ben_sample_ch7 - 202 PART 3: Labour Supply and Demand...

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Chapter Seven Wages and Employment in a Single Labour Market Main Questions 202 • How is the equilibrium wage and employment level determined in a single labour market? • How does imperfect competition affect the way in which we use the supply and demand model to analyze wages and employment determination? • Are payroll taxes “job killers”? Is employment lower in Europe than in North America because of higher taxes? • What is monopsony? How do wage and employment outcomes differ in labour markets where firms have market power in the hiring of labour? How much worse off might workers be if they have few alternative places of employment? • Do minimum wages do more harm than good? In this chapter we complete the neoclassical model by analyzing the interaction of labour supply and demand in a single market. The firm may be operating in a competitive or noncompetitive (monopoly, oligopoly, monopolistic competition) product market. Alter- natively, the firm may be competitive or not competitive (i.e., possess some market power, or monopsony) in the labour market. Throughout the analysis we assume that workers are selling their labour on an individual basis; in later chapters we analyze the situation of col- lective bargaining via unionization. In dealing with the interaction of supply and demand in various market structures, it is important to be specific about the level of aggregation that is being analyzed. In this section we begin at the level of aggregation of the individual firm, and consequently focus on the firm as the decision-making unit. Subsequently we move to the “market,”dealing with higher levels of aggregation such as the occupation, industry, region, and economy as a whole—the levels at which the market wage is determined in competitive labour markets. We then relax the assumption of perfect competition in the product market. As will be seen, this does not substantially alter the supply and demand analysis. We describe the use of the supply and demand framework in policy analysis, with an extended investigation into payroll taxes. Relaxing the assumption of perfect competition in the labour market has a greater impact on the analysis of wage and employment determination. We move from this discussion of monopsony to an in-depth examination of the impact of minimum wages on the labour mar- ket, where the monopsony and perfectly competitive models of the labour market have been brought to bear in the interpretation of recent, potentially anomalous, empirical evidence.
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203 Chapter 7: Wages and Employment in a Single Labour Market A GUIDE TO CHAPTER 7 Chapter 7 pulls together the components of the supply and demand framework developed in Chapters 1 to 6, exploring how firms and workers interact in the market in determining the level of employment and wages. The key model is the competitive, neoclassical, market-clearing, “supply and demand” model. This model underlies the topics in the remainder of the text. The main objective of this chapter, then, is to see how the model works, and to consider some of the ways in which it may be wrong.
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ben_sample_ch7 - 202 PART 3: Labour Supply and Demand...

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