5. Consider a labor market where supply and demand are given by: L, = 200 + 40w

Question

5. Consider a labor market where supply and demand are given by: L, = 200 + 40w = 800-20u, where w is the wage rate. (a) What is the equilibrium market wage and employment? (b) Suppose workers negotiate a benefit worth S1 per worker that costs employers $1 to implement. What is the new equilibrium wage, total compensation for a worker, cost of employing a worker, and labor supplied? Is the equilibrium efficient? Why/why not? (c) Suppose instead that the benefit is worth $1 to the workers and costs $2 to implement. What is the new equilibrium wage, cost of employing a worker, and labor supplied? Is the equilibrium efficient? Why/why not?

Explanation / Answer

a) To find equilibrium wage and supply of labors equalize demand and supply as follows -

200+40w = 800-20w

60w = 600

w = 10

and L = 200+(40*10) = 600

henec labor supplied is 600 labors and wage rate is $10 per worker.

b) IF benefit cost $1 to workers then new supply function would be

Ls = 200 +40(w+1)

and cots if $1 to implement then new demand would be

Ld = 800 - 20(w+1)

now equate new demand and supply

200 +40(w+1) = 800 - 20(w+1)

240 + 40w = 780 - 20w

w = $9

and Labor supply = 200 + 40(9+1) = 600

Total compensation for worker = wage + benefit = $9+$1 = $10

Total cost of employers per worker = wage + implementation cost per worker = $9+$1 = $10

As the benefits and costs per worker is same as before and also the labor supply then this is efficient equilibrium.

c) New labor demand = 800 - 20(w+2)

Now

800 - 20(w+2) = 200 +40(w+1)

760 - 20w = 240 + 40w

w = $8.667

and Labor supply = 200 + 40(8.667+1) = 586 approximately

per worker compensation = $8.667 + $1 = $9.667

per worker cost = $8.667 + $2 = $10.667

As this results out lesser compensation and more costs than earlier and also the labor supply is less it is not efficient equilibrium.

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