3.5 Labour Markets Flashcards
What is MRPL (Marginal Revenue Product of Labour)
MRPL = marginal physical product * marginal revenue
What does the demand curve for labour show
how many workers will be hired of any given wage rate over a given period of time
What is demad for labour derived from
The need to expand output to satisfy demand; goods need workers to make
What is the optimal wage rate
MC (marginal cost) = MRP (marginal revenue product)
How does the diminishing marginal returns affect MRPL
As workers increase, ceteris paribus, MRP will increase at first then decline
Why is the demand for labour assumed to be downward spending
- Short run fixed levels of capital so diminshing marginal returns means adding extra workers gives a lower return so they are woth a lower wage rate
- Long run, all factors of prod. vary, high wage rates will encourage businesses to use machinery instead of workers
What are the 6 main factors influencing demand for labour
- Wage Rates
- Demand for the product
- Price of other factors of production
- Wages in other countries
- Technology
- Regulation
How do wage rates influence demand for labour
same influence on demand for labour as price has on the demand for a product
Higher wage means contraction of demand
How does demand for the product influence demand for labour
if there is no demand for the product, there is no demand for the labour.
How does prices of other factors of production influence demand for labour
If machinery and equipment becomes cheap, people will switch machinery for labour and therefore the demand for labour will fall.
How do wages in other countries influence demand for labour
people will be employed in other countries as it represents a lower cost for businesses. This means that demand in the UK is low.
How does technology influence demand for labour
less demand for labour, but demand for labour in technological based industries is increasing. By 2040, about 47% of jobs could be lost to technology.
How does regulation influence demand for labour
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
What is price elasticity of demand for labour
responsiveness of the quantity demanded of labour to the wage rate
% change in quantity demanded for labour/ % change in the wage rate
What are some factors affecting PED of labour
- PED of product
- Propotion of wages to the total cost of production
- Subsitutes
- Time
How does PED of the product affect PED of labour
If the good is elastic, then a rise in wages and hence a rise in prices for consumers will have a large impact on the quantity the business sells. This will mean that the business will reduce the number of people it employs, in order to help it make a profit.
direct correlation
How does the proprtion of wages to total costs affect PED of labour
- if wages are a huge proportion of costs, then an increase in wages will increase costs massively and so there will be a large fall in demand for labour hence it will be elastic.
direct correlation
How do substitues affect PED of labour
substitutes, such as machinery and labour in other countries, then the demand will be elastic.
This means high skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced.
How does time affect PED
In the long run, it is more elastic as machinery can be developed and jobs can be moved whilst
in the short run firms have to employ workers and redundancy payments can be expensive.
What is does the supply of labour curve represent
The labour supply is the the ability and willingness of people to make themselves available to work at different wage rates.
What are the 7 main factors affecting the supply of labour
- Wages
- Population/distribution of age
- Non-monetary benefits
- Education
- Trade unions and barriers to entry
- Wages and conditions of other jobs
- Legislation
How do wages influence the supply of labour
- Through either offering more hours or getting new workers, higher wagese wil incentivise more workers
How do population/distribution of ages influence the supply of labour
- High population ensures large supply
- Distribution of age is important to also ensure this
- Migration rienforces working force (75% of child-bearing age) and boost young people
How does non-monetary benefits influence the supply of labour
- Supply will increase from high job satisfaction
- this may be due to being close to family or offer perks like free healthcare/ flexible hours
How does education influence the supply of labour
More educated workers means a higher supply of workers in skilled labour or just generally being able to overcome barriers to enter
How do trade unions and barriers to entry influence the supply of labour
- Can increase job satisfaction through security and higher wages
- Restrict supply of labour by introducing barriers e.g. need degree to teach
How do wages and conditions of other jobs influence the supply of labour
If many jobs in a local area are considered to be unpleasant and offer low wages, then supply for alternatives will be higher.
How does legislation influence the supply of labour
The government rules can affect supply of labour, for example school leaving age and the retirement age.
What is occupational immobility
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
What is geographical immobility
they find it difficult to move from one place to another due to the cost of movement, family etc.
Those on lower incomes are more geographically immobile.
How does labour immobiliy cause distortions in the market
mmobility can mean that there can be excess supply of labour in one area/occupation and excess demand in another.
Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation because of their immobility.
Explain the UK skill shortage
The UK suffers from a severe skills shortage and this could cost £90bn a year following Brexit.
There are four million too few high skilled people but six million too many low skilled people. Engineering is one industry suffering particularly badly from skills shortages.
Define elasticity of supply of labour
responsiveness of supply to a change in wage rates.
What is elasticity of supply of labour based on
● Higher skill requirement reduces elasticity
● Similarly, it can depend upon the availability of suitable labour in other industries , for example if a company can ‘poach’ workers from other industries, then it will be more elastic
● Moreover, it depends on time as in the long run supply of labour will be more elastic as people will have time to train. If the job is vocational, it will be inelastic since even if wages fall people won’t leave the job.
What are the 2 assumptions to why the labour supply curve is upwards
- Workers may be attracted into industry from related jobs
- Workers previously employed in this occupation may be attracted back e.g. they decided to end a period of economic inactivity
What causes ana outward shift in labour supply
- Net inward migration of suitable qualified / experienced workers
- Fall in relative pay/earnings in substitute occupations
- **Lower entry barriers **to this particular job such as minimum professional qualifications
- Demographic factors causing a rise in the active labour supply
What causes an inward shift in labour supply
- Brain drain effects – an economy loses skilled workers overseas
- Decline in non-monetary rewards associated with the job e.g. job dissatisfaction / stress
- Fall in relative pay in this occupation compared to other jobs / rise in min qualifications
What is the income effect in wages
Positive income effect: Higher wages –> incentivise to work more hours (to reach a target income)
Negative income effect: Target income reaches so higher wages –> incentivises working less hours
What is the substitution effect in wages
- A rise in the real wage increases the opportunity cost of leisure
- Therefore higher wages will always cause people to be incentivized to work longer hours via the substitution effect
But the income effect may work in the opposite direction
Draw the effect of both the substitution effect and the income effect
Backwards bending supply curve
How does the average and marginal cost of labour interact with employment
f a firm can employ each additional worker at the same wage rate, then the average and marginal cost of labour will be the same
If the firm has to pay higher wages to attract more workers, then the average cost of labour rises and the marginal cost of labour will be above ACL. This is since raising wages for one worker means raising wages for workers
What is occupational immobility and structural unemployment
when there are barriers to the mobility of factors of production between different industries leading to these factors remaining unemployed, or being used inefficiently
structural UE is when applied to a whole industry
What is geographical immobility
Geographical immobility refers to barriers people moving from one area to another to find work.
What are reasons for occupational and geographical immobility
- Family and social ties – older people more reluctant to move
- Financial costs involved in moving home; no affordable housing, differences in costs
- Migration controls e.g. possible caps on inward migration
- Cultural and language barriers to living and working overseas
What are Policies to improve occupational mobility
- Better funding for and more effective workplace training
- Teaching new skills e.g. Computing skills
- An expansion of apprenticeship / internship programmes
What are policies to improve geographical mobility
- Rise in house-building will help to keep property prices lower and encourage more affordable rents
- Active regional policy to create new jobs and businesses
What policies stimulate stronger work incentives
- Higher minimum wage or a living wage
- Reductions in income tax / national insurance
- Welfare reforms to reduce the risk of the poverty trap
What causes wage rates to differ in an occupation
- age
- education
- training
- work experience
- skill/talent/ability to perform tasks
- sex
- ethnic background.
What is illegal to discriminate wages by
sex and ethnic background
How does the immobility of labour impact wages
excess supply in one area/occupation, causing low wages, and not enough workers in another, meaning high wages
What is a perfectly competitive labour market
- Same assumptions as perfect competition in products
- Therefore, 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.
*
What is a monopsony labour market
there is only one buyer of labour
How does a monopsony employ workers
They will employ to where:
Cost of employment (MC) = Value of worker to company (MRP/D)
At this quantity they will then use their monospony power to push the wages down to a wage determined by the Supply curve
Compared to a perfectly competitive market they employ less people at a lower wage
What is a monpoly in the labour market and how do they arise
- Only seller of labour
- existence of trade unions through a process of collective bargaining.
