3.5 labour market Flashcards
what does the demand and supply of labour determine?
equilibrium wage rate and employment levels
what is demand for labour?
derived demand
what is demand for labour derived from?
from the demand for goods and services that the labour produces
what factors influence demand for labour?
-labour productivity
-price of other factor inputs
-price of goods
-supplementary labour costs
how does labour productivity influence demand for labour?
greater productivity means that each worker has become more valuable to a firm, greater demand ALT, advances in technology may allow firms to produce more with fewer workers, less demand
how does price of other factor inputs influence demand for labour?
price of capital rises relative to the price of labour more labour is likely to be demanded
how does price of the good influence demand for labour?
if market price increases, the marginal revenue product of each worker will increase
how does the supplementary labour costs influence the demand for labour?
if the non wage costs of employing labour rise then demand for labour will fall
what factors influence the elasticity of demand for labour?
substitutability, ratio of labour costs to total costs, elasticity of demand for the product, time
how does substitutability influence elasticity of demand for labour?
how easy it is to substitute between capital and labour
how does ratio of labour costs to total cost influence elasticity of demand for labour?
the more significant the cost of labour to a firm’s costs the more elastic
how does elasticity of demand for a product influence elasticity of demand for labour?
firms will be more able to absorb a wage rise if the demand for the good is price inelastic
how does time influence elasticity of demand for labour?
always increases elasticity
labour supply?
involves an opportunity cost (work vs leisure), wage rate must be sufficient to overcome the opportunity cost of leisure
what is the income effect?
as wages rise, people feel better off and therefore may not feel a need to work as many hours
what is the substitution effect?
as wages rise, the opportunity cost of leisure ruses, so more hours are worked
what factors determine the supply of labour?
-wage
-substitute professions
-entry barriers
-migration
how does wage determine the supply of labour?
wage and bonuses of the job itself, movement along curve
how does substitute professions determine the supply of labour?
relative wages and work conditions in other jobs
how does entry barriers determine the supply of labour?
higher qualification requirement would reduce supply
how does migration determine the supply of labour?
an inflow of workers increases the supply of labour (may not be easily spread)
what factors determine the elasticity of supply?
-occupational mobility
-geographical mobility
-extent of unemployment
-time
how does occupational mobility determine the elasticity of supply?
quality of transferable skills held by workers, ease of moving in to new labour markets
how does geographical mobility determine the elasticity of supply?
willingness of individuals to move, regional cost difference, information about jobs in other regions
how does extent of unemployment determine the elasticity of supply?
supply is more elastic when unemployment is high
how does time determine the elasticity of supply?
a longer period of time allows greater response to employment trends
demand-side wage differentials?
-different value of labour
-resources of employers
-age differences
-employer discrimination
-difficulty observing workers MRP
how is different value of labour demand-side wage differentials?
workers ‘worth’ more to their employers should earn igher wages
how is resources of employers demand-side wage differentials?
employers with greater resources can pay higher wages
how is age differences demand-side wage differentials?
many jobs pay are related to amount of experience
how is employer discrimination demand-side wage differentials?
undervaluing employees worth on basis of race, gender, etc
how is difficulty observing workers MRP demand-side wage differentials?
in some labour markets it may be more difficult to observe the value a worker brings to the company
supply-side wage differentials?
-compensation
-greater supply of lower-skilled labour
how is compensation a supply-side wage differentials?
higher pay a reward for risk-taking, working in poor conditions or having to work unsocial hours, may also reflect opportunity cost of acquiring more advanced skills, or living in an area with a high cost of living
how is greater supply of lower-skilled labour a supply-side wage differentials?
more workers are able to fulfil a working role in a lower-skilled job
what is a trade union?
organisation of workers that combine together to further their own interests, being part of a trade union should improve the bargaining position of workers
what is the trade unions impact on the market?
if successful they are effectively enforcing a minimum price for the supply of labour, te impact on employment levels depend on type of industry they are operating in
what is the trade unions impact on the market OVERALL?
-raise wages but lower employment in a competitive labour market
-raise wages and raise employment levels in a monopsony labour market
what is bilateral monopoly?
when there is a monopoly supplier of labour (e.g trade union) and a monopsonist buyer of labour (e.g government), strong bargaining power of each party balances the other out
what are the key elements that affect the power of trade unions?
