3.5 Labour Market

Question 1

Derived demand?

Answer 1

Demand for a good or service as a result of demand for a different, or related, good or service
i.e. labour

Question 2

Movements vs shifts in demand for labour?

Answer 2

Movements caused by changes in wage rate

Shifts caused by other factors

Question 3

Factors that shift demand curve for labour?

Answer 3

• Changes to productivity of labour - more productive = more demand
• Changes in demand/price of good that labour produces
• Changes in price of capital - capital cheaper = less demand for labour

Question 4

Substitution effect?

Answer 4

Increase in wage = leisure has bigger opportunity cost = increased substitution of leisure with work

Question 5

Income effect?

Answer 5

Higher wage = higher disposable income = increased consumption of goods and services (including leisure)

(Assuming that leisure is a normal good)

Question 6

Shape of individual labour supply curve?

Answer 6

Backward bending

At relatively low wages, substitution effect stronger then as wage rises, income effect gradually stronger

Question 7

Shape of industry labour supply curve?

Answer 7

Upward sloping

More people tend to offer themselves for work when wage is relatively high

Question 8

How does the price mechanism relate to labour market?

Answer 8

Wages act as a signal to workers about which industries are offering best returns for work

Question 9

Factors that cause shifts to industry labour supply curve?

Answer 9

• Size of working age population
• Demographic changes and immigration
• Wages on offer in substitute occupations
• Barriers to entry (e.g. qualifications)
• Non-pecuniary benefits (perks involved with job e.g. staff discounts)
• Overtime

Question 10

What happens when wage is below market equilibrium?

Answer 10

Excess demand for labour, vacancies will not be filled

Higher wage has to be offered to fill vacancies

Question 11

What happens when wage is above market equilibrium?

Answer 11

Excess supply of labour

Wage will drift down until equilibrium reached

Question 12

Effect of increase in demand for labour in the LR

Answer 12

Demand shifts rightwards from DL0 to DL1, wage rises from W0 to W1 (short run)

But encourages workers to switch from other industries, shifting supply of labour rightwards from SL0 to SL1, reducing wage rate

Question 13

Impacts of immigration to labour market?

Answer 13

Increases supply of labour so wages initially fall

But, new workers lead to increased spending and demand in economy = increased demand for labour

Question 14

Two types of factor immobility of labour?

Answer 14

Occupational

Geographical

Question 15

Occupational immobility of labour?

Policies to remove it?

Answer 15

Refers to workers being unable to move between jobs as they lack the appropriate skills/training
i.e. structural unemployment w/ steel industry

Investing in training schemes/ skills reform

Subsidising vocational training

Question 16

Geographical immobility of labour?

Policies to remove it?

Answer 16

Refers to workers being unable to move to different places to seek and find work
e.g. migration laws, regional variations, high rent costs

Reforms to housing market e.g. reducing restrictions on green belt

Deregulation on immigration laws

Specific subsidies e.g. temporary housing for nurses, Help to Buy scheme

Question 17

Wage rate?

Answer 17

The price of labour

Question 18

Current issues in labour market?

Answer 18

• Trade Union
• Gender pay gap
• Ageing population
• Skill shortages

Question 19

Minimum wage definition?

Answer 19

The minimum amount firms legally have to pay their workers

Question 20

Benefits of a minimum wage?

Answer 20

• Reduces poverty
• Increases productivity
• Increases incentives to accept a job
• Increased investment (labour more costly to firms will invest in productivity for max efficiency)
• Counterbalances effect of monopsony employers (e.g. NHS)

Question 21

Maximum wage definition?

Answer 21

For specified industries and jobs, wages cannot exceed a certain level

Question 22

Problems with a minimum wage

Answer 22

Unemployment if above labour market equilibrium (excess supply, not enough demand for labour)
- Regional variations in wages
- Higher wages passed onto consumers
- Incentive to work in black market for firms

Question 23

Arguments for a maximum wage?

Answer 23

• Helps reduce costs for firms
• Regulates worker’s excess monopoly power
• Prevents skilled labour from entering professions with highest paid jobs (e.g. all graduates becoming lawyers leading to lack of doctors/engineers etc.)

Question 24

Arguments against a maximum wage?

Answer 24

Limits income of high earners and government gets nothing in return

Disincentives work

Question 25

Elasticity of labour supply?

Answer 25

Measures the responsiveness of labour supply to a change in the wage rate

Low skilled occupation = elastic labour supply
High skilled occupation = inelastic labour supply

Question 26

Elasticity of demand for labour?

Answer 26

Measures responsiveness of demand for labour to changes in the wage rate

Elastic => ↑ wage rate = aggressive cutback on employment and ↓ wage rate = rapid expansion