Chapter 4 The Labour Market and Unemployment

Chapter 4 The Labour Market and Unemployment - Chapter 4...

Info icon This preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4 The Labour Market and Unemployment
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Road Map 1. The labour market 2. The natural rate of unemployment 3. Frictional and structural unemployment 4. Cyclical unemployment 5. Why doesn’t the labour market clear? 6. The costs of unemployment 7. Reducing unemployment 8. Unemployment in Ireland 9. Unemployment in the euro area © Leddin & Walsh 2013
Image of page 2
© Leddin & Walsh 2013 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Figure 4.9 Unemployment rate in Ireland: 1960 - 2014 P e r c e n t
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Recall from Chapter 2 that the production function can be written as: Y = F(K, L) where Y is output, K is capital and L is labour. The MPL is defined as the extra output the firm can produce using an additional unit of labour (holding other inputs fixed): MPL = F(K, L + 1) – F (K, L) (1) This reflects the assumption of diminishing returns. As more and more labour is applied to a fixed amount of capital, each additional worker becomes less efficient. 1 . The Labour Market © Leddin & Walsh 2013
Image of page 4
© Leddin & Walsh 2013 Table 4.1 The marginal product of labour Labour Units of output Marginal product of labour L Y MPL 0 0 NA 1 10 10 2 19 9 3 27 8 4 34 7 5 40 6 6 45 5 7 49 4 8 52 3 9 54 2 10 55 1
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
© Leddin & Walsh 2013 0 1 2 3 4 5 6 7 8 9 10 0 10 20 30 40 50 60 Figure 4.1 The Production function Labour Output
Image of page 6
© Leddin & Walsh 2013 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 12 Marginal Product Of Labour (Diminishing returns) Workers U n i t s O f O u t p u t
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Demand for Labour Profit maximisation rule: Increase output until the marginal cost (MC) of producing an extra unit of output is equal to the marginal revenue (MR) from selling it: MC = MR In a competitive market the marginal revenue equals the output price (P). The profit-maximising rule is: MC = P © Leddin & Walsh 2013
Image of page 8
MC is equal to the cost of hiring one extra worker divided by the number of units of extra output he or she produces. MC = W/MPL (4) A firm maximises its profits when: W/MPL = P (5) Rearranging, the profit maximisation rule can be written as: W/P = MPL © Leddin & Walsh 2013
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Bakery: Worker earns €20 per hour. Price of loaf of bread = €2. Real wage W/P = 10 loaves per hour. (Payment to labour measured in units of output rather than in euros.) When MPL falls to 10 loaves per hour, hiring additional workers is no longer profitable. © Leddin & Walsh 2013
Image of page 10
Table 4.1 The marginal product of labour Labour Units of output Marginal product of labour L Y MPL 0 0 NA 1 14 14 2 27 13 3 39 12 4 50 11 5 60 10 6 69 9 7 77 8 8 84 7 9 90 6 10 95 5 © Leddin & Walsh 2013 The firm would maximize its profits by limiting its workforce to 5.
Image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Picking a particular real wage and reading over to the MPL line we obtain the associated demand for labour along the horizontal axis. Demand for labour (L d ) curve coincides with the MPL curve. The MPL/L d depends on the level of capital, technology, education and training.
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern