3.5 Labour Market

Question 1

labour demand

Answer 1

• the labour market is composed of labour suppliers (workers) and buyers / demanders of labour (firms)
• demand for labour is the amount that firms are willing to pay for a certain amount of workers and the price (wage) of workers

Question 2

labour as a derived demand

Answer 2

• demand for labour is known as derived demand as it’s dependent on demand for the final goods / services the labour produces
• e.g. demand for people who make cars is derived from the demand from cars
• elasticity of demand for labour is linked to how price elastic the demand for the product is

Question 3

factors that influence the demand for labour

Answer 3

• the wage rate (diagram 1); inverse relationship between wage rates and the number of workers employed; higher wage rate contracts demand for labour because if wages are higher than MRP, it’s not worthwhile for a firm to employ more people (leads to movement along demand curve - all other factors shift the curve)
• demand for products; as labour is a derived demand, the higher the demand for the products, the higher the demand for labour
• productivity of labour; the more productive workers are, the higher the demand for them (this can be increased with education/training, etc.)
• substitutes for labour; if labour can be replaced for cheaper capital, demand will fall, shifting the demand curve to the left
• profits of the firm; the higher the firm’s profits, the more labour they can afford to employ
• number of firms in the market; labour demand is lower if there’s only one employer (e.g. NHS), compared to if there’s many employers in the industry (e.g. supermarkets)

Question 4

evaluation of factors influencing labour demand

Answer 4

• it’s hard to measure productivity of workers
• lower demand for labour can mean wages are lower, so trade unions try to encourage higher wages
• those who are self-employed are unaffected by this

Question 5

the supply of labour

Answer 5

• the number of workers willing and able to work at any given wage rate

Question 6

factors influencing the supply of labour

Answer 6

• the wage rate (diagram 2); higher wages may increase supply as workers from other industries / unemployed workers are incentivised to join a (causes a movement along the supply curve - all other factors, i.e. non-wage determinants, cause a shift)
• wages / conditions on offer in substitute labour markets; it’ll reduce supply for one industry if if it’s better in another industry (e.g. lower supply of economics teachers as the private sector offers higher wages for their skills)
• size of the working age population; a higher population means a larger pool of labour
• policies that increase migration rate increase the supply of labour to certain lower-skill; industries, and vice versa, e.g. migration fell after Brexit, resulting in a shortage of workers in the UK hotel industry
• education/training; more educated workers means a larger supply of labour, and jobs that require heavy training will suffer from a lower supply compared to lower-skill jobs
• trade unions can increase the supply of labour, e.g. as they fight for higher wages, so more workers are incentivised to join (however this decreases demand as firms will employ less if they’re paying higher wages)
• income tax; after a certain level, higher income taxes become a disincentive to workers, so they’ll be more inclined to withdraw from the labour market
• non-monetary benefits, such as high job satisfaction (e.g. London jobs = good social life / transport links) and increased job perks (e.g. free private healthcare) will increase supply
  social trends; changes in society can affect labour, e.g. after Covid-19, many restaurant workers didn’t feel safe returning to their jobs

Question 7

market failure in labour markets

Answer 7

• market failure is common in the labour market as it’s often difficult for workers to move easily between jobs (labour immobility);
• geographical immobility of labour
• occupational immobility of labour
• immobility can mean there’s excess supply of labour in one area and excess demand in another; even if wages are higher where there’s excess demand, people are unable to leave the area of excess supply due to labour immobility

Question 8

geographical immobility of labour

Answer 8

• refers to workers being unable to move o different places to seek and find work
• causes include social reasons, e.g. not wanting to move away from family, or cost-related issues such as the cost of travel / accommodation prices or imperfect knowledge
• can be tackled by relocation subsidies, improving info on job vacancies, discounted / free travel, policies to reduce house prices, etc.

Question 9

occupational immobility of labour

Answer 9

• when workers find it hard to transfer occupations due to a lack of transferrable skills
• may be caused by insufficient education, training, or skills (structural unemployment)
• e.g. in the UK after the collapse of the mining industry, workers didn’t have transferrable skills to find other work
• it can be tackled in the long-run by educational reforms / apprenticeships in skill shortage areas, or subsidies / incentives for firms to spend on training

Question 10

labour market equilibrium

Answer 10

• diagram 3
• labour is a factor market (as it’s a FoP)
• labour supply is determined by employees and demand is determined by employers
• labour market equilibrium is determined by where labour supply and demand meet; this determines the equilibrium price of labour, e.g. the wage rate
• however, wages aren’t this flexible in reality; they don’t tend to adjust to changes in demand
• minimum wage makes wages ‘sticky’, so during a recession, some workers may be sacked rather than lowering wages of several workers

Question 11

labour market equilibrium in non-competitive markets

Answer 11

• where there’s market power, either buyers (employers) have monopsony power, e.g. the NHS, or suppliers (employees) have monopoly power, e.g. trade unions which can force up wages
• so, firms exploit workers by taking advantage of their weak market power to keep wages low
• but, trade unions can adopt collective bargaining power, e.g. the teachers union controls the whole industry labour supply, and force wages to rise
• both factors can influence wages at the same time in a bilateral monopoly
• diagram 4
• conversely, some employers have weak power and employees have huge power, e.g. lawyers who charge high fees

