10: The Labour Market & How Wage Determination

Question 1

What is labour market refer to?

Answer 1

Refers to the demand for labour by employers and the supply of labour.
(Demand for labour is derived demand If the demand for a product increase – then demand for workers to make the product increases too)

Demand = employers

Supply = workers/imployees

Question 2

Define labour demand

Answer 2

Is the number of workers employers are willing and able to employ at a given wage rate in a given time period

Question 3

What are the factors that influence the demand in labour?

Answer 3

• level of demand for product: labour is derived demand

• wage rates: a rise in wage rates could result in a contraction in the demand for labour

•Substitutes: an increase in the cost of a substitute factor of production (e.g. machine used production instead of a worker) would increase the demand for labour

Question 4

What are the factors that may cause the demand for labour to shift right?

Answer 4

•Productivity of labour increases

•New machinery is used which increases productivity

•If there is an increase in the demand for the good/service itself

Question 5

What are some factors that may cause the demand for labour to shift left?

Answer 5

• A fall in the demand for the product (decreases the value of output for each worker). less worker demand

• Change in the price of capital – if new machinery is cheaper (over the long term) – workers will be replaced by machines (less demand of workers)

Question 6

What are the factors that affect elasticity of labour demand ?
(Sect)

Answer 6

Substitutability of capital for labour:

• The more substitutable the more wage elastic demand for labour will be
E.g. Wages rise Workers are too expensive – replace them with cheap machines instead or easy to replace a security guard in a hotel

• Elasticity of demand for the final product:

• If elasticity of demand for the final product (e.g. 3D printers) is inelastic and wages go up – firms will not cut workers significantly because they can easily pass on higher wage costs into higher prices

• Cost of labour as a percentage of total cost :

• If wages rise – workers will be too expensive therefore firms will reduce workers (reducing their demand of labour) proportionately more that the rise in wages

E.g. E.g. supermarkets employ many workers on minimum wage

• Time Period :

• Short run normally two factors of production are fixed: land and capital

Due to the high cost of machinery, firms can’t easily substitute workers with capital. As a result, demand for labor increases, making the demand for labor wage-inelastic.

• Long run all factors of production are variable

Therefore, easier to increase capital (machinery) when wages rise. Therefore demand for labour will fall = wage elastic