Labor Economics (Part 2)

Demand for Labor

Principles
Labor demand = derived demand (product demand comes first, labor demand comes second)

government influences:
- min wages
- welfare laws
- retirement , pension regulation
- safety protection laws
- immigration control
increase the cost of hiring labor

profit maximization
2 preconditions
- price are influenced by the market ( profit max is done thru output decision)
- most decisions are marginal (incremental)

max profit = incrementally optimise output
- if income of one additional input unit > expense of unit => add more input
- if income of one additional input unit < expense of unit => reduce input

2 input factors: labor , capital

marginal product
  MPL = dQ/dL ( holding capital constant)
  MPK = dQ/dK ( holding labor constant)

marginal revenue
  MR = P in competitive mkt

marginal revenue product
  MRPL = MPL * MR     =>     MRPL = MPL * P

marginal expense of labor
  MEL = w  ( forms are wage takers in competitive mkt)

Employee Value Proposition
- what ppl can get out of the company
- why ppl would want to work there

Labor demand in the SR
(capital is fixed, only labor can be adjusted)
assume declining MPL, diminishing marginal returns

from profit max to labor demand, MRPL = MEL
MPL*P = w ; in dollar term
MPL = w/P ; in physical quantity

at E2, MPL < (w/p)0, make a loss, reduce employees
at E1, MPL > (w/p)0, make a profit, increase employees

not making judgement about individual, labor are interchangeable

criticism (to the marginal productivity theory of demand)
- firms don not really understand MPL, firm guess the value added of a worker
- adding labor without increasing capital does not work
 (not entirely true: holiday coverage. shift breaks)

Labor demand in the LR
LR: other input factors can be varied and affect the demand for labor
Two equations must be fulfilled:
MPL = W/P   ;   MPK = C/P

so   W/MPL = C/MPK
- marginal cost of producing an extra unit, using capital , same as marginal cost of producing an extra unit, using labor
- to maximise profit, firm must adjust the labor and capital inputs, so that MC of an extra unit is equal, whether using L or K

(to be continued...)