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: when an increase in wages -> workers to work fewer hours - they can get a higher income by working fewer hours so may work less - 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?
- 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?
- 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
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?
- 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
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
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%
- 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
- 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 mobility?
- 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
What is marginal revenue product?
The extra revenue generated when an additional worker is employed