How do monopolies in labour markets (TUs) increase wages
1) They could set **barriers of entry **which would reduce supply. Teachers’ unions lobbied for a rule which means that all teachers must have degrees .
2) Alternatively, they could set wages at a specific wage and ensure workers are not prepared to work for less, creating a kinked supply curve as seen in the diagram (the grey line). Supply is perfectly elastic up to output of QS and if the company wanted to employ more than this, they would have to increase wages further.
The firm will employ where supply is equal to demand, at QDW2. Both of these methods will lead to higher wages but cause a fall in employment from the perfectly competitive equilibrium of Q1W1.
How did the Government reduce the power of Trade Unions
The government has introduced **postal ballots, outlawed secondary picketing, restricted the size of the picket line and forced unions to provide 14 days’ notice of action. **
The Trade Union Act 2016 clause saying that at least 50% of people must vote in the ballot
What is a bilateral monopoly
both monospony and monopoly in the labour market
Explain the steps to arrive at a wage rate and draw a diagram for a bilateral monopoly
- The firm is a monopsonist and wants to employ at Q2W2.
- However, the union may decide to set a minimum wage at W1 and ensure that there is no one willing to work below this price, creating a kinked supply curve. The new MC and AC curves are the purple curves.
- The wage that is set will depend on the relative bargaining strength of both .
- In a time of economic recession and unemployment the unions may have less bargaining power and wage is most likely to be down at W1. In times of full employment, they may have the power to influence and wages could be at W3 .
What are the positive effects of a biliateral monopoly
they are able to increase wages to W3 without negatively impacting the number of workers. This increase in wages and employment is able to make the economy more efficient.
even at W1 that increases employment rather than decrease
What are the 7 main labour market issues
- Skills Shortage
- Young Workers
- Retirement
- Wage Inequality
- Zero-hour contracts
- The ‘Gig Economy’
- Migration
Explain the labour market issue of a ‘skills shortage’
Occupational and geographical issues mean there are a lack of engineers
shortfall of roughly 59,000 engineers every year.
Explain the labour market issue of ‘retirement’
Rising life expectancy and demographic shift as ‘baby boomers’ reach retirement
Retirement age will have to rise and pensioners makeup over 50% of welfare spending
Explain the labour market issue of ‘Wage Inequality’
Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages.
wealthiest 100 people in the UK have as much money as the poorest 18 million people, according to the Equality Trust.
Explain the labour market issue of ‘Zero-Hour contracts’
Nearly half (48%) of employers of zero-hours workers said that they do not compensate workers for shifts that are cancelled with less than 24 hours’ notice.
incentivises a lack of capital investment
Explain the labour market issue of the ‘Gig Economy
Many more people are now self-employed and undertake short term contracts, working for companies such as Uber and Deliveroo.
There are concerns over the rights of these workers and the unreliability of their pay each week.
What is the labour market issue of ‘migration’
people suggest that migration causes a fall in wages
With Brexit, drivers are also choosing not to return to the UK, as large numbers of them now prefer “EU stability” and the perspective of higher salaries working in France or Germany.
100,000 shortage in crucial HGV drivers in Septmeber 2022
What is the national minimum wage
a legally enforced lowest salary possible
What is the current minimum wage
What are arguments for the national minimum wage
- Reduces poverty and inequality
- Reduces gender wage differentials
- More content workforce makes the business more productive
- Prevents unemployment trap
What is the unemployment trap
benefits are higher than the wage people would otherwise receive.
What are some arguments against the national minimum wage
- Classical UE aka Real Wage Inflexibility; dependent on elasticity of supply and demand
- Cost-push inflation/ lower profits so lower R+D
- No consideration of regional differences
- Dependent wether it is above or below current wage
What is efficiency wage theory and draw the graph
increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay.
Therefore if firms increase wages – some or all of the higher wage costs will be recouped through increased staff retention and higher labour productivity.
What are reasons for efficiency wage theory
- Fear of losing jobs – “Shirking model”
- Loyalty
- Labour market ‘Gift Exchange’
- Lower costs of supervision
- Attract higher quality labour
- Nutritional +healthcare
How does the Shapiro and Stigliz’s shirking model contribute to efficiency wage theory
if workers are paid a relaatively higher wage, they have more to lose from being made redundant.
