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



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

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

Individual LFS function
•wage rate – below the MFCL function
AFCL = sL = w
MFCL
L
w
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

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

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

•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
Demand for labour function: ↑MFCL, AFCL
AFCL = sL = w
MFCL
L
w
MRPL
w*
L*
w*'
L*'
AFCL' = sL' = w'
MFCL'

Minimal wage impacts
AFCL = sL = w
MFCL
L
w
MRPL
w*
L*
wmin
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
wmin minimal wage too high – employment decreases in comparison to the case of no wage regulation

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

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

Wage discrimination
sL2
MFCL2
L
w
MRPL
w1
w2
L*
sL1
MFCL1
MFCL
L2
L1
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

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)
•

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
•

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

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

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

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

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

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)

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

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

Increase of the wage rate and impact on the market LFS curve
L
w
SL
SL'
w 1
w 2
L 1
L 2
L 2´
increase of the wage rate leads to the increase of willingness to work of existing workers
+ 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)

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

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

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

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

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

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

Bilateral monopoly on the labour market
L (h)
SL
DL=MRPL
MW
w1
L1
w2
L2
w (CZK/h)
MFCL
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