3.5 - Labour market

Question 1

Definition of demand of labour

Answer 1

The amount of workers a firm is willing and able to hire at a given wage rate

Question 2

What is derived demand?

Answer 2

The demand of a good + service results form the demand for a different or related good and service

E.g. increase in demand for coffee would increase the demand for barristers

Question 3

Demand curve for labour?

Answer 3

Marginal Revenue Product (MRP)
The demand is downwarding sloping because the higher the price of labour, the less workers firms will hire

Question 4

What is the formula and definition of Marginal Revenue Product?

Answer 4

MRP = Marginal Physical Product (MPP) x Price (P)

The additional revenue produced by an additional worker

Question 4

What factors influence the demand for labour? (6)

Answer 4

1. Labour productivity
2. Relative cost of using capital inputs
3. Employment taxes
4. Demand for final output
5. Productivity of labour saving technology
6. External macroeconomic factors

Question 4

Definition of Marginal Physical Product

Answer 4

The extra output produced by an additional worker

Question 5

When will a firm add another worker?

Answer 5

If marginal revenue product of those workers is higher or equal to the wage rate of employing those workers

Question 6

What do we assume in the short run?

Answer 6

That all factors of production, except labour, are fixed

Question 7

What is the demand of labour for a firm depend upon? (2)

Answer 7

1. Productivity of labour
2. Demand for the good (final output)

Question 8

What is diminishing marginal returns?

Answer 8

Marginal output will start to decline if more units of any of the factors of production increases

Question 9

Evaluations of MRP (2)

Answer 9

1. Self employment
2. Some jobs are difficult to measure their productivity (e.g. teaching)

Question 10

Chains of reasoning for question which asks the effect of an increase in productivity for electricians

Answer 10

• increase in productivity of labour
• increase in MPP as they are producing more output
• increase in MRP due to increase in MPP
• Firms are profit maximisers which means they will want to boost output as this will result in higher profits
• Increase in demand of labour in order to take advantage of higher output (derived from rise in productivity)

Question 11

Evaluation for increased productivity of electricans?

Answer 11

• capital may still be a better, more efficient way in ensuring productivity (greater substitute)
• employment taxes
• rise in this tax will increase cost of production
• decrease in demand of labour as more expensive to hire workers

Question 12

Definition of supply of labour

Answer 12

The number of hours a worker is willing and able to work at a given wage rate

Question 13

Why is the supply curve upward sloping?

Answer 13

As wages rise, other workers enter the industry as they are more attracted by the incentive of higher pay

Question 14

Why does the supply curve not begin at the Y axis point of 0?

Answer 14

Reservation wage - the lowest wage rate a worker is willing to accept for a job

Minimum wage

Question 15

What are the two considerations for a worker to take up a job?

Answer 15

1. Monetary factors - relating/consisting of money
2. Non-Monetary factors - e.g. job satisfaction, location, friends and family, status, working environment, job security

Question 16

Does monetary factors cause a movement along the supply curve?

Answer 16

Yes

This includes bonuses, wage, commission, share options, etc

Question 17

Does non-monetary considerations cause a movement along the supply?

Answer 17

No - it causes a shift

Very important one is Net migration

Question 18

What is the formula of net advantage?

Answer 18

Net advantage = utility derived from a wage + utility derived from working

Question 19

Factors affecting the supply of labour? (5)

Answer 19

1. Wage offering in substitute occupation
2. Barriers to entry - high qualifications needed decreases the supply of labour
3. Non monetary characteristics
4. Demographic changes / immigration - inward migration boosts labour supply in many occupations
5. Improvements in the occupational mobility of labour

Question 20

What causes the backward bending supply curve of labour?

Answer 20

1. Income effect - rise in incomes means workers take more leisure time resulting in fewer hours worked
2. Substitution effect - because the opportunity cost of not working rises, workers will chose to substitute their leisure time with increased work

Question 21

Assumptions of a perfectly competitive labour market (6)

Answer 21

1. Many firms
2. Firms offering identical jobs
3. Firms are profit maximisers - they will continue to employ workers up to the point where MRP = MC (Wage rate)
4. No barriers to entry / exit
5. Many workers with the same skill
6. Perfect information about wages and job conditions (no monopsony)

Question 22

Evaluations of a perfectly competitive labour market

Answer 22

Too theoretical:

1. imperfect information
2. workers aren’t homogenous
3. search costs

Question 23

Definition of Elasticity of Demand for labour

Answer 23

The responsiveness of the quantity demanded of labour to a change in wage rate

Question 24

Factors influencing elasticity of demand for labour

Answer 24

1. Ease and Cost of factor substitution - if there are no/few substitutes, then wages are inelastic
2. Proportion of labour costs to total costs (TC) - if the proportion of labour costs is high, then wages are elastic
3. Demand for the final output - if a good is inelastic then wages can be passed onto consumers (wages are inelastic)
4. Time period:
   SR - wages are inelastic
   LR - wages are elastic

Question 25

Definition of Elasticity of Supply of Labour

Answer 25

The responsiveness in the quantity supplied of labour to a change in wage rate

Question 26

Factors influencing Elasticity of Supply of Labour

Answer 26

1. Time period
2. Occupation mobility (nature of skills + qualifications required)
3. Vocational nature of work (jobs where people are attracted more by the type of work are inelastic)