3.5 labour market

Question 1

What does the demand curve for labour show?

Answer 1

The quantity of labour that employers would wish to hire at each possible wage rate.

Question 2

What type of demand is labour?

Answer 2

A derived demand
- it comes from demand for goods and services
- only when the demand for goods and services is high, the demand for labour is high
- firms only employ labour when there is a need for it, e.g. increasing output in a car assembling factory

Question 3

When is the demand for labour high?

Answer 3

Only when the demand for goods and services is high.

Question 4

What do firms base their demand decisions for employing labour?

Answer 4

Marginal Revenue Product
- the extra revenue generated when an additional worker is hired

Question 5

How do you calculate marginal revenue product?

Answer 5

Marginal revenue product = marginal output x price.

Question 6

What does the MRP curve actually show?

Answer 6

At any given wage rate, how many workers should a firm employ.

Question 7

Why is the MRP curve shaped like this?

Answer 7

Because of the law of diminishing marginal returns.

Question 8

What happens to productivity with additional workers?

Answer 8

because of the law of diminishing marginal returns
- the first 3 workers were brining in more revenue and MRP is increasing
- this is because of specialisation and excess land and capital being utilised
- however the 4th, 5th and 6th worker suffer from lower productivity because of the constraints of fixed FOPs land and capital. Therefore individual productivity decreases therefore reducing marginal revenue product for these workers

Question 9

What condition does the MRP curve give firms?

Answer 9

Firms will hire workers up until the MRP = wage.

Question 10

Why is the demand curve for lawyers downward sloping?

Answer 10

• because the demand curve in the industry is the total MRP of all lawyers in the industry
• it shows an inverse relationship between the wage rate and the quantity of workers

Question 11

What causes the inverse relationship between wage and quantity of workers?

Answer 11

In the short run, due to the law of diminishing returns; in the long run, firms may substitute labour with cheaper capital.

Question 12

What are the criticisms of the Marginal Product theory?

Answer 12

How to measure productivity?
**- Productivity is difficult to measure in certain industries. For example, working out the MRP for teachers is very difficult because the output that teaches produce is not marketed

**Teamwork makes it difficult to measure individual productivity
**
- Many professions work in teams and when they work in teams, to know the productivity of each individual is very different work measure

**The self employed
**
- The self employed don’t pay themselves according to their MRP

**Imperfect labour markets (trade unions)
**
- If the Labour Market is not perfectly competitive which is the assumption and there are trade unions bargaining for higher wages, this may have nothing to do with the MRP and trade unions may just want their workers to be paid me not depending on their MRP

Question 13

How does wage affect demand for labour?

Answer 13

If the wage rate increases, employers will want to hire fewer employees.

Question 14

What factors cause a shift in the labour demand curve?

Answer 14

Wage rates, demand for the product, prices of other factors of production, wages in other countries, technology, regulation.

Question 15

Define the elasticity of labour demand.

Answer 15

Measures the responsiveness of labour demanded given a change in the wage rate.

Question 16

What does elastic demand for labour mean?

Answer 16

The proportion in change of labour demand is greater than the change in the wage.

Question 17

What does inelastic demand for labour mean?

Answer 17

The proportion in change in labour demand is less than the change in wage.

Question 18

What factors determine the elasticity of the labour demand curve?

Answer 18

Substitutability of capital for labour, elasticity of demand for the product, cost of labour as a percentage of total cost, time period.

Question 19

What is the key choice individuals have when deciding whether to supply their labour?

Answer 19

Work vs leisure.

Question 20

What determines the shape for the individual supply curve for labour?

Answer 20

Income effect and substitution effect.

Question 21

What is the income effect?

Answer 21

As wages go up, individuals may want to work more or less depending on their target income.

Question 22

What is the substitution effect?

Answer 22

As wages rise, the opportunity cost of leisure time increases, providing an incentive to work.

Question 23

What does the supply of labour show?

Answer 23

The ability and willingness of people to make themselves available to work at different wage rates.

Question 24

Why does the labour supply curve look like this for a firm operating in a perfectly competitive labour market?

Answer 24

Because these firms are wage takers.

Question 25

Why does the supply of labour curve look like this for a monopsony?

