3.5 - Labour Market Flashcards
What does excess supply show in the labour market?
Unemployment
What is the difference between the income and substitution effect? (individual supply curve)
- Substitution effect: with higher wages, workers will give greater value to working than leisure - there is a higher opportunity cost of not working -> more hours to be worked as wages rise
- Income effect: after wages rise, workers may work less as they can get their target income with fewer hours spent working
What is elasticity of labour demand and what factors affect it?
- How responsive demand for labour is to changes in wages
- Substitutes
- % of total costs
- Time (LED)
How do substitutes affect LED? Give examples.
- How easy it is to substitute/replace workers when their wages go up
- McDonald’s workers = elastic (easily substituted)
- Footballers = inelastic (hard to substitute)
How does % of total costs affect LED? Give examples.
- What % of total costs is made up by workers’ wages
- If wages are a small % - any wage increase -> unresponsive -> inelastic
- Wages are a large % e.g. barbers -> elastic
How does time affect LED?
- If wages rise in the SR -> inelastic demand - not enough time to find substitutes
- LR = elastic
- In the SR wages will be higher and demand will be more inelastic
What factors affect LES? Give examples of different job sectors.
- Skills & qualifications
- Unemployment levels
- Time
- Inelastic - if NHS raises heart surgeon wages supply will be unresponsive - takes 15yrs to train
- Elastic - waiters
How do skills and qualifications affect LES? Give real world example.
- Few skills e.g. supply of McDonald’s workers is elastic - an increase in wages -> easy to get employed -> increased QS -> elastic (£7.20 p/h)
- Lots of skills e.g. heart surgeon -> inelastic (SR)
How do unemployment levels affect LES?
Give case study examples.
- High unemployment e.g. Greece 2017 = 25% -> elastic labour supply - a rise in wages -> increased QS of labour -> elastic
- Low unemployment e.g. 3.7% unemployment rate in Switzerland + unemployed entitled to £10,000 in benefits
- UK = 4.4%
How does time affect LES?
- SR -> supply is inelastic - little time to apply & train
- LR -> supply is elastic
What are the reasons for labour market shifts in supply and demand?
- Derived demand
- Productivity
- Capital costs
- Migration
- Income tax & benefits
- Non-pecuniary benefits
- Education & training
- Extra: advertising (affects supply)
How does derived demand lead to labour market shifts?
Give examples.
- If demand for houses rises -> demand for builders rises -> increases wages -> increases quantity of labour
- Demand for a factor of production derived from a G/S
- Examples: actors & films, plane tickets & pilots
How does productivity lead to labour market shifts (use the example of woodcutters)
Evaluate?
- Woodcutters given chainsaws instead of saws -> demand for woodcutters rises as each woodcutter can create more profit for a firm
- Increased productivity -> woodcutters produce more wood -> need fewer workers
How do capital costs lead to labour market shifts?
Give examples.
- Capital and labour are substitutes
- If capital costs fall -> fall in demand for labour
- E.g. self-service machines, cheaper AI in finance
How does migration lead to labour market shifts?
Give a case study example.
- Inward migration from abroad -> increased labour supply
- In 2016, 333,000 left Romania -> decreased labour supply
How do income tax and benefits lead to labour market shifts?
Give real world example.
Suggest an eval.
- In 2016, Conservatives wanted to cut benefits by £6000/yr in order to increase labour supply of skilled workers
- Fall in benefits -> less to spend -> increased labour supply
- In 1974 , top bracket for income tax was increased to 83% -> reduces take home pay -> reduces incentive to work -> reduces supply of highly skilled workers
- Eval: increased income tax -> must work more hours to earn the same income after tax -> rise in labour supply
How do non-pecuniary benefits lead to labour market shifts?
Give examples.
- Increased non-pecuniary benefits (work is more appealing) -> increased supply -> decreased wages
- High non-pecuniary benefits -> firms get away with low wages -> workers are incentivised by other benefits
- Examples: gym membership, company car
How does education & training lead to labour market shifts?
