3.5 Labour market Flashcards
Explain derived demand for labour
The demand curve for labour shows how many workers will be hired at any given wage rate over a given time period
This type of demand is derived i.e. demand for labour is determined by demand for goods & services. If product demand is high, labour demand is high
Factors that influence demand for labour?
Demand (for product) – As demand for product increases, demand for labour increases
Productivity – Higher productivity of labour means firms will demand more labour. Firms will have to pay more for highly productive workers
Capital - price of capital – in LR firms may either hire more workers or purchase capital. If capital is more expensive, demand for labour will increase – shifting right
Labour regulation - High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas.
Factors that influence supply of labour?
1) Wage on offer in substitute occupations. Higher wages elsewhere will cause S to shift less – there will be less supply
2) Non-monetary benefits of job – e.g. holidays, healthcare, pension and security
3) Improvements in occupational mobility of labour (ability of workforce to move industry) – Higher mobility, higher supply, shifting it right
4) Migration - increases quantity of workforce
Whats the difference between occupational and geographical immobility of labour? (Labour market failure)
- Occupational immobility is where workers find it difficult to move from one job to another because of a lack of transferable skills.
- It is particularly difficult in the short term when workers need to get new training but in the long run it may only be possible at a high cost.
- Geographical immobility where workers find it difficult to move from one place to another due to the cost of movement, family, housing costs etc.
Effects of immobility of labour?
- Immobility can mean that there can be excess supply of labour in one area/occupation and excess demand in another
- The immobility of labour means that there may be excess supply in one area/occupation, causing low wages, and not enough workers in another, meaning high wages
Conditions for a perfectly competitive labour market?
In a perfectly competitive labour market, wages are determined purely by demand and supply and all workers are paid the same
If workers were not paid the same, they would simply move somewhere else where the wage rate in the industry was higher.
Monopsony in a labour market
In a monopsony market, there is only one buyer of the labour
They employ where MC=D at Q1 and at this output, they will pay their workers W1 (determined by the S curve), which is below what would be paid in a perfectly competitive market
Bilateral monopoly?
Where there is both a monopoly and monopsonist in the labour market (trade unions act as a sole seller of labour
Trade unions set a minimum wage, causing a kinked supply curve
Trade unions can, therefore, increase wages and employment - there is no trade-off
3 current labour market issues?
- Skills shortages: UK suffers engineering skills shortage - 1.8 million engineers needed by 2025. Government announced 12 new institutes of technology in order to fill skills gap in key STEM areas
- Wage inequality: Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages. Gender pay gap
- Migration: migration causes a fall in wages but it allows employers to recruit from a larger pool of workers and helps to fill skills shortages.
Government intervention in labour markets - minimum wages
Minimum wages:
- The wage is able to reduce poverty. It can reduce male/female wage differentials
- Provides an incentive to work and prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive.
- However, can mean loss of jobs in the industry (excess supply) Minimum wage will raise costs for the companies so may increase their prices, which is likely to lead to a fall in profit and consumer surplus. Depends on ELASTICITY of labour
Government intervention in labour markets - public sector wage setting
- Between 2010 and 2015, public sector workers experienced a pay freeze - led to downward pressure on private sector wages (supply to private sector increased)
- in the long run, wages of public and private sector workers tend to rise by the same percentage (as a rise in private sector wages leads to shortage of supply in public sector)
Government intervention in labour markets - maximum wages
Maximum wages:
- The introduction of maximum wages may lead to excess demand within the industry. Workers may relocate abroad leading to a skills shortage
3 ways a government can tackle labour immobility?
- Geographical immobility:
- They could improve the supply of houses and reduce the price of properties (help to buy scheme helps people buy homes with 5% deposit) making it easier for people to move.
- They could improve transport links (HS2) which will allow people to work further away from where they live
Occupational immobility:
- UK apprenticeship levy of 0.5% on medium to large firms in order to increase funding for apprenticeships - develops human capital and gives workers necessary skill that can be transferable
Factors influencing elasticity of labour demand?
1) Substitutability of labour for capital – if capital is cheaper and easily substitutable, demand will be elastic as an increase in wages means much less labour is demanded – capital is cheaper
2) Elasticity of demand for the product. If price inelastic, then it’s wages inelastic. If price elastic, then its wage elastic
3) Time period – in long run it’s easier to use capital – wage elastic - in the SR capital is harder so wage inelastic
Factors influencing elasticity of labour supply?
1) The levels of qualifications and training required - a high level of qualifications necessary for the job means people can’t easily take up the job so the supply of labour will be inelastic.
2) Length of training period e.g. Medicine could make supply inelastic
3) Vocation – high passion for job – more inelastic as you’re less likely to leave job
