3.5 Labour Market Flashcards
What is a labour market?
Where firms and workers interact. Workers supply labour which firms demand
Why is labour derived demand?
The demand for labour is dependent on the demand for the product the labour produces. Businesses only want workers for as long as people are willing and able to buy their good.
What does the labour demand curve show?
How many workers will be hired at a given wage rate
What are the 2 reasons the labour demand curve slopes downwards?
- Diminishing marginal productivity: If capital is fixed, every extra worker is less productive and will receive lower wagers (Long-run)
- Substitute effect: If wage rate is too high firms will substitute labour for capital (Short-run)
What 4 factors influence demand for labour?
1. Derived demand for product: If consumers demand more a good, firms will increase their demand for labour
2. Productivity levels: Productive workers will be in greater demand by firms
3. Capital substitutes: If capital is available and cheap, firms will substitute labour for it
4. No. of firms: Greater number of firms means there is increased demand for labour
What is labour supply?
The number of workers willing an able to work a particular job or industry at a given wage
Why does the labour supply curve slope upwards?
At a higher wage rate, more workers are incentivised to enter the profession
What 6 factors influence labour supply?
1. Barriers to entry: supply restricted if minimum entry requirements, qualifications, high training costs
2. Training length: extensive training periods restrict labour in the short-run
3. Substitute occupation wages: if wages increase in substitute occupations, supply will decrease e.g teachers & tutors
4. Non-money characteristics: the benefits/conditions of work e.g holiday benefits, promotional opportunities
5. Geographical opportunities: supply depends on whether workers are able to access firms/employment e.g transport links
6. Population size
How are wage rates determined?
By the interaction of demand and supply
How does a change in demand impact wages?
If demand for labour increases but the supply remains constant, wages will increase
How does a change in supply impact wages?
If supply of labour increases but the demand stays constant, the wage rate will decrease
What is an imperfect labour market?
Where wages will not always be set where demand equals supply. Firms or workers have the power to influence wages e.g monopsonies
What is elasticity of labour demand?
A measure of the responsiveness of labour demand following a change in the wage rate
What 4 factors influence the elasticity of labour demand?
1. PED of the final good: labour is a derived demand therefore elasticity will match the PED of the good
2. Time: short-run=inelastic (difficult to substitute for capital,contracts)
3. Ease and cost of factor substitution: if easy and cheap, firms will attempt to substitute workers for capital
4. Proportion of labour costs compared to fixed costs: high labour costs=elastic as firms will be more sensitive to any increase in the wage rate
What is marginal revenue product (MRP)?
The extra revenue generated when an additional worker is hired
What is a competitive labour market?
Where there are multiple buyers and sellers
What is a perfectly competitive labour market?
A market where there are a lot of buyers and sellers and neither can influence the wage rate
What is a minimum wage?
A legally enforced pay-floor on wages in the labour market. It is set as an hourly rate
What is the current UK minimum wage?
£11.44
Why is minimum wage set above the equilibrium?
It results in higher wages for workers which is an incentive to join the labour market
What are 3 benefits of a minimum wage on the economy?
- Increased wages for workers: able to reduce poverty/inequality as it impacts the lowest wages
- Increased production and motivation
- Tackle monopsonies
What are 4 drawbacks of minimum wage on the economy?
- Labour substitution for capital
- Firms relocation overseas: firms may not want to pay the higher wages and therefore move their business elsehwere
- Real-wage unemployment: wages are set above the equilibrium level resulting in excess supply
- Less FDI/business confidence:
What affects the impact of a minimum wage?
- Regional variation: where it is set
- Time frame: whether it is introduced in stages or all at once
- Age: are young workers included?
- Elasticity: labour demand will contract severely if elastic
What is a maximum wage?
The highest level of pay that is legally allowable
What are 2 benefits of a maximum wage?
- Reduce firm costs: firms able to pay workers lower than they could be paying
- Reduces inequality
What is a trade union?
An organised group of employees who join together to represent and protect the rights of workers . through collective bargaining techniques
What are 2 benefits of trade unions?
- Increased wages for workers
- income equality
What are 2 drawbacks of trade unions?
- Increased production costs
- Firms relocation overseas/less FDI
What impacts the effect of trade unions?
- Degree of unionisation: some industries have strong unions (e.g train drivers vs amazon)
- Aims
- Profits: unions more successful when highly profitable
- Laws restricting trade unions: e.g trade unions act 2016
What is labour market failure?
A labour market where there is an inefficient allocation of workers
What are the 4 causes of labour market failure?
- Occupational immobility
- Geographical immobility
- Monopsonies
- Discrimination
What is occupational immobility?
The inability of labour to move from one type of job to another due to a mismatch of skills
What is geographical immobility?
Barriers that prevent people from moving from one area to another for work
What causes geographical immobility?
- Transport links
- Housing prices
- Family/community ties
What causes occupational immobility?
- Lack of skills/training
- Age
- Lack of motivation/confidence
What is the result of labour immobility?
It leads to an excess supply of labour in one area/occupation and excess demand in another
What are 4 solutions to occupational immobility?
- Subsidising training schemes
- Reducing tuition fees/access to university
- Adult education provisioning
- Information provisioning
What is labour market flexibility?
The speed and ability of labour market to respond to a change in the economy (ease for workers to move between jobs/for firms to hire and fire workers)
What are 2 examples of labour market flexibility?
- Flexible employment contracts: zero-hour contracts, temp/part time work
- Flexible arrangements: work from home/overseas
What 3 factors increase labour market flexibility?
- Training for low skilled workers
- Encouraged immigration
- Reduced minimum wage
What are 2 benefits of labour market flexibility?
- Less structural unemployment
- Choice for workers
What are 2 drawbacks of labour market flexibility?
- Uncertainty for firms and workers
- Rising inequality: allows firms to make decisions about compensation and benefits
What are 3 types of labour market discrimination?
- Wage disparities: persistent wage gaps between different groups
- Glass ceiling effect: invisible barriers that prevent certain groups from advancing beyond a certain level
- Occupational segregation: demographic groups disproportionately represented
What are 2 impacts of discrimination in the labour market?
- Lower productivity: employers pass up on skilled workers due to racial/gender characteristics
- Legal costs: fines and compliance costs
What are wage differentials?
The difference in wages between workers in the same or different occupations
What are the 4 reasons for wage differentials?
- Trade unions or monopsonies
- MRP
- Discrimination
- Compensation (unsocial hours, risk)
What are 2 problems with public sector wage setting?
- Political considerations + budget
- Hard to measure workers
Name 3 factors that contribute to changing labour markets
- Net migration
- Ageing population
- Growth in female participation
How has the government intervened to solve the ageing population?
- Increasing retirement age to 67
- NHS prevention funding
What is the gig economy?
A part of the labour market that is characterised by short-term contracts or occasional work, as opposed to permanent jobs
