3.5 Labour Markets

Question 1

What does the demand curve for labour show?

Answer 1

The ​quantity of labour that employers would wish to hire at each possible wage rate

Question 2

What determines the demand for labour?

Answer 2

Marginal revenue product (of labour) MRP(L), the extra revenue generated by a single worker

The higher the MRP, the higher the demand for workers

Question 3

What does the law of diminishing marginal productivity mean for MRPL?

Answer 3

Increasing the number of workers, whilst all other factors are fixed, is likely to increase MRPL at first but then cause it to decline

Question 4

Why is the demand for labour assumed to be downwards sloping?

Answer 4

● In the long run, all factors of production vary, so high wage rates will encourage businesses to use machinery instead of workers
● In the short run, firms have fixed levels of capital and so diminishing MRP means that adding extra workers gives a lower return so to employ these workers, the wage rate has to fall

Question 5

How is MRP(L) calculated?

Answer 5

MRPL = marginal output x price/difference in total revenue

Question 6

Why is labour a derived demand?

Answer 6

It is derived from demand for the product the labour produces

Question 8

How do wage rates affect the demand for labour?

Answer 8

As wage rates increase, demand for labour contracts since the MRP of labour must be higher for it to be worthwhile employing more people, so less people are employed

Question 9

How does demand for the product affect the demand for labour?

Answer 9

Labour is a derived demand, if there is no demand for the product, there is no demand for the labour. Firms won’t employ people if the goods they make aren’t going to be sold and make a profit. An increase in demand for the product leads to an increase in demand for labour

Question 10

​By 2040, how many jobs could be lost to technology

Answer 10

​By 2040, about 47% of jobs could be lost to technology

Question 11

How can regulation affect the demand for labour?

Answer 11

High regulation within the labour market will likely discourage firms from hiring since it can be very costly and time-consuming, this will reduce demand for labour in these areas

Question 12

What are levels of labour regulation like in France?

Answer 12

​France is a country that used to have high levels of labour regulation and this is something the new president, Emmanuel Macron, is trying to change​

Question 13

How can the state of the economy affect the demand for labour?

Answer 13

● When the economy is in a poor state there will be less demand for the product
● State of the economy affects future expectations - if confidence is low, the business might start laying off workers and are less likely to employ more

Question 14

What is PED (regarding labour)

Answer 14

The ​responsiveness of the quantity demanded of labour to the wage rate

Question 15

What factors affect the PED of labour?

Answer 15

● It is ​directly correlated to the PED for the product the labour produces
● The ​proportion of wages to the total cost of production​
● Substitutes​ for labour
● Time also plays a role

Question 16

How can the PED of a product affect the PED of labour?

Answer 16

● 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 17

How can the proportion of wages to the total cost of production affect the PED of labour?

Answer 17

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 18

How can substitutes for labour affect the PED of labour?

Answer 18

● 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 19

How can time affect the PED of labour?

Answer 19

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 20

What does the supply of labour curve show?

Answer 20

The ​ability and willingness of people to make themselves available to work at different wage rates

Question 21

What factors can influence the supply of labour?

Answer 21

● Wages
● Population and distribution of age
● Non-monetary benefits
● Education/training/qualification
● Trade unions and barriers to entry
● Wages and conditions of other jobs
● Legislation

Question 22

How can population and distribution of age affect the supply of labour?

Answer 22

● A high population will mean there is a large supply of labour
● 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 23

How can non-monetary benefits affect the supply of labour?

Answer 23

​● 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, require little commuting or are near friends and family
● 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 24

How can education/training/qualifications affect the supply of labour?

Answer 24

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

Question 25

How can trade unions and barriers to entry affect the supply of labour?

Answer 25

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 26

How can wages and conditions of other jobs affect the supply of labour?

Answer 26

​If many jobs in a local area are considered to be unpleasant and offer low wages, then supply for alternatives will be higher

Question 27

How can legislation affect the supply of labour?

Answer 27

Government rules can affect supply of labour, for example school leaving age and the retirement age.

Question 28

What types of immobility can labour suffer from?

Answer 28

● Occupational immobility ● Geographical immobility

Question 29

What is occupational immobility of labour?

Answer 29

● 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

Question 30

What is geographical immobility?

Answer 30

Where workers find it difficult to move from one place to another due to the cost of movement, family etc.

Question 31

What are some potential reasons for geographical immobility?

Answer 31

● People will be unaware of job vacancies in other locations, it would be expensive to attend interviews and they would have to leave their family behind ● People may not be able to afford to buy a house in their new area. They may also struggle if they need to find social housing and it is difficult for young people, since they often do not have the money to move out of their parents’ home. ● In general, those on lower incomes are more geographically immobile.

Question 32

How can immobility of labour lead to market failure?

Answer 32

There can be excess supply ​of labour in one area/occupation and excess demand ​in another ## Footnote Even if wages are higher where there is excess demand, people will be unable to leave to get a job in that area/occupation because of their immobility.

Question 33

What is elasticity of supply of labour?

Answer 33

The ​responsiveness of supply to a change in wage rates

Question 34

What can affect the elasticity of labour supply?

Answer 34

● Level of qualifications and training ● Availability of suitable labour from other industries ● Time

Question 35

How can level of qualifications and training affect the elasticity of labour supply?

