This presentation is done by Export Agriculture students in Uva Wellassa University.

1. Labour
Economics

2. Introduction
• Labour economics is the study of the market
for labour services in the economy
• The actors in the labour market includes;
Households
 Firms
 Government

3. • The interactions between these players in the
labour market determines;
I. equilibrium price
- the wage that workers receive
II. equilibrium quantity
- the amount of work that the
people do in the economy

4. Labour Demand
• Labour demand is the need for employees
and workers in particular job in given time
• The demand for labour comes from the
employees
Factors affect for labour demand
I. Wage rate
II. Unit cost of capital
III. Selling price of output

5. Profit maximization
• Economic profit = TR - TC
• By adding a worker;
TR TC
• A firm will add more labor if;
TR > TC

6. Marginal Revenue Production
MPR is the additional revenue that results
from the use of an additional unit of labor
MRP = TR
L

7. Assumptions of marginal revenue
productivity
1. Workers are homogeneous in terms of their
ability and productivity
2. Trade unions have no impact on the available
labour supply
3. Firms have no buying power when
demanding workers
4. The physical productivity of each worker can
be accurately and objectively measured
5. Workers can be hired at a constant wage rate

8. Marginal Factor Cost (MFC)
• MFC is the additional cost associated
with the use of an additional unit of labor
MFC = TC
L

9. MRP, MFC & Profit Maximization
• A firm will use more labor if MRP > MFC
• A firm will use less labor if MRP < MFC
• A firm maximizes its profit at the level of
labor use at which MRP = MFC

10. Labour Output
(Q)
MP price ($) MRP ($) MFC ($) Hire or
not
0 0 - 10 -
1 5 5 10 50 20 Hire
2 12 7 10 70 20 Hire
3 16 4 10 40 20 Hire
4 17 1 10 10 20 Not hire
5 15 -2 -- -- --

11. Derivation of MRP curve
MRP = TR
L
MRP = MR MP
MR = TR MP = Q
Q L
MRP = TR = TR Q
L Q L

12. Derivation of MRP curve cont’ –
MP curve
MP
Quantity of Labor

13. Derivation of MRP curve cont’ –
MR curve
• Perfect Competition
P = MR = AR
MR
Quantity of output

14. MRP curve
MRP
Quantity of Labor
MRP curve =Demand Curve

15. Law of Diminishing of Returns
• Every additional unit of labor will yield a
higher MR for a while
• Eventually MR starts to increase at a
decreasing rate
• Then MRP = MFC
• Finally MR decreases

16. Derivation of MFC curve
• In a perfectly competitive labor market,
MFC = w
RealWageRate
Units of labour
MFC = w

17. Short run Labour Demand Curve in a
Perfectly Competitive Market
RealWageRate
L3L2L1
W
Units of labour
MFC = w

18. RealWageRate
Units of labour
MFC1
L3L2L1
MFC2
MFC3
W2
W1
W3
Short run Labour Demand Curve in a
Perfectly Competitive Market

19. W2
Demand for LabourRealWageRate
W3
W1
Units of labour
L3L2L1
MRP curve =Demand Curve

20. RealWageRate
Units of labour
Shifts in demand curve
E0
W0
L0
D0
D1
D3
L2 L1
S
W1
W2

21. Rightward shift of demand curve due to;
 Increase in labour productivity
 Higher demand for the final product
 Lower price of a substitute input (capital)
Leftward shift of demand curve due to;
Decrease in labour productivity
Lower demand for the final product
Higher price of a substitute input (capital)

22. Labour Supply
• Supply of labor is the total hours (adjusted
for intensity of effort) that workers wish to
work at a given real wage rate

23. Basic concepts: measures and definitions
• Employed (E) : if a person works for pay for more
than one hour per week
• Unemployed (U) : if a person must have used at
least one active method to look for a job in the
last four weeks
or
the person must be willing to start a job and able
to take one up within two weeks if offered one

24. • Labour Force (LF) = employed(active) +
Unemployed(active)
• Individuals who are neither employed or
unemployed called inactive or out of the labour
force (NLF)
• These include pensioners, students and those
who serve in the military in the countries with
compulsory draft
• Working age population (P) = LF + NLF

25. • Unemployment rate = the ratio between the
total number of unemployed and those in
the labour force
ur = U/LF
• Labour market performance;
lfpr = LF/P
• Employment to population rate = ratio of
total employment to total working age
population
epr = E/P

26. Supply Curve
RealWageRate
Units of labour
W3
W2
W1
L1 L2 L3
Supply Curve

27. Factor affecting on labour supply
 Workers decide whether, to work or not to
wor & time of work
 It depends on the income & leisure
 There are two effects on labour supply
1.Substitution effect
2.Income effect

28. Substitution effect
IC2
IC1
No of leisure hrs per period of time
Income
per period
of time
Y1
Y2
A
B
X0
YA
YB
XA XB

29. Income Effect
IC2
IC1
No of leisure hrs per period of time
Income
per period
of time
Y1
Y2
A
B
X
YA
YC
YB
XA XB XC
C

30. • Higher wages attract labours to work more
• Because it makes more money
• As the wage rate rises, there are two things
going on…
1. Substitution effect
 Worker will offer himself for more hours
 The price of 'leisure' has become relatively
expensive
 So the worker will substitute 'leisure' hours
for 'work' hours
 It always have a positive relationship

31. 2. Income effect
 Higher wages lead to an increment of the
individual's real income
 Some people continue to earn high amount
of money
 But majority wants to spend more leisure
time since they have enough money
 Demand for leisure starts to rise
 As a result, demand for working hours
decreases

32. Backward bending supply curve of labour
RealWageRate
W
W 1
W2
XX1 X2
Substitution effect
Income effect
Units of labour

33. Market Equilibrium
RealWageRate
Units of labour
W0
L0
E0
Supply curve
Demand curve

34. Monopsony
• A labor market in which there is only one
firm demanding labor is called a monopsony
• The single firm in the market is referred to as
the monopsonist

35. Supply curve facing a monopsonist
RealWageRate
Units of labour
MFC
S
A monopsony firm faces the entire market labor
supply curve
MFC > w

36. Wage & Employment
determination under a monopsony
RealWageRate
MFC
S
MRP
W0
Units of labour
L0

37. Trade union in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
S
MRP
MFC

38. Trade union in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
MFC
S
MRP

39. Minimum wage in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
MFC
S
MRP

40. Unemployment
RealWageRate
Units of labour
W0
L0
E0
S
D1
W1
L S
D2
E1
L D
Surplus of workers
(unemployment)

41. W0
L0
RealWageRate
Units of labour
W2
Ls
D1
D2
E0
S
Labour Shortage
L D
Shortage
L D

42. Group Members
 D.N. Nanayakkara UWU/EAG/11/0028
 K.H.M.A.P. Kariyawasam UWU/EAG/11/0006

43. Thank You!