3.5 Labour markets

Question 1

What does the demand for labour represent

Answer 1

The demand for labour show the quantity of labour that employers wish to hire at each possible wage rate

Question 2

What does the demand for labour depend on

Answer 2

The demand for labour is a derived demand
This means that it depends on the demand for goods/services

Question 3

marginal revenue product

Define MRP

Answer 3

The extra revenue generated when an additional worker is hired

Question 4

marginal revenue product

How to calculate MRP

Answer 4

MRP= MPP x MR

MPP- the output from each worker

Question 5

Why is wages and quantity of workers an inverse relationship

Answer 5

SR- law of diminishing returns
LR- substituability of labour + capital (all FoP are variable)- employ cheaper capital relative to labour as it is more cost effective

Question 6

What is the shape for labour curve determined by and explain why

Answer 6

• Diminishing marginal returns/ productivity
  SR–> 1 FoP (capital/ factory) is fixed
  Specialisation, demand of labour MRP increases
  Fixed FoP, MRP falls

Question 7

Define PED of labour

Answer 7

This is the responsiveness of the quantity demanded of labour to the wage rate

Question 8

How does the PED for a product affect the PED of labour

Answer 8

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

Question 9

How does proportion of wages to the total CoP affect the PED of labour

Answer 9

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.

Question 10

How does substitutes affect the PED of labour

Answer 10

If there are many 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.

Question 11

How does time affect the PED of labour

Answer 11

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.

Question 12

Define labour supply

Answer 12

The number of hours people are willing and able to supply at a given wage rate

Question 13

Why is the labour supply curve upward sloping

Answer 13

As wages rise, other workers enter this industry attarcted by the incentive of higher pay

Question 14

How does population and distribution of age influence the supply of labour

Answer 14

A high population will mean there is a large supply of labour. The distribution of age is important as there needs to be many people of high working age to ensure there is lots of labour. Migration plays a role in
determining the workforce, since many migrants are of working age and come to the UK to work

Question 15

Non-financial rewards for a worker supplying their labour for a firm

How does non-monetary benefits influence the supply of labour

Answer 15

Supply of labour will increase if there is high job satisfaction, for example in vocational jobs. Some jobs are attractive because they are close by or in an area with good social life, such as London, require little
commuting or are near friends and family. Similarly, some jobs offer perks such as free private healthcare etc. which will increase supply. Factors such as holiday, hours of work, flexibility and opportunities for promotion also play a significant part.

Question 16

How does education/training/qualifications influence the supply of labour

Answer 16

More educated workers means there is a higher supply of workers. This is particularly important for some industries which require qualifications. Occupations which require high levels of education may suffer from
lower supply of labour compared to low skilled jobs.

Question 17

How does trade unions and barriers to entry influence the supply of labour

Answer 17

Trade unions may be able to restrict the supply of labour by introducing barriers to entry, for example you have to have a degree for teaching.

Question 18

How does wages and conditions of other jobs influence the supply of labour

Answer 18

Comparative wage rates in substitute labour markets strongly influence the supply of labour e.g. it is getting harder to recruit economics teachers as the private sector offers higher wages for their skills

Question 19

How does legislation influence the supply of labour

Answer 19

School leaving age: If it falls, higher supply of labour
Retirement age: If it falls, lower supply of labour as people retire early

Question 20

Define reservation wage

Answer 20

Lowest pay rate at which people are willing to work in an occupation

Question 21

increase in wages= increase opp cost of leisure

How does higher wages lead to positive substitution effect and negative income effect

Answer 21

• Positive substitution effect between work and leisure. Higher wages means workers substituting more work for leisure
• Negative inome effect between work and leisure. Higher wages means workers supply less work as they can worker fewer hours for the same income

Question 22

labour supply curve

Define income effect

Answer 22

The rise in income as wages rise but with the potential of individuals reaching a target income (+ve or -ve)

Question 23

labour supply curve

Define subsitution effect

Answer 23

As wages rise, the opp cost of leisure time increase providing an incentive to work (always +ve)

Question 24

Responsiveness of supply to a change in wage rates

How does education/ qualifications influence PES of labour

Answer 24

• Specific skill and educational requirements make labour supply inelastic
• Lengthy and costly training periods makes labour supply wage inelastic
• When the minimum skill factor needed is realtively low, then the pool of available labour will be large, making labour supply more elastic

Question 25

Responsiveness of supply to a change in wage rates

How does time influence PES of labour

Answer 25

• In the SR, the supply curve for labour to a particular occupation is relatively inelastic
• It takes time for people to respond to changes in relative wages and earnings available- especially if people need to be re-trained in order to successfully eneter a new occupation

Question 26

Define geographical immobility of labour

Answer 26

Where workers in an economy find it difficult to move from one region to another

Question 27

Define occupational mobility

Exists when there is a skills shortage

Answer 27

Workers are not equipped for different types of work. e.g. a coal miner cannot easily transfer to become an accountant

