1.6 The labour market Flashcards
labour
human input into production e.g. the supply of workers available and their productivity
wages
the reward for the factor of production that is labour
law of diminishing returns
where increasing amounts of a variable factor are added to a fixed factor and the amount added to the total product by each unit of the variable factor eventually decreases
Derived demand
demand for a good or factor of production, not wanted for its own sake, which is a consequence of the demand for something else
marginal physical product of labour (MPPₗ)
the addition to a firm’s total output brought about by employing one more worker
Labour productivity
output per unit of labour
Marginal revenue product of labour (MRPₗ)
the money value of the addition to a firm’s total output brought about by employing one more worker
Marginal revenue (MR)
addition to the total revenue resulting from the sale of one more unit of the product
wage elasticity of demand for labour
proportionate change in demand for labour following a change in the wage rate
Marginal revenue product of labour formula
marginal physical product x marginal revenue
wage elasticity of demand for labour formula
(%change in the quantity of labour demanded)/(%change in the wage rate)
The wage elasticity of demand will be more inelastic if… (4)
- wages form a relatively small proportion of the total cost of production
- demand for the good produced by the workers is inelastic
- it is difficult to substitute the workers for other factors of production
- the period of time is in the short-run, since this means the firm cannot vary the quantity of all their factors of production
Utility
the satisfaction or economic welfare an individual gains from consuming a good or service
Disutility
the dissatisfaction or negative economic welfare and individual gains from consuming a good or service, or working a job
Substitution effect
a higher hourly wage rate makes work more attractive than leisure, so workers substitute labour for leisure
How can a worker maximise personal welfare?
a worker must supply labour to the point at which welfare from the last unit of money earned=welfare for the last unit of leisure sacrificed (Marginal private benefit=marginal private cost)
Monetary considerations
utility derived from the goods bought with wages
Non-monetary considerations
aspects of working - job satisfaction (e.g. status, enjoyment) and job dissatisfaction (e.g. unpleasantness, danger)
Net advantage
the sum of the monetary and non-monetary considerations of working
Wage elasticity of supply of labour
proportionate change in the supply of labour following a change in the wage rate
Wage elasticity of supply of labour formula
(%change in labour supply)/(%change in the wage rate)
The wage elasticity of supply of labour will be more inelastic if… (4)
- workers have special skills that are hard to maintain
- workers are tied to their local area (lack geographical mobility)
- there is low unemployment in the whole economy
- period of time is in the short-run as opposed to the long-run
Perfectly competitive labour market
a labour market that displays the six conditions of perfect competition
conditions of a perfectly competitive labour market (6)
1) there are a large number of firms and workers
2) every firm and worker possesses perfect information (workers are aware of available jobs, wages, and working conditions)
3) every firm is able to hire as many workers and each worker sell as much labour as they wish at the market wage
4) any single firm or worker is unable to influence the ruling market wage
5) All workers are uniform in terms of productivity (homogenous)
6) there are no barriers to entry or exit in the long-run (no geographical immobility, government restrictions, trade unions, or professional bodies)
Profit maximising rule
marginal revenue product of labour = marginal cost of labour
total cost of labour
the total wage bill employing a quantity of workers
Marginal cost of labour
the change in total amount by which the wage bill rises when employing one more worker
Average cost of labour
the total amount of the wage bill divided by the number of workers employed
wage differential
the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or localities
Equilibrium wage
a wage where the quantity of labour demanded equals the quantity of supplied labour. At this wage there is no shortage or surplus, and there is no tendency for the market wage to change
Free market forces
forces in free markets which act to reduce prices when there is excess supply and raise prices when there is excess demand
human capital
the accumulated stock of skills and knowledge, relevant to work, embodied in human beings
frictional unemployment
unemployment that is usually short term and occurs when a worker switches between jobs
geographical immobility
when workers are unwilling or unable to move from one area to another in search of work
Occupational immobility
when workers are unwilling or unable to move from one type of job to another, for example because different skills are needed
Monopsony
there is only one buyer in a market
imperfectly competitive labour market
a labour market that does not display the six conditions of perfect competition (usually characterised by firms having monopsony power)
Monopsony power
the market power exercised in a market by the buyer of a good or the services of a factor of production such as labour, even though the firm is not a pure monopsonist
Workers’ surplus
a measure of the economic welfare enjoyed by workers: the difference between the wage a worker is paid and the minimum wage they world be prepared to work for
Employers’ surplus
a measure of the economic welfare enjoyed by employers: the difference between the wage an employer succeeds in paying and the maximum wage they would be prepared to pay
Deadweight loss
the loss of welfare when the maximum attainable level of total welfare is not achieved. Surplus has been lost from one party without being transferred to another.
Lost wages from underpayment
the difference between the wage an employer pays and the value of the marginal revenue product of the workers
How does monopsony power lead to labour market failure?