Answer 25

Because this firm is the sole employer in the industry and has control over wages.

Question 26

What factors influence the supply of labour?

Answer 26

Wages, population and distribution of age, non-monetary benefits, education/training/qualification, trade unions and barriers to entry, wages and conditions of other jobs, legislation.

Question 27

What is the elasticity of the labour supply curve?

Answer 27

A measure in the responsiveness of labour supplied given a change in the wage rate.

Question 28

What does an elastic labour supply curve mean?

Answer 28

The proportion in change in labour supply is greater than the change in the wage rate.

Question 29

What does an inelastic labour supply curve mean?

Answer 29

The proportion in the change in labour supply is less than the change in the wage rate.

Question 30

What are the determinants of elasticity of labour supply?

Answer 30

The nature of skills required in the job, length of the training period, vocational elements of profession, time.

Question 31

What are the assumptions under a perfectly competitive labour market?

Answer 31

Workers are perfectly mobile, firms and workers have perfect knowledge, no barriers to entry or exit, many firms, no monopsony power, no government or trade union intervention.

Question 32

What are the causes of labour market failure?

Answer 32

Many potential workers and employers, labour is homogenous, perfect information, firms are wage takers, no barriers to entry and exit.

Question 33

What is assumed about workers in a perfectly competitive labour market?

Answer 33

All workers have the skills and qualifications needed to take any job, therefore labour is perfectly mobile.

Question 34

What is meant by perfect information in a labour market?

Answer 34

Workers know the wage rates, and firms know the skills, qualifications, and productivity of all workers.

Question 35

What does it mean for firms to be wage takers?

Answer 35

Firms have no control over the wages they can offer; they accept the market wage where demand equals supply.

Question 36

What are the barriers to entry and exit in a perfectly competitive labour market?

Answer 36

There are no extra skills or qualifications needed to take jobs, and workers can leave without a notice period.

Question 37

At what point do firms decide to employ workers to maximize revenue?

Answer 37

Firms employ workers where the marginal revenue product equals the marginal cost of labour, which is equal to the wage.

Question 38

How does labour not being homogenous affect the labour market?

Answer 38

Different workers have varying marginal revenue products (MRPs) due to differing productivity levels, leading to wage differentials.

Question 39

What is occupational immobility?

Answer 39

Not all workers have the same skills and qualifications, which can restrict the supply of labour in certain professions.

Question 40

What is geographical immobility?

Answer 40

Workers may be unwilling to relocate for jobs, even if the wage is high, reducing the supply of labour.

Question 41

What is a monopsony in the labour market?

Answer 41

A monopsony is a sole employer of labour in a profession, such as teachers or nurses in the UK.

Question 42

How do monopsonies affect wages?

Answer 42

Monopsonies are wage makers, maximizing revenue by hiring up to where marginal revenue product equals marginal cost of labour.

Question 43

Why is the supply of labour for a monopsonist equal to the average cost of labour?

Answer 43

Supply of labour indicates the number of workers willing to work at different wage rates, which equals average cost of labour.

Question 44

What role do trade unions play in the labour market?

Answer 44

Trade unions engage in collective bargaining to negotiate wages and working conditions for workers.

Question 45

What is one way governments intervene in the labour market?

Answer 45

Governments can set a minimum wage to ensure fair pay for workers.

Question 46

What are the arguments for the national minimum wage?

Answer 46

It reduces poverty, decreases male/female wage differentials, increases employee loyalty, provides work incentives, and ensures fair wages.

Question 47

What are the arguments against the national minimum wage?

Answer 47

It may lead to job losses, increased costs for companies, and wage spirals that reduce competitiveness.

Question 48

What is the impact of a maximum wage?

Answer 48

It may reduce inequality but can lead to excess demand for jobs and loss of high-quality workers.

Question 49

How does public sector wage setting affect the labour market?

Answer 49

The government can set wages, impacting private sector wages and potentially causing shifts in worker supply.

Question 50

What methods can the government use to tackle geographical immobility?

Answer 50

Improving housing supply, transport links, national advertising, and providing subsidies in areas with labour shortages.

Question 51

How can the government improve occupational mobility?

Answer 51

By increasing vocational training, encouraging further study, and promoting workplace training.