Question

In: Economics

Predict the impact of each scenario described below on the labor market. Assume the labor market...

Predict the impact of each scenario described below on the labor market. Assume the labor market is originally in equilibrium, and then each scenario happens independently. (In other words, only a) happens; then only b) happens. Do not put them all on one graph or accumulate their effects.) Draw the labor market graph originally in equilibrium. Either denote movement(s) along or shift(s) in appropriate curves. Note whether employment and wages will increase or decrease.

c.   The firm is a monopsony. The state passes a competency test on potential employees.

Solutions

Expert Solution

When the firm is in monopsony, it is the only buyer of labour, that is it is the only firm that provides employment in the region. This means that it will face the entire supply of labour alone, or in other words, its labour supply curve will be the labour supply curve of the entire market. Thus, it is upward sloping, as is shown by the ACL curves in the figure. The labour supply curve is given by the average cost of labour (ACL) curve. The firm will face an upward sloping marginal cost of labour (MCL) curve because at any given wage rate, the firm will have to incur a higher cost to amploy an extra unit of labour from the market. The labour demand curve is a downward sloping curve and is given as the marginal revenue product of labour (MRPL) curve, which means for the firm, the demand for labour is based on the revenue generated by each unit of labour.

In equlibrium condition, the firm will employ at the point where its MCL1is equal to its MRPL1, that is at point E1, and the wages will be established at the point where the vertical line from E1 intersects with the ACL1. Hence, the level of employment is L1 and the wages is W1. If the state passes a competency test on employees, only those employees who clear this test will be able to join the firm. This will effectively decrease the number of employees available to the firm, essentially shift its supply curve to the left from ACL1 to ACL2. Since, the supply of labour has reduced, the firm will now have to offer a greater wage to attract the employees who do clear the test as it has to fulfill its labour needs. Thus, the MCL curve will also shift from MCL1 to MCL2. Thus, the new point of equilibruim will be established at the point where the MCL2 curve intersects the MRPL curve, at point E2, and the level of wages will be establised at point M2 with level of employment being at level L2.

Hence, the result of the state passing a competency test for all the employees is a higher wage rate in the market and a lower level of employment.


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