Chapter 9
Answers to Questions in Chapter 9
Note: No. before indicates a page number
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207Which of the above four assumptions do you think would be correct in each of the following cases?
(a)Keyboard operators
(b)Agricultural workers
(c)Crane operators
(d)Economics teachers
(e)Doctors
The four assumptions are: (i) Everyone is a price taker; (ii) There is freedom of entry; (iii) There is perfect knowledge; (iv) Factors are homogeneous. They apply to the above cases as follows: (in some cases you may want to challenge our answers, since the answers themselves depend on the assumptions you make!)
(a)(i) approximately, (ii), (iii), (iv) approximately.
(b)(i), (ii), (iii).
(c)(ii), (iii) approximately.
(d)(ii) assuming that the teachers are qualified, (iii) approximately.
(e)None of the assumptions hold.
208Which way will the supply curve shift if the wage rates in alternative jobs rise?
To the left. Workers will tend to move away from this job to the higher-paid alternatives.
209(Box 9.1) Assume that it is agreed by everyone that it is morally wrong to treat labour as a mere ‘factor of production’, with no rights over the goods produced. Does this make the neo-classical theory wrong?
It depends what is meant by ‘wrong’. If the word means ‘factually incorrect’ then the theory could still make accurate predictions about the incomes of the various factors, and it could still look at the implications for employment of various policies pursued by firms – policies such as profit maximisation. If the word means ‘morally wrong’, however, then the neo-classical analysis could be regarded as guilty of demeaning workers. On the other hand, many using neo-classical analysis do so to demonstrate the inequalities (and hence, for them, the injustices) of the free market. Just because you study the workings of the capitalist system, it does not follow that you are lending moral support to it.
210(Box 8.2) 1. The Economist on June 12, 1993 reported that ‘Saturn, a new car-making subsidiary of General Motors ... reckons it has saved $500000 a year in air fares by installing a video-conferencing link between its factory in Spring Hill, Tennessee, and its Detroit Office.’ What effects are such developments likely to have on executive salaries?
They will tend to be equalised across a country (or even between countries). Firms would recruit executives in areas where they could be obtained at a lower salary (thus bidding up salaries in these areas) and then allow then to communicate with other executives through video links.
2111. Assume that there is a growing demand for computer programmers. As a result more people train to become programmers. Does this represent a rightward shift in the supply curve of programmers, or merely the supply curve becoming more elastic in the long run, or both? Explain.
It represents a rightward shift in the short-run supply curve. It can be seen as a movement up along a long-run supply curve (which is more elastic than the short-run curves, given that it allows for the time taken to train).
2112. Which is likely to be more elastic - the supply of coal miners or the supply of shop assistants? Explain.
Shop assistants: it is a less skilled occupation and thus it is easier to switch from other occupations if the wage becomes more attractive.
212(Box 9.3) Do any of the following contradict marginal productivity theory?
(a)Wage scales related to length of service (incremental scales).
(b)Nationally negotiated wage rates.
(c)Firms taking the lead from other firms in determining this year’s pay increase.
(d)Firms providing employees with fringe benefits.
Even if marginal productivity theory were not relevant in these cases, the theory would still be accurate in the sense that if firms wanted to maximise profits then they should employ workers to the point where MCL = MRPL.
But do any of the above four cases necessarily contradict marginal productivity theory?
(a)No, not necessarily. A system of incremental scales may be consistent with a profit-maximisation strategy. The employer can pay less to new recruits and yet still attract them to the firm because of the prospects of higher pay in the years to come. The firm can go on recruiting new staff to the point where their MRP was equal to their addition to costs (based on the agreed scale).
(b)No, not necessarily. Firms may find it convenient (in terms of the costs of negotiating and the avoidance of disputes) to pay nationally agreed wage rates. They then could employ workers up to the point where their MRP was equal to this wage rate (which, given that the firm was a ‘wage taker’ would be equal to the MCL).
(c)No, not necessarily. (See answer to (b) above).
(d)No. A fringe benefit of, for example a maintained car to the value of $5000 a year, is the same as an additional salary of $5000.
213Why is the MCL curve horizontal?
The firm in a perfectly competitive labour market is a ‘wage taker’. The cost of employing one more worker (MCL), therefore, will simply be the market wage. It will not vary with the number of workers employed.
214For each of the following jobs, check through the above list of determinants (excluding the last), and try to decide whether demand would be relatively elastic or inelastic: firefighters; typists; carpenters; bus drivers; airline pilots; farm workers; car workers.
Elasticity of demand for labour will tend to be greater:
(i) greater the price elasticity of demand for the good; (ii) the easier it is to substitute labour for other factors and vice versa; (iii) the greater the elasticity of supply of complementary factors; (iv) the greater the elasticity of supply of substitute factors; (v) the greater the wage cost as a proportion of total costs.
The elasticity of demand for the particular occupations given in the question will depend on the relative strength of these factors. We would estimate that the balance of these determinants would make demand more elastic in the cases of bus conductors, farm workers and car workers than in the other cases. The demand for airline pilots is very inelastic – no substitution is possible and wages of pilots are a minute proportion of the costs of operating a plane. You may well disagree, however, depending on the assumptions you make!
216(Box 9.4) 1. Why did competition between employers not force up wages and improve working conditions?
Partly because there was little local competition; partly because employers could collude oligopsonist-ically to keep wages down; partly because the elasticity of demand for labour was relatively high, especially in labour-intensive industries where labour costs were a relatively high proportion of total costs; and partly because the supply of labour was so high that the competition between workers for jobs kept wages down.
216(Box 9.4) 2. Were the workers making a ‘rational economic decision’ when they chose to work in such factories?
Often they had no alternative. There were no other jobs they could do that paid better, and they had to feed and clothe themselves and their families.
219(Box 9.5) When you are working full-time what factors will you take into account when deciding whether to join a union?
You will presumably weigh up the perceived benefits of joining against the annual cost of union membership. Benefits may include higher wages, protection against dismissal or unfair treatment, and even shopping discounts.
220If the negotiated wage rate were somewhere between W1 and W2, what would happen to employment?
It would increase. It would be at the level where the horizontal line from the negotiated wage crossed the MRPL curve, which would be to the right of Q1
222(Box 9.6) 1. Is a flexible firm more or less likely to employ workers up to the point where their MRP = MCL?
More likely. By being able to switch workers from task to task and, by the use of temporary workers, being able to vary the amount of labour employed, the firm can more easily employ the profit-maximising number of workers in each category.
222(Box 9.6) 2. How is the advent of flexible firms likely to alter the gender balance of employment and unemployment.
Given that a higher proportion of women than men seek part-time employment and are prepared to accept temporary contracts, it is likely to increase the employment of women relative to men.
224(Box 9.7) When the relative pay of women increased substantially in the early 1970s it had virtually no effect on their employment levels. Is this consistent with out analysis in this chapter? If not, how would you explain it? Hint – consider the effect of segregation.
This is inconsistent with our analysis. When the cost of employing women rose substantially relative to that of men one would expect the employment of women to fall relative to men. In the event this did not happen. Why? Because the labour market is segregated. In many occupations (and industries) men and women are not seen as substitutes. There are male jobs and female jobs. Thus the predicted substitution of men for women could not take place in many occupations.
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