3.5 Labour Market Flashcards
Demand for labour (definition and type)
= quantity of labour employers wish to hire at each possible wage rate
= derived demand as it is derived from demand for the product the labour produces (firms only want workers if ppl are willing and able to buy the product they produce)
Employ workers as there is a need to produce goods and services
Factors that influence the demand for labour: (diagram)
PPP WR DCTR
The wage rate- As wage rates increase, demand for labour contracts since MRP of labour must be higher for it to be worthwhile employing more people, so less people are employed.
Productivity directly affects an individuals MP by influencing marginal product- If labour productivity increases, the MP of workers rise- increases willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
Demand for the final product- Labour is a derived demand, derived from the demand for goods and services produced. If the demand for the final product produced increases, so will demand for labour, increasing the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
The price of the final product directly affects MRP by influencing marginal revenue- If the final price of a product increases, the MRP of workers rise. This increases the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
Cost of capital is an important factor for labour demand in long run- if capital becomes more expensive, workers can substitute for capital; a more profitable decision by firms, inc the willingness and ability of firms to hire workers at a given wage rate, shifting labour demand curve to the right from D1 to D2. Substitutes for labour: If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left:
How profitable the firm is- more profit, more labour they can afford to employ
Tech- Improvements in computers and technology means that many jobs have been lost with the work being done by machines. This means that there is less demand for labour, but demand for labour in technological based industries is increasing. By 2040, about 47% of jobs could be lost to technology.
Regulation- : As laws are passed some jobs disappear, such conductors, whilst other jobs are made. High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas. France is a country that used to have high levels of labour regulation and this is something the new president, Emmanuel Macron, is trying to change.
MRP
marginal revenue product = MP X MR
= measure of worker’s output
Extra revenue generated when an additional worker is hired
Immobility of labour (as a market failure in labour markets)
Geographical: unwillingness of labour to move to another location to seek work (family, high travel/accom costs, differences in cost of living), causes imbalance of labour supply in certain areas
Occupational: workers lack the skills and training required to transition to another job sector, often occurs during structural changes in economy & naturally as consumer taste changes (eg. transition period from manufacturing to services), = lack of supply for higher skilled jobs w more qualifications required (with higher wages so more inequality), gov intervention needed for training, info gap or benefits for workers
Supply of labour def
= ability & willingness of people to make themselves available to work at different wage rates
Factors influencing supply of labour (diagram)
- wage in substitute occupations
- barriers to entry
- non-monetary job characteristics
- improvements in occupational mobility of labour
- time
- size of working pop
- value of leisure time
The individual labour supply curve (diagram, what determines its shape)
Key choice between work and leisure
Income effect : rise in income as wages rise (positive income effect)but potential of individuals reaching target income can cause a negative income effect
Substitution effect : as wages rise, oc for leisure time increases as well, always providing an incentive to work. Positive effect
First section - income and substitution effect both positive. So wage effect positive
Middle section - substitution effect remains positive, income effect negative (individuals starting to reach the target income), but it’s not enough so wage effect positive
Last section - sub effect posive, income effect negative and wage effect negative so curve bends backwards
Government intervention in the labour market: (list)
- maximum wages
- minimum wages
- public sector wage setting
- policies to tackle labour market immobility
What are the determinants of wage elasticity of demand for labour?
Wage elasticity of demand for labour DEF- responsiveness of the quantity demanded of labour to the wage rate. %change in QD/ %change in wage rate
1) Substitutability between labour and capital. As wages rise labour demand= responsive and fall proportionately more than the wage increase if labour and capital machinery are easily substitutable wage elastic demand. High skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced.
2) Price elasticity of demand (PED) for the final product. If the PED for the final product is price inelastic, an increase in wages for workers in the industry can be passed onto the consumer via a higher price as demand will not fall considerably with revenue and profit increasing. Therefore labour demand will decrease but proportionately less than the wage increase, wage inelastic demand in this case. Low PED- still inelastic demand for labour
3) Labour costs as a proportion of total costs. If labour costs are a large percentage of total costs, as wages rise, firms need to reduce employment in order to stay profitable where the fall in labour demand will be proportionately more than increase in wage; wage elastic demand.
4) Time period. In the short run normally two factors of production are fixed: land and capital. Therefore workers cannot be easily substituted for capital as wages rise, making labour demand wage inelastic. However in the L/R as wages rise, demand for labour will fall proportionately more than the increase in wage as all FOP = variable. This means that capital can substitute for labour, thus labour demand is wage elastic.
What factor make demand for labour wage inelastic?
§ If labour and capital aren’t easily substitutable – an increase in the wage rate will lead to a fall in demand for labour but proportionately less than the wage increase= wage inelastic demand
§ If the PED for the final product is price inelastic, an increase in wages for workers in the industry can be passed onto the consumer via a higher price as demand will not fall considerably with revenue and profit increasing. Therefore labour demand will decrease but proportionately less than the wage increase,
§ If labour costs are a small percentage of total costs, as wages rise, firms do not have to reduce employment to stay profitable thus labour demand will fall but proportionately less than the wage increase= wage inelastic demand
§ short run normally two factors of production are fixed: land and capital. Therefore workers cannot be easily substituted for capital as wages rise, making labour demand wage inelastic
What does it mean if demand for labour is elastic or inelastic?