Shapiro and Stiglitz posited that workers with a higher wage will work at an effort level which involves no shirking. This wage is above market-clearing levels.
How does Akerlof’s Gift Exchange model contribute to the efficiency wage theory
labour market has a ‘gift exchange’ where good labour relations depended on goodwill. FIrms could pay wages above market-clearing levels, and in return, workers would take on more responsibility and initiative.
How does Rebitzer’s supervision argument contribute to efficiency wage theory
Rebitzer noted that lower wages were associated with higher levels of supervision. Workers receiving higher wages were more motivated and therefore needed less managerial supervision
What is the best example of minimum efficiency wages
in 1914 when Henry Ford introduced a five dollar day. Ford paid well above the market-clearing rate. He wanted to pay higher wages in order to:
- Ban unions. A condition for high pay was no trade unions
- Compensate for boring work on his efficient assembly lines. Ford increased productivity by the revolutionary use of assembly lines, but was worried a low wage, workers would get bored and stop working.
Raff and Summers (1986) concluded that Ford’s five dollar day was consistent with what was expected of efficiency wage theories.
“There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day
What are the limits of the efficiency wage theory
- In practice, many factors determine worker morale and productivity, wages are just one of them. Often other factors are more important such as work conditions, management
- Wages are relative to similar positions by other firms
Firms with monopsony power may not need to pay higher wages to create the threat of workers losing their jobs.
What are maximum wages
A legally enforced limit on a wage
What are the positive and negative impacts of maximum wages
- Help to reduce inequality; max pay ratio to lowest earners
- Dependent on elasticities; chief executives are v inelastic so no effect
- Excess demand within industry –> loss of most productive workers
How do public wages and private wages vary in the short run and long run
SR:
* Gov. can make whatver wage it decideds e.g. 2010-15 pay freeze
LR:
* To incentivise workers to stay have to stay in line with private sector wage rises
How does monopsony theory apply in real life
Even if a firm is not a pure monopsony, it may have a degree of monopsony power, due to geographical and occupational immobility’s
They will also often have a degree of monopoly selling power
What are examples of monpsony in product markets
· Supermarkets have monopsony power in buying food from farmers. If farmers don’t sell to the big supermarkets, there are few alternatives.
· Amazon.com is one of the biggest purchases of books. If publishers don’t sell to Amazon at a discounted price, they will miss out on selling to the biggest distributor of books.
What did Thatcher do to Trade Unions
Thatcher banned wildcat strikes (instant strikes) and secondary picketing (sympathy strikes) and introduced secret ballots to remove intimidation to get workers to strike.
TU action can still consist of:
- Announced Strikes
- Introducing overtime ban
- Work to rule (working to the contract and no extra)
How do Trade Unions negotiate higher wages
- Will likely neogitate productivity deal; changing working practices, training and capital to increase MRP of the workforce
Draw the effect of a productivity deal
Diagram shows that as MRP rises, more workers could now be employed at the TU wage, contrary to the opinion that the TU will increase wage rate at the expense of employment.
This should protect against redundancy
Explain why MC=AC=Ls
TU now enters a monopsony market and through collective bargaining now raises the wage to w/pTU.
The agreed wage becomes the standard for the industry/firm, therefore MC = AC = LS.
This is because the cost of employing the next worker is the same as the previous, meaning MC is constant and so is AC.
Explain why the firm won’t employ past Q(tu)
At this wage, QTU workers are prepared to work and the monopsony is happy to employ as MC is below MRP. If the monopsony wished to employ beyond the LS curve kink, a higher wage would have to be offered.
In offering a higher wage, all previous workers would have to be paid more and MC would discontinue and go above MRP. Therefore, the firm would not employ beyond QTU.
Explain the labour market issue of ‘Zero-Hour contracts’
Nearly half (48%) of employers of zero-hours workers said that they do not compensate workers for shifts that are cancelled with less than 24 hours’ notice.
incentivises a lack of capital investment
What causes ana outward shift in labour supply
- Net inward migration of suitable qualified / experienced workers
- Fall in relative pay/earnings in substitute occupations
- **Lower entry barriers **to this particular job such as minimum professional qualifications
- Demographic factors causing a rise in the active labour supply