-trade union membership and militancy
-elasticity of demand
-profitability of the employer
how does trade union membership and militancy affect the power of trade unions?
greater proportion of workers in an industry that are members, the more powerful, more ‘militant’ trade unions may have a stronger position
how does elasticity of demand affect the power of trade unions?
if demand for labour is inelastic, a rise in wages will have less impact upon employment
how does profitability of the employer affect the power of trade unions?
a trade union is more likely to be successful if the employer has the resources to give wage increases
what is labour immobility?
if more barriers to labour being able to move between jobs then it is referred to as being ‘immobile’, form of market failure
what is geographical immobility of labour?
when workers find it difficult to move jobs from one region to another
what are reasons for geographical immobility of labour?
-lack of knowledge of jobs in other areas
-high price of housing/ cost of living in other areas
-limited flexibility if in council housing
-language barriers
-poor transport infrastructure
what is occupational immobility of labour?
when workers find it difficult to move from one occupation to another
what are reasons for occupational immobility of labour?
-skills may not match jobs that are available
-barriers to entry in some professions e.g qualifications
-long period of time to train towards a new profession
-high cost of retraining
what are policies to tackle geographical immobility?
-housing based solutions
-transport based solutions
-regional solutions
-information solutions
what are housing based solutions for geographical immobility?
providing relocation subsidies to workers who have to move house to get a job, reforms to housing market designed to improve the supply and reduce the price of rented properties and increase supply of affordable properties
what are transport based solutions for geographical immobility?
improving quality of transport infrastructure, subsidise public transport to make more affordable (increase the range which workers can access jobs)
what are regional solutions for geographical immobility?
subsidies and financial incentives for job types in regions with shortages of specific types of labour
what are information solutions for geographical immobility?
provision of information of available jobs in other regions e.g gvt providing job centres
what are policies used to tackle occupational immobility?
-improving education
-providing specific training
-work incentives
-reforming the tax and benefits system
how is improving education used to tackle occupational immobility?
improving the types of skills taught so that skills are more flexible between jobs, lead to greater transferability of skills between careers in the longer term
how is providing specific training used to tackle occupational immobility?
targeted training at skills shortages in the economy, e.g STEM subjects, nurses
how is work incentives used to tackle occupational immobility?
subsidising employers who take on unemployed workers, incentivises employers to take workers that might not otherwise be chosen
how is reforming the tax and benefits system used to tackle occupational immobility?
raise minimum wage to reduce the level of unemployment benefits to increase the incentive to work
what are the main aims of minimum wages?
- the equity justification
-labour market incentives
-labour market discrimination
what is the equity justification?
that every job should offer a fair rate of pay for the skills and experience of an employee
what is the labour market incentives?
the NMW is designed to improve incentives for people to start looking for work, thereby boosting the economies labour supply
what is the labour market discrimination?
the NMW is a tool designed to offset some of the effects of persistent discrimination of many low-paid females workers and younger employees
what is the impact of minimum wages on workers?
workers benefit form higher wages as a result of a rise (positive impact on spending power and living standards) BUT potential loss of jobs from the rise (greater costs to businesses cause less demand for workers)
what is the impact of minimum wages on businesses?
rise in labour costs (rise in costs will reduce profitability), BUT greater spending in the economy could create extra demand
what is the impact of minimum wages on consumers?
rise in prices (firms will look to protect their profit margins by raising prices), BUT many goods and services are likely to be unaffected (e.g firms that don’t employ low wage workers)
what is the impact of minimum wage on the economy?
economic growth- fall in LRAs lower real output BUT 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
unemployment- loss of jobs could increase unemployment, rise in AD can counter this
current account- higher cost worse competitiveness, bad for exports, rise in AD lead to more spending on imports
what is the impact of minimum wages on inequality?
-reduction in inequality (rise in pay of lowest paid in the economy) BUT bigger gap between those in work and out of work
what is a maximum wage?
wage ceiling above which the wages cannot be set, helping narrow gap between the pay of the richest and poorest in a company
what is the impact of a maximum wage on workers?
rise in wages (gives company incentive to raise wages if they wish to be paid more), BUT companies can outsource low paid work, no longer count as employees, worsen job conditions and security
what is the impact of maximum wages on incentive to work?
reduced work incentive for the highest paid workers (could earn more in other countries) BUT greater incentive to take up lower paid work (increase in pay for lowest earners would increase this incentive)
what is the impact of maximum wages on inequality?
reduction in the gap between the richest and poorest (maximum wage would prevent the difference going beyond a set level), BUT loopholes can be found e.g shares
what is public sector wage setting?
public sector is the sector of the economy which is controlled by the government e.g NHS
what does UK government have a impact on?
direct impact on significant proportion of wages in the economy, government in powerful bargaining position compared to the workers, as there is a lack of private sector alternatives
UK vs French government public sector wage setting?
uk government has a strong pay settlement position compared to french government as public sector trade unions are relatively weak in the UK