When demand for labour is elastic, small wage changes can cause large changes in the quantity of labour demanded.
When it’s inelastic even large wage changes only cause small changes to the quantity of labour demanded.
What is definition of supply of labour?
number of workers willing and able to work in a profession at a given wage rate in a given time period
What are the non wage factors that affect the labour supply curve
SIMBA POV
- Substitute’s wage. If the wage in substitute occupations decreases, more workers will be attracted into the market as the earning capacity is greater. The willingness and ability to work increases at the same wage rate, shifting the labour supply curve to the right from S1 to S2
- Incentives. If there are non monetary benefits to the job as well as a suitable wage, workers will be attracted into the market. Such perks could include a company car, private healthcare, a good pension plan, flexible holiday leave, free lunches etc which increase the willingness for workers to enter a profession, shifting the labour supply curve to the right from S1 to S2.
- Mobility of Labour. If more workers gain skills and qualifications necessary to work in a given profession, labour supply will increase or if the workforce generally becomes more educated the willingness and ability of workers to take jobs in a profession increases, shifting the labour supply curve to the right from S1 to S2
- Barriers to Entry. If barriers to entry into a profession are high, it becomes more difficult for workers to enter that industry. If to become a hotel receptionist for example, requirements are for individuals to able to speak a variety of languages, experience required is high and computer proficiency expectations- high, several people who want to work in this job may not be able to, shifting the labour supply curve to the left from S1 to S3.
- Ability to work overtime. Overtime opportunities = lucrative as an extra earner for workers. such opportunities exist, willingness of workers to enter profession increases, shifting labour supply curve the right from S1 to S2
- Size of the working population. If the size of the working population increases due to immigration of people of a working age for example, the number of people who are willing and able to work in a given profession increases, shifting the labour supply curve to the right from s1 to 52.
- Value of leisure time. If individuals value leisure time less and consider working and earning income to be important, the willingness and ability to work inc in labour market- shifting labour supply to the right from S1 to
What are the determinants of wage elasticity of supply?
Def- responsiveness of supply to a change in wage rates.
POLVOTS
- Pool Of potential workers that could enter the profession is high, as wage increases= proportionately greater increase in labour supply than the increase in wage- labour supply wage elastic
- Length of the training period strongly determine responsiveness of workers to higher wage rates. If length of the training period is high to enter a profession, higher wage rates will attract workers to enter but such a long training period will detract the majority from actually entering. Therefore as wages rise, labour supply will increase but proportionately less than the wage increase; wage inelastic labour supply.
- Vocational element to the job. Professions -, vocational element - teaching, holidays reps for example - tend to have more wage inelastic supply= wage isn’t a fundamental consideration when deciding to take the job or not, thus if wages fall, supply will decrease but proportionately less than wage decrease = wage inelastic labour supply
- Time. Professions where it takes time to exit the industry - influence workers responsiveness to lower wages or higher wages in other occupations. If wages decrease but notice times needed are long- can force a worker to remain the job for a period of time before leaving. short run therefore as wages fall, supply will decrease but proportionately less than the wage decrease implying wage inelastic labour supply.
- Nature of skills required. strongly determine the responsiveness of workers to higher wage rates. If the nature of skills required is high to enter a profession, higher wage rates will attract workers to enter but such a strict skills requirement will detract the majority from actually entering. Wages rise, labour supply will increase but proportionately less than the wage increase; wage inelastic labour supply.
What makes wage supply elastic or inelastic?
Elastic:
1) Large pool of potential workers
2) Small training period
3) Non vocational elements
4) Low skills
5) L/r- easier for people to respond to wages
Inelastic:
1) Very specific skills required
2) Little pool of potential workers
3) Long training period
4) Working in vocational professions
5) S/r – immediately after a wage decreases- labour supply may decrease but proportionately less than wage decrease- cotracts
How does labour suffer from occupational or geographical immobility?
They can suffer from occupational immobility where workers find it difficult to move from one job to another because of a lack of transferable skills. It is particularly difficult in S/T when workers need to get new training
but in the L/R it may only be possible at a high cost.
§ Moreover, they can suffer from geographical immobility where they find it difficult to move from one place to
another due to the cost of movement, family etc. There may be no jobs available in Glasgow, but jobs in London. Unfortunately, someone from Glasgow will struggle to get a job in London as they may not know about the vacancies, it would be expensive to attend interviews and they would have to leave their family behind. Housing is also a big issue because people may not be able to afford to buy a house in their new area. They may also struggle if they need to find social housing and it is difficult for young people, since they often do not have the money to move out of their parents’ home. In general, those on lower incomes are more geographically immobile.
§ Immobility can mean that there can be excess supply of labour in one area/occupation and excess demand in another. Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation because of their immobility.