalwagesdonottakeintoaccountthepriceofgoodsandservicesintheeconomy.Thisdoesnottellushowwealthyapersonisaswealthisdefinedbywhatyoucanbuy.Thereforeweneedatypeofwagethattakespricesintoaccount.

Realwagestakeintoaccountthepriceofgoodsandservicesintheeconomyandtherateofinfla;on(therateatwhichpricesareincreasing).

Realwagesareconsideredtobemoreimportantinwagenego;a;ons.Thisisduetothefactthatrealwagesaccuratelyindicatehowmanygoodsandservicespeoplecanbuywhichisthedefini;onofwealth.

Remember,nominalwagescanriseand,inrealterms,peoplecans;llbegerngpoorer.Ifpricesarerisingfasterthantheriseinnominalwages,thenrealwagesarefallingandassuchpeoplearegerngpoorer.

NominalWages:ReferstothemoneyearnedaWeracertainperiodofworkwhichisexpressedinstandardcurrencyunits.

RealWages:referstothepurchasingpowerofmoneyearned.


Labour Marginal Physical Product (MPP) of Labour The ... 1.pdf · Marginal Physical Product (MPP)...

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