3.5 Labour market Flashcards
What does the demand curve for labour show?
It shows quantity of labour that employees would wish to hire at each possible wage.
What is the labour market composed of?
Labour market is composed of sellers of labour (employees/households) and buyers of labour (firms).
What does demand for labour being derived mean??
Demand of labour is derived as it depends on demand for products.
If demand for products increase, demand for labour will increase.
What is MRP/how does it affect labour market?
MRP is the extra revenue generated by an individual worker.
Higher MRP; higher demand for labour
What does the law of diminishing marginal mean?
When other FoPs are constant, increasing labour will increase MRP initially.
After certain amount of workers, MRP declines due to restrictions to other FoPs.
Why is the labour demand curve downwards?
Demand curve for industry is total MRP of all workers in industry.
Why is there an inverse relationship between wage and Q of workers in the long run?
In long run, FoPs are variable.
Labour can be substituted for capital
What are criticisms of MRP theory?
Measurement of productivity
- Hard to measure productivity of individual workers e.g teachers
Teamwork
- Output as a team; individual MRP harder to measure
Self-employed
- Don’t pay themselves against their MRP**
Imperfect labour markets
- Trade unions change wages regardless of MRP
What are factors of demand of labour?
Price of product produced
- Higher price of product increases, MRP of labour increases; firm will demand more labour
Demand for final product
- Higher demand means more labour required to meet demand.
Productivity of labour
- If labour productivity increases, workers will demand more labour as they work more efficient
Ability to substitute labour for capital
- If capital is more cost effective, demand for labour will fall
What is PED of labour?
Responsiveness of QD of labour to change in wage rate
Factors affecting PED of labour
Substitutability of capital for labour
- More substitutable; more wage elastic. If wages rise, firms replace labour with capital
Elasticity of demand for product
- Inelastic product means higher wage can be passed onto consumers; inelastic labour demand
Cost of labour as % of TC
- High %; elastic; eager to cut costs
Time period
- LR all FoPs variable; easier to bring in capital; elastic labour demand
What does the supply of labour signify?
Ability and willingness of people to work at different wage rates
Factors affecting supply of labour
Wages
- Higher wage means more hours worked initially; less hours beyond a certain point.
- New workers coming in from unemployment
Population and distribution of age
- High population; large supply of labour
- High working age
Non-monetary benefits
- High job satisfaction e.g jobs in area of good social life
Education/training
- Better education/training -> higher supply
Legislation
- e.g retirement age
Why does market failure occur in labour market?
Occupational immobility
- Lack of transferrable skills makes it hard for workers to move from one job to another.
Geographical immobility
- Difficulty to move from one place to another for jobs due to cost of movement, family etc
- Areas of excess supply and other areas of excess demand
What does PES of labour depend on?
Level of qualifications and training
What are characteristics of perfectly competitive labour markets?
Large no of workers and employers
Labour is homogenous
- All workers have skills to take any job
Perfect information
Firms are wage takers
No barriers to entry/exit
How is wage determined in a perfectly competitive market?
Wage is determined through supply and demand
At what point will firms stop demanding labour in a perfectly competitive market?
Firms looking to maximise revenue from workers will hire workers up until MRP = W/MCₗ
What is a monopsony labour market?
Monopsony is when there is a sole employer of labour in a given profession
e.g teacher and nurses
What are characteristics of a monopsony in the labour market?
Wage maker
-
Maximise rev from workers
- Hire upto where MRP=MC of labour
Why is the labour MC curve above labour AC curve?
As wages increase, monopsony increases wage for every worker, not just additional worker.
How does monopsony wage and employment differ to competitive wage and employment and what does it mean for workers?
Q of workers decrease
Wage decreases
Workers get much less wage compared to their MRP.
How can you measure power of a monopsony?
Compare how low wage is to MRP
Greater difference means greater monopsony power
Why is the supply of labour = to AC of labour/Wage?
W = a + bQ
AC = TC/Q = WQ/Q
= W
AC = Supply curve
Labour Market issues in the UK
Skills shortage
- In 2021, more than 50% of firms reported difficulties in finding skilled workers
- Shortages mean firms have to increase wage rates to attract labour
Youth unemployment
- Unemployment for 16-24 in Apr 2022 is 10.8%; general at 3.8%
- Firms prefer workers with experience for productivity
- Harder for youth to get experience and employment
Changes to retirement ages
- Increase to 68 for retirement age; 60 in 1995
- Pensions major part of government budget
School leaving age
- Earlier leave means less skill level
Zero-Hour contracts
- 2022 had ∼1mil workers on zero-hour contracts; 5x number in 2000
- Workers not guaranteed work
- Changes unemployment count
What is the minimum wage?
Minimum wage is a wage that firms cannot underpay to their employees otherwise they risk fine.
Arguments for minimum wage
Reduce poverty
- Increases lowest wages; ensure ppl have enough to live on
More content workforce
- More motivated, more productive, more profits
Prevents unemployment trap
- Benefits can’t be higher than wage people could receive
No exploitation
Arguments against minimum wage
Raise costs
- Companies may pass on increased costs to consumers, higher consumer price
Wage spiral
- Other individuals want pay rise, increases costs
No consideration for regional difference
- Living cost in London is much more than elsewhere
Advantages of max wages
Limits govt spending
- For public sectors, can help reduce spending.
Firms lower costs
- Lower costs mean lower pric
Disadvantages of max wage
Excess demand
- People may feel exploited with low max wages; not willing to work but firms are willing to hire more
Migration of skilled workers
- Workers may move to countries with higher wages; reduce quality and competitiveness
Who is the largest employer in the UK?
The government
In Apr 2022, 5.74 mil public sectors out of 29.6 mil. 19.39%
They can exercise monopsony power.
When was a pay freeze put onto public sector workers and how did this affect employees?
Pay freeze was put in place between 2010 and 2015.
Few people likely to leave private sector; employers could use this to to limit pay rises
Why did government introduce pay freeze in — to —?
Reduce government spending
Policies to reduce labour market immobility
Improved education/training
- Wider skill base allows workers to move easier between jobs which aren’t identical; reduces structural unemployment
Subsidising employers
- Provides incentive to employers to employ workers without necessary skills and rather train them; improves occupational immobility
Relocation subsidy
- Reduces geographical immobility
Reduce information asymmetry
- Set up job centres and improve flow of information to make jobs easier to find
What is a trade union?
An organisation of lots of workers that collectively bargain for higher wages and better working conditions; TU bargains on behalf of all workers
What is a closed shop trade union?
In a given profession, all workers are a part of one TU; others don’t exist
One trade union has all power; monopoly supply of labour
What happens if firms don’t accept higher TU wage?
TU with a lot of power can organise a strike.
Effect of TU on wages and employment
Wages increases
Demand for labour decreases
- TU causes unemployment; excess supply of workers
Why is TU effective in a monopsony power?
In monopsony labour market, firms have wage setting power. They set wages lower than MRP and comp wages. Employment is lower in monopsony.
TU can help get wages closer to competitive wage; increase employment
What is union density?
Proportion of the workforce of a given profession that are part of given TU
Greater proportion = greater power
What is a union mark up?
Difference in wage between what workers are getting who are part of TU compared to workers in a similar profession but not part of TU.
Greater diff = greater union markup
How has legislation prevented effect of TU?
Closed-shop TU illegal
- Reduces power of TU; limits union density
Striking
- Strikes only happen if 75% agree
- Only against your employer