Answer 35

If there is a high level of qualifications necessary for the job, people will not easily be able to take up the job so the supply of labour will be inelastic

Question 36

How can availability of suitable labour from other industries affect the elasticity of labour supply?

Answer 36

If a company can ‘poach’ workers from other industries, then it will be more elastic

Question 37

How can time affect the elasticity of labour supply?

Answer 37

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

Question 38

How can government spending and tax affect the supply of labour?

Answer 38

High tax rates and high welfare benefits can reduce incentives and means there is a lower supply

Question 39

How can unemployment levels affect the elasticity of supply of labour?

Answer 39

High levels of unemployment make supply more elastic as the firm can increase the number of people it employs without having to raise wage rates significantly

Question 40

Why is the MC curve above the supply curve for labour in a monopsony market?

Answer 40

● Businesses know if they want to increase their labour force they will have to increase the wage they offer ● An increase in the wage for one increases the wage for all. ● Therefore, the MC curve is above the supply curve (AC) of labour because it costs more to employ an additional worker than the average cost of labour

Question 41

What point will a monopsonist firm decide to employ at?

Answer 41

● A firm will determine how many workers to employ where the cost of employing them is equal to the value of that worker to the company ● They employ where MC=D at Q1 and at this output, they will pay their workers W1 (determined by the S curve) ## Footnote Compared to a perfectly competitive market (which would produce at W2Q2), they employ ​less people at a lower wage rate​

Question 42

What is a trade union?

Answer 42

An organisation with members who are usually workers or employees, which protects the rights and pay of workers through a process of **collective bargaining** with employers ## Footnote The existence of trade unions means they can operate as the only seller of labour

Question 43

What are some of the aims of trade unions?

Answer 43

● Protect and improve the real incomes of their members ● Provide job security ● Protect workers against unfair dismissal ● Provide a range of other work-related services including support for people claiming compensation for injuries sustained in a job

Question 44

What ways can trade unions increase wages?

Answer 44

● Setting barriers of entry which would reduce supply - Teachers’ unions lobbied for a rule which means that all teachers must have degrees ● Setting wages at a specific wage and ensuring workers are not prepared to work for less, creating a kinked supply curve ## Footnote Both of these methods will lead to ​higher wages but cause a fall in employment

Question 45

What is an example of how trade unions increased barriers of entry to reduce supply?

Answer 45

Teachers’ unions lobbied for a rule which means that all teachers must have degrees

Question 46

What happens as a result of a trade union setting wages at a specific wage?

Answer 46

● Creats a kinked supply curve, seen in the diagram ( 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 ## Footnote This will lead to higher wages but cause a fall in employment from the perfectly competitive equilibrium of Q1W1

Question 47

What is a bilateral monopoly?

Answer 47

A scenario in a labour market in which there is a monopoly supplier of labour (i.e. a trade union) and a monopsony buyer of labour. The wage rate will depend on which of the monopoly or the monopsony is stronger in terms of relative bargaining power

Question 48

What are arguments for the national minimum wage?

Answer 48

● Able to ​reduce poverty as it mainly impacts the lowest wages and ensures that these people have enough to live on ● It can ​reduce male/female wage differentials as women are more likely to take up lower paid jobs (because they are vocational, offer more flexible hours etc.) ● Potentially a ​more content, motivated workforce, making the business more productive and increasing its profits. (assumes all people are ​motivated by money​ which is not necessarily the case) ● Provides incentive to work and prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive ● Ensures everyone receives a ​fair wage, ​and is not exploited by being drastically underpaid

Question 49

When does the unemployment trap happen?

Answer 49

When unemployed people are discouraged from taking a job because they might lose more money in welfare benefits & facing other costs (e.g transport, childcare) than they would earn from the job

Question 50

What are arguments against the national minimum wage?

Answer 50

● Potential ​loss of jobs in the industry (or unemployment on a macro level) ● It will ​raise costs for companies ​and so may increase their prices, which is likely to lead to a fall in profit. ● Potential ​wage spiral as individuals try to protect wage differentials between them and the lowest price workers. An increase in the wage of the lowest paid will mean that others expect theirs to rise too. This will reduce profit and further reduce competitiveness ● There is ​no consideration of regional differences​. This, alongside the fact many people on minimum wages are ​secondary earners​, means the minimum wage may be ineffective at reducing poverty

Question 51

How can the government try to improve geographical mobility of labour?

Answer 51

● Improve housing supply, (reduces property prices) making it easier for people to move. They could make renting cheaper e.g. rent caps to help people working in temporary jobs ● Improve transport links, allowing people to work further away from where they live. Also, it will be easier for them to visit family and get to job interviews ● National advertising​ so people know about jobs all over the country ● They could introduce subsidies on houses in ​areas with labour shortages to encourage people to move to the area and take up jobs ## Footnote One action taken has been to move public agencies out of London, e.g. the DVLA was moved to Swansea. Although this doesn’t improve the mobility of labour, it helps to prevent excess demand for labour in one place and excess supply in another.

Question 52

What are drawbacks of imposing a maximum wage?

Answer 52

● Can lead to ​excess demand within the industry, as people may not put themselves forward for the job if they don’t think the salary matches the stress and responsibilities or they know they could get higher wages abroad ● The UK may suffer from a ​loss of the best workers​, which will reduce the quality of businesses and decrease competitiveness ## Footnote (depends on elasticity of supply)