3.5 Flashcards
Explain the factors which could influence the demand for labour of a particular occupation
The price of the product being produced
If the selling price of the product increases, it increases the marginal revenue product of labour & the firm will demand more labour
Higher priced products incentivise firms to supply more (law of supply) & demand for labour will continually increase with increasing prices
The demand for the final product
As demand for labour is a derived demand, when an economy is booming then demand for most goods/services will be high - and the demand for labour will be high
Conversely, when an economy is in a recession demand for most goods/services will be lower - and the demand for labour will be lower
The ability to substitute capital (machinery) for labour
Firms will constantly evaluate if it will be possible & more cost effective to switch production from using labour to capital (machinery)
If it is more cost effective, then demand for labour will fall
The productivity of labour
If the productivity of labour increases (possibly through training) this will lower average costs & firms will likely demand more labour
Explain the factors affecting the elasticity of demand for labour (how responsive demand for labour is to a change in wage rate)
Substitutability - how easy is it to substitute between capital and labour
Ratio of labour costs to total costs - the most significant the cost of labour is to a firms costs, the more elastic
Elasticity of demand for the product - firms will be more able to absorb a wage rise if the demand for the good is price inelastic
Explain the factors which could influence the supply of labour to a particular occupation
Involves an opportunity cost - work vs leisure
If income is greater than substitution effect. Income effect- as wages rise people feel better off so feel less need to work as many hours
Substitution effect greater than income effect. Substitution effect- as wages rise, the opportunity cost of leisure rises ( the cost of every extra hour taken in leisure rises, so more hours are worked
Wage and bonuses of the job itself
Trade unions - These could attract workers to the labour market, because they know their employment rights will be defended. However, the limits on workers, such as limiting their ability to strike, might cause some people to withdraw from the labour market.
Entry barriers
What are the two factors affecting the elasticity of supply of labour
Geographical immobility of labour
Occupational immobility of labour
Both make it more elastic
Explain the concept ‘geographical immobility of labour’
When workers find it difficult to move jobs from one region to another
Factors which could cause geographical immobility of labour
Lack of knowledge of jobs in other areas (asymmetric info)
High price of housing/ cost of living in other areas
Limited flexibility if in council housing
Family/ community ties in existing area
Language barrier
Poor transport infrastructure
Explain the concept ‘occupational immobility of labour’
When workers find it difficult to move from one occupation to another
Factors which could cause occupational immobility of labour
Skills may not match jobs that are available
Barriers to entry in some progressions - eg professional bodies/ qualification
Long period of time to train towards a new profession
Why is unskilled demand and supply more elastic in regards to wage differentials
Unskilled demand elastic as can be replaced more easily by capital than skilled labour
Unskilled supply elastic as more easily to move from one job to another as little barriers such as qualifications needed
Explain why wage differentials occur
Labour supply -
Compensation - reward for working in high risk or unsocial hours
Artificial barriers - visa, qualification ect
Trade unions/ agents - act as an artificial minimum wage
Labour demand -
Difference in productivity/ revenue growth - how much money will the person bring in
Labour supply/demand - Skill level/ experience
Explain the reasons why a government might introduce a minimum wage
Incentivise Work ( may reduce the ‘poverty trap’)
Reduce inequality of income (may reduce relative poverty)
Evaluate the impact of a rise in the minimum wage on Consumers workers and Producers
Consumers
Higher prices due to increased labour costs (inwards shift in SRAS)
BUT BUT - many goods and services are likely to be unaffected
Firms which don’t employ low wage workers will be unaffected
Workers
Workers benefit from higher wages as a result of a rise
Positive impact on spending power and living standards
BUT
potential loss of jobs from the rise
The greater costs to businesses causes less demand for workers
Businesses:
Rise in labour costs
Rise in costs will reduce profitability (P=R-C)
Particularly relevant to firms where labour costs are a significant proportion of total costs - e.g. hospitality, retail
BUT
greater spending in the economy could create extra demand
Evaluate the impact of a rise in the minimum wage on the economy and Inequality
Economy
Diagram - fall in SRAS and rise in AD
Economic growth
Fall in SRAS leads to lower real output
Rise in AD could counter this
Inflation
Fall in SRAS → cost push inflation, rise in AD → demand pull inflation
Increased work incentive could raise LRAS → delationary
Unemployment
Loss of jobs could increase unemployment
Rise in AD could counter this
Current account
Higher costs worsen competitiveness - bad for exports; Rise in AD could lead to more spending on imports
Increased work incentive could raise LRAS →increasing competitiveness
Inequality
Reduction in inequality
Rise in pay of lowest paid in the economy
Closes the gap between the low pay and average wages
BUT - bigger gap between those in work and out of work
Explain the reasons why a government might introduce a maximum wage
To help narrow the gap between the pay of the richest and poorest in a company as well as
Incentivising unemployed to work
Explain +evaluation the impact of a maximum wage on worker wages
Rise in wages
eg a maximum wage ratio (eg1:20) would limit the ability of CEO to rise their wages without rising lowest earners wages also
BUT
Companies could simply outsource low paid work so they no longer count as employees - this could worsen job conditions + security
