MicroeconomicsCorso E

John Hey

Chapter 26

• The LABOUR MARKET • The supply of labour.• The demand for labour.• Equilibrium.• Minimum wage legislation?

Two questions for you

• An increase in the wage rate implies an increase in the supply of labour?

• Minimum wage legislation is a Good Thing?

The supply of labour• We use the analysis of Chapter 6• The space: (T,C)• T: free (non-working) time• C: consumption• The supply of labour – Lo where• Lo =24 – T• ...depends upon the preferences.• Obviously both consumption and leisure

time are desirable (are both goods).• Let us go to Maple…

The demand for labour• We use the analysis of Chapters 11,

12 and 13.• We begin in a space with...• ... Ld the demand for labour on the

horizontal axis... • ... and total Costs total and total

revenues on the vertical axis.• Let us assume we are in a short

period with fixed costs equal to 5, and the wage fixed at 1 per unit.

The optimality condition for the demand for labour

• The slope of the total cost curve must be equal to the slope of the total revenue curve.

• The slope of the total cost curve is equal to the wage rate.

• The slope of the total revenue curve is equal to the price of output multiplied by the marginal product of labour.

• Hence the optimality condition: the real wage rate (the wage rate divided by the price of output) must be equal to the marginal product of labour.

A minimum wage?

• What happens in this market if the government introduces a minimum wage?

• Obviously at a level higher than the equilibrium wage in the competitive market.

Chapter 26

• Goodbye!