Imperfect Labour Markets and Monophony

Imperfect Labour Markets: Monophony

• In monophony, the marginal cost of hiring an additional worker is the wage paid to that worker plus the cost of raising the wages of all other workers (assuming an upward-sloping supply curve for labour). This can be seen by noting that the total cost of labour is w (L)L, where w(L) is the supply curve (inverse supply function) of labour. Thus, we can derive the marginal cost of hiring another worker as:

Above equation shows that the marginal cost curve for labour lies above the supply curve for labour. If the supply curve is linear the function for the curve is able to be written as w = a + bL. And differentiating w.r.t. L, we get dw/dL = b

Thus, we get MCL = a + bL + bL = a + 2bL , which indicates that the marginal cost curve will have the same wage intercept and twice the slope as the labor supply curve.

Profit Maximization by a Monopolist:

A monopolist’s short run profit function in terms of choice of labour holding capital constant. Π = px x(L;K) − w(L)L − rK. Assuming price is a parameter, the first-order condition is:

Prevalence of Monophony:

On the one hand, there still exist many small towns with only one or two substantial employers. On the other hand, the residents of those towns could leave to find work elsewhere. Thus, in some sense the employers in small towns compete with employers in other locations. Those who stay may perhaps work for lower wages but is the difference due to monophony or the value of community? These are hard to separate empirically. A better case for monophony can be made where there are real barriers to the movement of labour. Ex) colleges and universities in small towns In the monophony, employees are exploited by the monopolist by ( w* − wM , line segment AB in the graph). As well as if the government sets a minimum wage w higher than wM , it can create new employment as long as the minimum wage is equal to or less than the wage rate in the competitive market ( wC ).

Labour Mobility:

Workers are continually searching for better jobs where they are more productive and they are more appreciated as well as firms are searching for better workers. Consequently of these search activities the value of marginal product of labour is equated across firms and across labour markets (for workers of given skills). However, actual labour markets are not quite as neat.

Workers often don’t know their own skills and abilities and are ill informed about the opportunities available in other jobs or in other labour markets. Firms don’t know the true productivity of the workers they hire. As in a marriage details about the value of the match between the worker and the firm is revealed slowly as both parties learn about each other. Consequently the existing allocation of workers and firms is not efficient and other allocations are possible that would increase national income.

We will discuss the mechanism that labour markets use to improve the allocation of workers to firms, namely labour mobility. There is a great deal of mobility in the labour market. Actually it seems as if the U.S labour market is in constant flux: Nearly 4 percent of workers in their early twenties switch jobs in any given month, 3 percent of the population moves across state lines in a year, and about 1 million legal and illegal immigrants enter the country annually. We want to figure out all these “flavours” of labour mobility which may be driven by the same fundamental factors: Workers want to get better their economic situation, and firms want to hire more productive workers. The topics are:

• What are the determinants of migration?
• How do the migrants be different from the persons who choose to stay?
• What factors resolve how migrants are self-selected?
• What are the consequences of migration, both for the migrants themselves and for the localities that they move to?
• Do the migrants gain considerably from their decision?
• How large are the competence gains from migration?

A) Geographic Migration as a Human Capital Investment:

The study of migration decision is a simple application of the human capital framework. Differences in net economic advantages, chiefly differences in wages, are the main causes of migration (John R. Hicks “The Theory of Wages” 1932).

Suppose there are two specific labor markets NYC and LA (they may be any two cities or even two countries) where the worker can be employed. Worker in NYC, who is 20 years old is considering the possibility of moving to LA (S)he earns w20 NY dollars. If (s)he moves, (s)he will earn w20 LA . M is moving cost (airfare and other transportation costs) plus “psychic cost” – pain and suffering that inevitably occurs when one moves away from neighbours, family and social networks.

Mobility resolutions are guided by the comparison of the present value of lifetime earnings in the alternative employment opportunities:

So, net gains to migration = PVLA − PVNY − M. If positive (s)/he will move. Some empirically testable propositions follow immediately from this framework:

• An enhancement in the economic opportunities obtainable in the destination increases the net gains to migration and raises the likelihood that the worker moves.

• An enhancement in the economic opportunities at the current region of residence decreases the net gains to migration, and lowers the probability that the worker moves.

• A raise in migration costs lowers the net gains to migration and reduces the likelihood of a move.
All these insinuation deliver the same basic message: Migration takes place when there is a good chance that the worker will recoup his human capital investment.

B) Internal Migration in the U.S.:

Many studies have attempted to determine if the size and direction of migration flows within the United States (or internal migration) are consistent with the notion that workers migrate in search of better employment opportunities. These empirical studies habitually relate the rate of migration between any two regions to variables describing differences in economic conditions in the regions (wages and employment rates) and to a measure of migration costs.

The Impacts of Region-Specific Variables on Migration (Aba Schwarz ‘Interpreting the Effect of Distance on Migration’ Journal of Political Economy 81 (September 1973)) (+) correlation between employment conditions and probability of migration. (-) correlation between distance and probability of migration.

The collision of Worker Characteristics on Migration:

Age and probability of migration: older workers are less likely to move because migration is a human capital investment with a shorter period of payoff for them. Educational attainment about employment opportunities in alternative labour markets therefore reducing migration costs.

It is as well possible that the geographic region that makes up the relevant labour market for highly educated workers is larger than the geographic region that makes up the labour market for the less educated.

Return and Repeat Migration:

Workers who have just migrated are extremely likely to move back their original location (generating return migration flows) and are also extremely likely to move onward to still other locations (generating repeat migration flows). Some of these flows arise because the worker has quickly learned that the initial migration decision was a mistake or used it as a “stepping stone.”

C) Immigrant performance in the U.S. Labour Market:

Immigrants who can adapt well and are relatively successful in their new jobs can make a significant contribution to economic growth. Furthermore natives need not be concerned about the possibility that these immigrants will enrol in public assistance programs and become a tax burden. In short, the economic impact of immigration will depend on the skill composition of the immigrant flow.

D) The Decision to Immigrate:

Two aspects account for the dispersion in relative wages across national-origin groups:

• Skills obtained in advanced industrialized economies are more easily transferable to the American labour market. Finally the industrial structure of advanced economies and the types of skills rewarded by firms in those labour markets greatly resemble the industrial structure of the U.S. as well as the types of skills rewarded by U.S. owners.

• A strong positive correlation among the earnings of an immigrant group in the U.S. and per capita GDP in the country of origin. Some studies determined that a doubling of the source country’s per capita GDP increases the U.S. earnings of a settler group by as much as 4 percent. For the reason that more recent immigrant waves tend to originate in low-income countries, they will be somewhat less successful in the U.S. labour market.

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