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 in SR and LR

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 demand 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

Factor influencing demand for labour

Answer 7

1. The price of the good or service: The higher the price of the good or service, the more profitable it is for firms to produce it, and the more labour they will demand.
2. Productivity of labour: The more productive workers are, the more output they can produce per hour, and the more labour firms will demand.
3. The cost of labour: The higher the cost of labour, the less profitable it is for firms to hire workers, and the less labour they will demand.
4. The cost and availability of substitutes: If there are good substitutes for labour, such as capital or automation, firms will be less likely to demand labour.
5. The level of technology: The higher the level of technology, the more productive workers can be, and the more labour firms will demand.
6. The level of government regulation: The more regulations there are on businesses, the more costly it is for them to operate, and the less labour they will demand.
7. The level of economic activity: The higher the level of economic activity, the more goods and services are being produced, and the more labour firms will demand.

Question 8

Define PED of labour

Answer 8

This is the responsiveness of the quantity demanded of labour to a change in the wage rate

Question 9

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

Answer 9

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 10

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

Answer 10

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 11

How does substitutes affect the PED of labour

Answer 11

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 12

How does time affect the PED of labour

Answer 12

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 13

Factors that shift demand for labour curve

Answer 13

• Demand for the product
• Prices of other FoP
• Wages in other countries
• Technology
• Regulation
• Economy

Question 14

Factors that shift supply of labour curve

Answer 14

• Population and distribution of ade (people of working age- retirement age)
• Non monetary benefits (perks)
• Education/ training/ qualifications
• Trade unions and barriers to entry
• Wages and conditions of other jobs
• Legislation

Question 15

Wage changes causes a…

Answer 15

Contraction or extension

Question 16

Define labour supply

Answer 16

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

Question 17

Why is the labour supply curve upward sloping

Answer 17

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

Question 18

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

Answer 18

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 19

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

How does non-monetary benefits influence the supply of labour

Answer 19

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 20

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

Answer 20

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 21

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

Answer 21

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 22

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

Answer 22

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 23

How does legislation influence the supply of labour

Answer 23

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

Question 24

Define reservation wage

Answer 24

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

Question 25

# increase in wages= increase opp cost of leisure How does higher wages lead to positive substitution effect and negative income effect

Answer 25

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

Question 26

# labour supply curve Define income effect

Answer 26

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

Question 27

# labour supply curve Define subsitution effect

Answer 27

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

Question 28

Define PES of labour

Answer 28

Responsiveness of quantity supply to a change in wage rates

Question 29

# Responsiveness of supply to a change in wage rates How does education/ qualifications influence PES of labour

Answer 29

* 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 30

Why does education/ training/ work experience influence supply of labour

Answer 30

One factor may be the level of training, qualifications, skills or work experience required. If there's a higher level of skills and qualifications required- supply of labour may fall. Many technical jobs, require certifications, degrees, and apprenticeships. The long duration of education and experience required acts as a barrier to entry. As a result, fewer individuals meet the entry requirements, restricting the supply of labour in the short and medium term. Potential workers may opt for alternative jobs that require fewer qualifications but offer similar or better wages. If the opportunity cost (e.g., spending years in training instead of earning a salary) is too high, fewer people will enter the industry. This diverts workers to other sectors with lower barriers to entry.

Question 31

# Responsiveness of supply to a change in wage rates How does time influence PES of labour

Answer 31

* 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 32

Define geographical immobility of labour

Answer 32

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

Question 33

Define occupational immobility | Exists when there is a skills shortage

Answer 33

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

Question 34

# Perfect competitive labour market Firms are looking to maximise revenue from workers will hire workers until...

Answer 34

MRP=Wages (MCl)

Question 35

Reasons for wage differentials

Answer 35

* 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 36

Define non-competitive labour markets

Answer 36

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

Question 37

The effect of a monopsonist on labour markets

Answer 37

* 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 38

Define trade unions

Answer 38

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 39

Role of trade unions

Answer 39

* 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 40

Determinants of the elasticity of supply of labour

Answer 40

* **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 41

Determinants of the elasticity of demand for labour

Answer 41

* **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 42

Define NMW

Answer 42

the legal minimum hourly rate of pay employers can set (a price floor that firms must pay their workers)

Question 43

Explain the NMW diagram

Answer 43

* 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 44

Pros on the NMW

Answer 44

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 45

Cons on the NMW

Answer 45

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 (eroding consumer surplus) 4. Might entice higher income workers to demand higher wages

Question 46

Public sector wages

Answer 46

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 47

How does investment in training programmes reduce labour immobility

Answer 47

* 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 48

How can retaining an ageing workforce reduce labour immobility

Answer 48

* 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 49

How can changing the industry image reduce labour immobility

Answer 49

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 50

Cons of retaining an ageing workforce to reduce labour immobility

Answer 50

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.

Question 51

Define diminishing marginal productivity of labour

Answer 51

Diminishing marginal productivity means for an additional unit of labour the additional increase in productivity declines

Question 52

MRP criticisms

Answer 52

1. Difficulties in measuring MRP 2. Teamwork makes it difficult to measure MRP individually 3. Calculation for the self employed can be problematic 4. Imperfect labour markets – where MRP theory breaks down.

Question 53

Define brain drain

Answer 53

The loss of human capital from one area to another or from one industry to another