Question 12

current labour market issues - wage differentials

Answer 12

• sometimes workers can be paid different wages, even when in the same job, e.g. due to;
• higher formal education, as those with a degree tend to earn more than those with just A-levels
• training workers is expensive for firms, so they can compensate for this by offering workers who’ve already undergone training with higher wages
• pay gaps
• skilled workers produce higher outputs as they’re more productive, so demand for their labour is higher and they can demand higher wages
• women still earn less than men on average, e.g. if women are discriminated against when it comes to promotions, which effectively locks out higher paying jobs, or due to career breaks and fewer hours worked than men, e.g. due to maternity leave
• workers may be discriminated against due to age, race, disabilities, and gender

Question 13

current labour market issues - impact of migration

Answer 13

• increase in migration increases supply of labour as they tend to be of working age
• they tend to bring high quality skills which can increase productivity of the labour market, but they may substitute workers of the domestic workers, or affect their wages

Question 14

current labour market issues - unemployment

Answer 14

• youth unemployment is increasing as many employers prefer to hire workers with more experience, or because some young people leave school without skills that employers require
• this may lead to hysteresis; a type of structural unemployment where someone’s skills deteriorate if they’re out of work for a long time, so it leads to long-term unemployment

Question 15

current labour market issues - skills shortages

Answer 15

• a shortage of skilled workers means firms have to increase wage rates to attract labour, but firms are ‘stealing’ each other’s skilled labour, so there’s a shortage of new skilled labour entrants, e.g. in industries such as nursing, secondary teaching, etc.

Question 16

current labour market issues - ages

Answer 16

• retirement age is gradually increasing, which is better for the govt. as they’ll pay pensions for a shorter amount of time, but an improvement in life expectancy has meant there are more pensioners in the system
• an increased school leaving age or requirement to start a traineeship or apprenticeship aims to increase skill levels, but also puts increased pressures on training providers and there’s not enough apprenticeships to match demand

Question 17

current labour market issues - temporary / flexible and zero-hour contracts

Answer 17

• Covid-19 has led to increased flexibility in work, e.g. many workers now want to work from home, and some employers prefer this as it lowers company costs, but other employers don’t as they want more control over their workforce
• more people are opting to work part-time jobs
• many workers are on zero-hour contracts, which are beneficial to employers as it reduces their costs compared to costs of full-time employees, but this impacts unemployment figures as some workers may end up not receiving much work, but will no longer be counted as unemployed

Question 18

government intervention in the labour market

Answer 18

• maximum and minimum wages
• public sector wage setting
• policies to tackle labour market immobility

Question 19

maximum wages

Answer 19

• diagram 5
• a govt. imposed price ceiling set below the market price
• e.g. there’s been some recent discussion to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full time employees
• it can be used to redistribute wealth more equitably in society, but it’s rarely used
• it may lead to govt. failure if they misjudge where the optimum wage should be
• a criticism may be that it can act as a disincentive to innovate, and workers may opt for less demanding work

Question 20

minimum wages

Answer 20

• diagram 6
• a govt. imposed price floor set above the market price
• e.g. the National Minimum Wage
• aimed to raise people out of poverty and provide decent minimum standards in the workplace
• increases supply but contracts demand, but not by much if demand is inelastic
• it can be used to raise people out of poverty and provide decent minimum standards
• incentivises people to work and yields positive externalities
• govt. may gain more tax revenue
• however, may increase youth unemployment as their lack of experience may not be valuable to firms paying more for labour

Question 21

public sector wage setting

Answer 21

• in many public sector industries, the UK govt. is the dominant employer, so can exercise monopsony power in setting wage rates
• e.g. after GFC, public sector wages were frozen in 2010
• if the govt. increase NMW, they’re increasing their own wage bill and increases in pay often have to be paid for through increases in tax rates
• private sector often uses public sector wages as a benchmark for their own wage calculations, and if wages in one sector increase but don’t in the other, it can create tension between workers in different sectors

Question 22

policies to tackle labour market immobility

Answer 22

• geographical;
• relocation subsidies in areas of labour shortages to encourage people to move there
• improve transport links, e.g. cross-rail
• national advertising of job vacancies around the country (improving imperfect info)
• more public agencies should move out of london to help with uneven demand and supply, e.g. DVLA to Swansea
• make housing more affordable, e.g. council housing
• occupational;
• education can be targeted at improving skills shortages and helping with job applications, e.g. interview skills
• vocational training can be increased, especially for younger students
• encouraging further education, e.g. university

Question 23

elasticity of demand for labour

Answer 23

• PED: the responsiveness of quantity demanded of labour to changes in the wage rate
• if labour demand is elastic, an increase in WR will significantly decrease QD and vice versa
• factors influencing PED of labour;
• PED of the final product; if product produced is price inelastic in demand, then labour demand will be more inelastic
• proportion of labour costs to total costs; the higher these are, the more elastic labour demand will be
• ease and cost of factor substitution; if substituting capital for labour is easy and the cost is comparable to increase in wages, labour demand will be more elastic
• time period; labour demand tends to be more inelastic in the short-run, and more elastic in the long-run as firms have time to research alternative methods of production

Question 24

elasticity of supply of labour

Answer 24

• PES: the responsiveness of labour supply to changes in the wage rate
• if supply is elastic, an increase in WR will significantly increase QS and vice versa
• factors affecting PES of labour;
• skills of the workforce; higher skilled jobs are inelastic as it’s harder to attract workers
• training; the longer the training period for a job, the more inelastic supply
• sense of vocation; some jobs have non-financial rewards, e.g. teaching, so these tend to have inelastic suppliers
• time period; labour supply is more inelastic in the short-run

Question 25

significance of PED and PES of labour

Answer 25

• we can use them to explain wage differentials and changes in wage rates
• the higher the elasticities, the lower the wages