Question 28

Perfect competitive labour market

Firms are looking to maximise revenue from workers will hire workers until…

Answer 28

MRP=Wages (MCl)

Question 29

Reasons for wage differentials

Answer 29

• Elasticity of supply: inelastic workers will earn higher wages, elastic lower
• Trade unions use collective bargining to increase the wages of members
• NMW and anti-discrimintaion legislation
• The value of their human capital

Question 30

Define non-competitive labour markets

Answer 30

Firms and labour have the power to influence wage rates
Labour market imperfection is influenced by monopsony power, trade unions and imperfect infomation

Question 31

The effect of a monopsonist on labour markets

Answer 31

• The monopsonist employs Q1 of labour, where MC = MRP. If they employed more labour the additional cost of an extra worker would be greater than the additional revenue as MC > MRP. There will be an increase in unemployment in comparison to the perfectly competitive model of Q – Q1.
• At this output the supply of labour equates to a lower wage rate of WR1.
• Therefore, in a monopsony labour market, the employer can use market power to reduce both the relative wage rate and the level of employment below those that would exist in a perfectly competitive labour market

Question 32

Define trade unions

Answer 32

Trade unions are national organisations whose role it is to protect the welfare of their workers in terms of:
* Economic well being
* Working conditions

Question 33

Role of trade unions

Answer 33

• Representing employees/members in negotiations on pay and working conditions
• Protecting the interest of members when large scale changes are being made that threaten their job security
• Supporting members during any disciplinary or grievance procedures

Question 34

Explain the NMW diagram

Answer 34

• Imposition of NMW increases wage rate from W to W1
• Incentivised by higher wages, supply of labour increases
• Increased CoP, demand for labour falls
• Excess supply of labour
• Potential for real wage unemployment (Qd-Qs)

Question 35

Determinants of the elasticity of supply of labour

Answer 35

• Elasticity of supply of the product: higher supply of the product will increase the elasticity of supply for labour
• Time: the longer the time period the more elastic the supply curve as it is easier to substitute between factors of production and to change the contracts of workers
• Availability of substitutes: low skilled labour will be more price elastic
• Barriers to entry: many professions restrict workers from entering the labour force e.g. dentistry and accountancy by requiring experience and qualifications

Question 36

Determinants of the elasticity of demand for labour

Answer 36

• Elasticity of demand for the product: higher demand for the product will increase the elasticity of demand for labour
• Time: the longer the time period the more elastic the demand curve as it is easier it is to substitute between factors of production and to change the contracts of workers
• Availability of substitutes: the greater the number of substitutes the more elastic the demand curve e.g. a supermarket worker will be more elastic than a Premiership footballer
• Labour costs as a proportion of total cost: if labour costs are insignificant as a proportion of total cost then increased wages will not impact on the firm making labour inelastic

Question 37

Pros on the NMW

Answer 37

1. Higher AR and Mr for income elastic goods (labour as derived demand and more workers hired): some jobs created
2. Wage efficiency theory: with higher wages make workers work harder (higher Mrp: higher demand for labour)
3. Should reduce wage differentials
4. Could reduce opportunity cost related to welfare payments (govt can spend on other things)

Question 38

Cons on the NMW

Answer 38

1. Higher MC and AC, reducing SNP, innovation in long run (affect dynamic efficiency)
2. Some firms might be closer to shut down points and leave industry (market less contestable)
3. Firms might pass on higher costs to consumers (erosding consumer surplus)
4. Might entice higher income workers to demand higher wages

Question 39

Public sector wages

Answer 39

1. Average (mean) public sector pay was around£34,500 per year in mid 2024, compared with just over £36,000 for private sector employees.
2. The govt does independent pay reviews and set public sector workers’ wages
3. In a recession public sector wages tend to be higher than private sector

Question 40

How does investment in training programmes reduce labour immobility

Answer 40

• Increase investment in training programmes to raise quantity and quality of human capital and
  productivity
• Increase provision of modern apprenticeship schemes
• It may involve government subsidies or tax breaks to firms.

Question 41

How can retaining an ageing workforce reduce labour immobility

Answer 41

• Retain ageing workforce by improving working conditions and rates of pay
• Offer flexible working hours and part-time work
• Raise state retirement age
• Older workers have higher levels of human capital and so productivity could be increased.

Question 42

How can changing the industry image reduce labour immobility

Answer 42

Change industry image so it appeals to more female school leavers and graduates – this may
involve restructuring of careers advice, marketing programmes and information on career
paths and opportunities.

Question 43

Cons of retaining an ageing workforce to reduce labour immobility

Answer 43

Retain older workers could lead to problems of poor health and low productivity and ability to
learn new tasks. Also the underlying skilled labour shortage remains – eventually older workers will retire.