- it redistributes welfare away from workers to their employers. Workers are exploited as their pay is below the value of their marginal product
- it contributes to relative poverty and weakening of work incentives
- in terms of economic efficiency, it reduces the total welfare enjoyed by both groups taken together, as the employer’s net gain is smaller than the loss inflicted on workers
trade union
a group of workers who join together to maintain and improve their condition of employment, including their pay
individual bargaining
a process by which wage rates and other conditions of work are negotiated and agreed upon by an individual worker with an employer
collective bargaining
a process by which wage rates and other conditions of work are negotiated and agreed upon by a union or unions with an employer or employers
trade union mark up
the amount by which a collectively-bargained wage is higher than what would’ve been earned in a competitive labour market
industrial action
action taken by employees in order to force or enforce an agreement, such as striking or working to rule
closed shop
a form of trade union agreement under which the employer agrees to hire union members only, and employees must remain members of the union at all times in order to remain employed
Scab
a worker who refuses to join a trade union or who takes the place of a striking worker, or a union member who refuses to strike or returns to work before a strike has ended
Employment act 1990
a piece of industrial of relations legislation of the United Kingdom which banned closed shop arrangements
Recognition agreement
names the union (or unions) who have the right to negotiate on behalf of employees in that workplace, as part of a collective bargaining process
Trades Union Congress (TUC)
a federation representing the majority of trade unions in England and Wales, with a role to support trade unions to grow and thrive
Forms of industrial action (6)
- strike
- picket
- work-to-rule
- overtime ban
- employee sabotage
- secondary action
How do trade unions reduce labour market failure caused by monopsony power? (3)
- They redistribute welfare away from firms to workers. The degree that workers are exploited is reduced as their pay is closer to the value of their marginal revenue product.
- They help to relieve poverty and strengthen work incentives.
- in terms of economic efficiency, they increase the total welfare enjoyed by both groups taken together, as the employers’ net loss is smaller than the workers’ gain. The amount of deadweight loss is reduced.
Impact of closed shop policy on a previously competitive labour market
- The union negotiates a closed shop policy which forbids the employer from hiring non-union members. This shifts the supply of labour curve to the left.
- There isn’t a pool of workers available who would be willing to work for a lower wage who could replace these unionised workers. This makes the supply of labour more wage inelastic.
National Minimum Wage (NMW)
a minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage
National minimum wage act 1998
a piece of employment law legislation which set a minimum wage across the UK
National living wage
an adult wage rate, set by the UK government, which all employers must pay from 2016 onward, and which has replaced the adult national minimum wage rate
Inflation
a persistent or continuing rise in the average price level
Real wage
the purchasing power of the nominal (or money wage) for example, real wages fall when inflation is higher than the rise in the nominal wage rate and real wages rise when the nominal wage rate increases more rapidly than inflation
Pros of the national minimum wage (7)
- increases income of low-paid workers, reducing poverty
- increases labour productivity as workers are more motivated
- firms have more incentive to invest in labour productivity
- can offset impact of monopsony employers
- increases incentive for people to enter labour market and accept jobs
- improvement in public finances due to increased income tax revenue + reduced welfare benefits
- knock-on effect on wages slightly above the NMW
Cons of national minimum wage (5)
- can cause unemployment in competitive markets
- could encourage use of black markets
- increase in cost of production, cost-push inflation, some firms cannot afford
- could lead to higher prices for consumers
- regional imbalances in wages and costs of living reduce the effectiveness
Wage discrimination
paying different workers different wage rates for doing the same job
Conditions required to wage discriminate (4)
- It must be possible to identify and separate different groups of workers supplying the same type of labour. This can happen because of differing knowledge or differing ability to choose jobs.
- Workers must not be able to offer their time at a relatively high wage and re-sell it themselves for a lower wage
- There must be a lack of legal protection against discrimination, or there must be imperfect information on the part of the government.
- Firms must have wage-setting ability.
Equalities act 2010
a piece of anti-discrimination legislation which protects people against discrimination, harassment, or victimisation in employment and as users of private and public services based on nine protected characteristics
third-degree wage discrimination
where a firm divides workers into different groups and pays a different wage to workers in different groups, but the same wage to all the workers within a group
First-degree wage discrimination
where a firm pays each worker the minimum amount they would be willing to work for
Negative discrimination
where a firm pays each worker the minimum amount they would be willing to work for
Positive discrimination
where a firm pays each worker the minimum amount they would be willing to work for
Impacts of wage discrimination (6)
- As employers’ wage costs are reduced, wage discrimination can increase demand for labour, providing more jobs
- Reduces the costs of labour, which can lead to higher profit
- Workers may organise and strike if they know about the differences in wages
- Vulnerable workers (such as young workers, women and immigrants) are going to be exploited, as they are forced to accept a lower wage
- Can lead to increased inequality throughout the economy, leading to relative poverty
- Waste of scarce resources
Assembly line
production organised into a series of processes by which a succession of identical goods become progressively assembled
Moving assembly line
an assembly line where completed and semi-completed goods are mechanically moved between the assembly processes, forcing labour to work at the speed that the goods are moving
Standardisation
using interchangeable resources and processes to produce a uniform output
Interchangeable inputs
inputs in production which can replace each other
dynamic efficiency
occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency
mechanisation
the process of moving from a labour intensive to a more capital intensive method of production, employing more machines and fewer workers
automation
the use of capital equipment with automatic control where machines operate other machines and so capable of completely replacing labour in the production process
capital intensive production
production that makes more use of capital relative to labour
labour intensive production
production that makes more use of labour relative to capital
uncertainty
the degree to which information is imperfect or unknown
waste
the consumption of resources without value being added
How can improvements in technology either increase or decrease demand for labour? (3)
- Improvements in technology can make labour more productive, in which case the demand for labour increases.
- Improvements in technology can increase the productivity of capital and may cause firms to want to adopt automated production methods. In which case the demand for labour decreases
- Improvements in technology can cause the demand for certain types of labour to decrease (e.g. the decline in the canal systems), while causing the demand for other types of labour to increase (e.g. the development of the railway system).
