3.5 Labour Market Flashcards
what happens in the LR when wage rates increase?
- LR = all factors of production vary
- firms are more likely to substitute workers for machines -> lower demand for labour
what happens in the SR when wage rates increase?
- SR = fixed amount of capital
- when adding more workers to a fixed stock of capital -> unlikely that the additional worker will be more productive
what is meant by ‘derived demand’?
the demand is derived from the demand for the goods + services that labour produces
what are the factors influencing demand for labour?
- wage rates
- demand for the final product
- prices of other factors of production -> if machinery = cheap, workers are substituted -> DFL dec.
- wages in other countries -> if wages are low in other countries -> people will be employed in other countries due to lower labour costs -> DFL dec. in UK
- technology -> improvements = machines substitute workers = DFL dec.
- regulation
what is meant by ‘wage elasticity of labour demand’?
the responsiveness of the quantity demanded of labour to the wage rate
what are the factors affecting WELD?
- PED of the product -> if good = elastic, rise in wages -> rise in prices -> big impact on quantity sold -> WELD = elastic
- proportion of wages to total cost -> if wages are a high proportion -> inc. wages = inc. costs -> large fall in DFL = elastic WELD
- no. of subtitutes -> lots of substitutes (e.g. machinery), WELD = elastic
- time -> in the LR, WELD = elastic as machinery can be developed; SR = firms have to employ workers
what is meant by ‘MRPL (marginal revenue product of labour)’?
the additional revenue generated when an additional worker is employed (MRPL = MPL X MR)
- MRP of labour initiallly increases then falls (LDMR)
what are the limitations of the MRPL concept?
- measuring labour productivity can be difficult
- collaborative work makes it hard to measure the productivity of each individual
what is the +ve subsititution effect?
real wage rate increases -> opportunity cost for leisure increases -> more hours worked
what is the -ve income effect?
real wage rate increases -> real income increases -> work less hours
what is meant by labour supply
hours that people are willing and able to supply at a given wage rate
what is the reversation rate
lowest wage at which workers are willing and able to work
what are the factors affecting labour supply to a specific industry?
- wages
- population and age distribution -> inc. population -> inc. labour supply if they are of working age
- non-monetary benefits through job satisfaction i.e. distance, good social life, etc.
- barriers to entry e.g. education/qualification
- wages and conditions of other jobs
- legislation
what is wage elasticity of supply?
responsiveness of labour supply to a change in wage rate
what are the factors affecting WELS?
- natrue/levels of qualifications required -> high level of skill ->harder for people to take the job = INELASTIC
- mobility of labour -> if occupationally mobile = WELS elastic; if geographically mobile = WELS more elastic; if both = WELS is very very elastic
- level of unemployment within a country = more elastic
what is meant by occupational mobility?
the ability for an individual to move between jobs
what is meant by geographical mobility?
the ability for an individual to move to new locations for a job
what are the causes of occupational immobility?
- training gaps - unemployed workers may not have access to affordable training schemes to inc. human capital + employability
- skills gaps - new jobs may require diff. skills from those that unemployed workers can offer
- experience gaps - long term structurally unemployed -> gaps in CVs -> less attractive to employers
chain of reasoning as to how occupational immobility leads to market failure
- cause -> occupational immobility of labour -> structural unemployment inc. -> less efficiency/deadweight loss -> market failure
what are some government schemes to correct occupational immobility?
- adult education and retraining programs
- apprenticeship schemes
- lifetime skills guarantee (2020) - offers free access to level 3 qualifications to adults without them
- localised career advice and support
causes of geographical immobility
- family ties
- language barriers
- access to good schools
- high cost of commuting/property
- migration controls i.e. visa restrictions
what are the conditions for a competitive labour market?
- many employers and workers
- perfect information
- homogeneous labour - skills + abilities are similar
- mobility of labour - workers have the ability to move from one job to another without excessive barriers
what is meant by wage discrimination?
when employers with monopsony power pay diff. wage rates based on workers’ willingness to supply labour
which workers are more likely to accept lower wages
- part-time workers
- younger workers looking for experience
what are the advantages and disadvantages of wage discrimination?
ADV:
- dec. cost of wages -> TC falls -> profits rise
- more workers employed as firms can demand for more -> more employment
DISADV:
- could lead to inc. administrative costs (to negotiate with each worker) -> potential pushback if workers discover wage disparity
- vulnerable workers are exploited -> can force wages down for all workers
what is meant by labour market discrimination
when a specific group of workers is treated differently in the same job e.g. due to race, gender, sexuality, etc
what do employers who are influenced by their prejudices believe
they belive that the MRP of certain workers is less than others -> some workers are forced to accept lower wages
chain of reasoning of how discrimination causes issues in the labour market
discrimination -> unequal distribution of wealth and income -> misallocation of resources -> reduced efficiency -> increased costs
draw a diagram to show how discriminated groups are forced to accept lower wages
draw 2 LD lines (the LD line for the discriminated group would be lower than the favoured group); draw LS and everything else as normal
chain of reasoning to show the impact of labour market discrimination
- resource misallocation -> increased inequality -> social costs
- leads to scarce human resources being underutilised -> slower trend growth rates
- lack of diversity -> hampers innovation -> lower productivity -> big variations in wages for the same job
how to evaluate the impact of labour market discrimination
equality act 2010 protects employees and workers from facing discrimination
what is the impact of imperfect information in the labour market?
- workers end up w/ jobs that don’t fully utilise their skills -> less productive -> cost of production increased -> prices for goods up -> less competitive goods
- increased frictional unemployment (workers between jobs) -> need time to search for the right job -> increased ‘discourgaed workers’ (people who have tried to find work but have given up) -> waste of scarce labour resources
what is the impact of skills shortages?
- shortage -> wage costs increased -> production costs increased
- firms may employ workers who are underqualified out of desperation -> reduced productivity and quality levels
solution(s) to skills shortages
- provide training to employees to increase productivity
- encouraging the immigration of workers with the desired skills
how does labour immobility lead to market failure?
- geographical immobility -> labour shortages in one area and surpluses in another -> regional wage differences
- occupational immobility -> evolving economies mean certain industries decline -> structural unemployment rises -> skills shortages are harder to fix
what is meant by a zero-hour contract
employment agreements where an employer does not guarantee a minimum no. of working hours to an employee
pros and cons of zero hour contracts
ADV:
- flexibility
- cost efficiency for employers -> only pay for hours worked -> labour costs reduced
- entry-level opportunities -> people can gain work experience
- workers can accept or decline shifts -> better work-life balance
DISADV:
- income insecurity -> no guaranteed hours -> unpredictable earnings
- lack of benefits -> no sick pay, holiday pay, pensions, etc -> lower job satisfaction
- job insecurity -> workers are very replaceable
- risk of exploitation
how does wage elasticity of labour affect the impact of a minimum wage
wage elastic = employment falls more
what are the arguments for minimum wages
- poverty reduction - more equitable distribution of income
- increased consumer spending: workers receive higher wages -> more disposable income
- reduced reliance on state welfare
- more workforce participation
- increased wages -> improved morale and productivity
what are arguments against minimum wages
- job losses - higher labour costs -> reduced workforce size, cutting hours, automating tasks, etc
- higher prices - higher labour costs -> passed onto consumers as higher prices -> cost-push inflation -> reduced real incomes
- higher costs -> lower profits -> less investment
- small businesses may struggle with higher labour costs
what happens to total earnings when NMW is implemented
- WELD = elastic; total earnings fall
- WELD = inelastic; total earnings rise