- Increased education -> increased productivity -> demand fewer workers -> decreased demand
- Increased education e.g. new coding courses available online -> workers become more productive -> increased demand
- In 2016, the no. of students studying medicine increased by 16,000 -> increased labour supply
What is a monopsony?
When there is only one buyer in the market
How do monopsonies control wages?
Give case study examples?
- Only buyer -> negotiate lower wages -> no choice
- NHS controls over 90% of UK healthcare market -> can charge as little as £121/hr
- 7 main supermarkets often collude -> act like a monopsony -> offer farmers lower prices
What is a trade union?
Give an example.
- A group of workers who collectively bargain to improve employee welfare
- E.g. National Union of Teachers - 400,000 teachers total
What is occupational immobility?
- Workers can’t move between different jobs as they lack the skills needed -> unemployment - resources aren’t used efficiently -> labour market failure
What is geographical mobility?
- Workers struggle to move between different areas due to housing costs, family ties etc
- Can’t move to fill new jobs -> unemployed -> capable workers aren’t being employed
What are some solutions to geographical immobility?
- Improved transport
- Relocation subsidies
What are some solution for occupational immobility?
- Apprenticeship scheme
- Tax breaks for workers willing to retrain/ move sectors -> financially easier to change careers
Eval: May mostly benefit higher-income earners, not low-skilled workers who need it most - Vocational Courses & Technical Education: expand access to BTECs, T Levels, or STEM courses
- Digital bootcamps
What is marginal revenue product?
The extra revenue generated when an additional worker is employed
What is the minimum wage as of 2025 (application)
- £11.44 -> £12.21 (21yrs+)
- £8.60 -> £10 (18-20yrs)
- £6.40 -> £7.55 (16-18yrs)
What are the advantages of a minimum wage?
- Workers should get a high enough wage to afford basic necessities -> reduces poverty e.g food, clothing
- Incentivises people to work & get off unemployment benefits
- It may increase the MRP of workers
- Minimum wage can improve worker morale & productivity
What are the disadvantages of a minimum wage?
- The introduction of a NMW reduces quantity demanded of low-skill labour -> lost jobs & sometimes worsening of inequality
- Increases firm’s costs
- It can decrease competitiveness
- It may not actually alleviate poverty - this is because many of society’s poorest are unable to work (e.g. elderly), so cannot benefit
- Setting the minimum wage below market equilibrium will have no effect
What is net advantage?
- The welfare that workers get from working - determined by both monetary & non-monetary factors
What are the reasons for wage differentials?
- Skill differences
- Location - wages differ by region
- Industry - some industries pay better than others
- Differences in Labour Productivity: more productive workers contribute more to output → higher MRP → higher wages e.g. tech developers in AI roles may be highly productive, earning premium salaries
- Trade unions - these can have an impact on wage rates
- Discrimination: wage differentials can exist due to gender, race or age discrimination – despite similar productivity e.g. gender pay gap persists in many UK sectors (e.g. finance)
- Elasticity of Labour Supply
If labour supply is inelastic (few can do the job), wages tend to be higher e.g. limited supply of pilots or dentists = higher wages
What are the disadvantages of a maximum wage?
- Can reduce motivation as many workers are incentivised by higher pay & promotions
- Workers may migrate abroad if they have higher earning prospects in other countries
- Some people think it’s unfair to limit the rewards a worker can gain
What are the advantages of a maximum wage?
- Can encourage hiring, often reducing unemployment levels
- Can prevent wages spiralling out of control
- Can reduce inequality (particularly if it’s combined with a minimum wage)
What is a monopsony?
- The sole employer of labour in a given profession e.g. teacher, nurses (UK)
- Wage makers
- Will maximise revenue from workers by hiring up to where MRP = MCL
- To employ an extra worker, they must increase wages for all -> MC is upward sloping & MC>AC
- Monopsonist reduces employment compared to competitive market + lower wages
- The lower the wages compared to MRP -> greater the monopsony power
What is a case study example of a maximum wage?
Labour’s Jeremy Corbyn suggested CEOs are paid a maximum of 20x the lowest paid workers
What is a case study reason against a maximum wage?
In 2016, top 1% of earners paid 25% of income tax revenue in the UK
