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Edexcel A - Microeconomics: Theme 1 & 3 > 3.5 - The labour market > Flashcards

3.5 - The labour market Flashcards

1
Q

Define the labour market

A

Includes the supply of labour by households and the demand for labour by firms.

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2
Q

Define wages

A

Representation of the price of labour, which provide an income to households and represent a cost to firms.

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3
Q

Define nominal wages

A

The money wages paid to labour in a given period in time.

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4
Q

Define real wages

A

Nominal wages adjusted to take into account changes in the price level (inflation).

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5
Q

Define the demand for labour

A

Quantity of workers an employer is willing and able to hire at a given wage rate in a given time period.

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6
Q

Explain the relationship between wages and the demand for labour

A
  • At higher wages, firms look to substitute capital for labour, or cheaper labour for the relatively expensive labour.
  • In addition, if firms carry on using the same quantity of labour, their labour costs will rise and their income (profits) will fall. For both reasons, demand for labour will fall as wages rise.​

[CHANGES IN WAGE CAUSES MOVEMENT ALONG CURVE]

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7
Q

State the non-wage factors that determine firm’s demand for labour

A
  1. Demand for the good/service
  2. Labour productivity
  3. Non-wage costs
  4. Profitability of firms.
  5. Substitutes to labour
  6. The number of buyers of labour
  7. Economic growth
  8. Time period considered
  9. Government policy

[CAUSE A SHIFT IN CURVE]

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8
Q

Explain how the demand for the good/service determine firm’s demand for labour

A

The demand for labour is a derived demand, which means it is derived from the demand for goods/services created by that labour. If consumers want more of a particular good or service, more firms will want the workers that make the product (and vice versa).

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9
Q

Explain how labour productivity determine firms’ demand for labour

A

Productivity means output per unit of input (in this case labour). If workers are more productive, they will be in greater demand. Productivity is influenced by skill levels, education and training, and the use of technology.​

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10
Q

Explain how non-wage costs determine firm’s demand for labour

A

This includes paying national insurance, health insurance, and potential redundancy pay. The higher such costs, the lower the demand for labour and vice versa. ​

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11
Q

Explain how the profitability of firms determine their demand for labour

A

Linked to non-wage costs is the profitability of firms. Firms which are just breaking even (AC=AR) are far less likely to increase their demand for labour than firms earning supernormal profits.​

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12
Q

Explain how subs to labour determine firm’s demand for labour

A

The extent to which labour is indispensable also affects the demand for it. If substitutes, such as capital (machinery), become cheaper or more expensive, the demand curve for labour will shift to the left or right. For example, if the price of new technology falls there may be a reduction in demand for labour.

[EVAL - TO WHAT EXTENT LABOUR & CAPITAL ARE CLOSE SUBS OR COMPLIMENTS]

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13
Q

Explain how the number of buyers of labour determine firm’s demand for labour

A

Single buyers, monopsonists, are relatively common in labour markets. When a labour market is dominated by one employer, the total demand for labour tends to be lower than if there are many employers. In addition, there is a tendency for the monopsonist to offer a lower wage rate, as staff have little choice to work elsewhere. This is one reason why trade unions form, and exert pressure for higher wages.​

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14
Q

Explain how economic growth determine firm’s demand for labour

A
  • When the economy is expanding (boom) there is likely to be a rise in demand for labour providing that the rise in output is greater than the increase in labour productivity.
  • During a recession or slowdown, demand for labour will decline as businesses look to cut their operations’ costs and scale back on production.
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15
Q

Explain how the time period considered determine firms’ demand for labour

A

In the short run, one or more factors of production is variable (often labour), while in the long run all factors of production are variable. Depending on the circumstances and linked to point 6, if a firm purchases more capital resources, in the long run demand for labour could diminish.​

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16
Q

Define the supply of labour

A

The number of hours that existing and new workers are willing and able to supply at a given wage rate at a given period of time.​

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17
Q

State the relationship between wages and the supply of labour

A

The higher the wage rate, the higher the quantity of labour supplied, which means the supply curve of labour will slope upwards. A worker’s wage, along with any bonus, provides the main monetary benefit from working.​

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

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18
Q

Explain how wages in substitute occupations determine individuals’ supply of labour

A

Workers may decide to supply their labour in substitute industries, if wage rates are higher.

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19
Q

State the non-wage factors that determine individuals’ supply of labour

A
  1. wages in sub occupations
  2. demographic factors, e.g. size of working population
  3. net migration of labour
  4. non-wage benefits of working
  5. improvements in the occupational mobility of labour
  6. changes in social welfare payments
  7. presence of trade unions
  8. social trends
20
Q

Explain how demographic factors determine individuals’ supply of labour to an industry

A

The working population is the number of people of working age who are willing and able to work. If this increases, the supply of labour will.

The size of the working population is influenced by the retirement and school leaving ages, migration, and numbers attending university.

21
Q

Explain how the net migration of labour determine individuals’ supply of labour to an industry

A

When the number of immigrants is larger than the number of emigrants, a positive net migration rate occurs and the labour supply rises.

22
Q

Explain how the non-wage benefits of working determine individuals’ supply of labour to an industry.

A

Improvements in fringe benefits can raise the supply of labour, EG positive changes in working conditions, job security, holiday entitlement, promotion prospects, and other psychological benefits of work. ​

23
Q

Explain how improvements in the occupational mobility of labour and stock of human capital determine individuals’ supply of labour

A

“Occupational mobility” refers to the ability of labour to switch between different occupations.

It is affected by the level of transferable skills and educational requirements of jobs.

As a result of the expansion of apprenticeships and other types of work experience, it could be argued that the supply of labour will increase as workers become more skilled and can therefore switch between occupations.​

24
Q

Explain how changes in social welfare payments determine individual’s supply of labour

A

Free marketeers (Hayek, Smith) argue that by reducing unemployment benefit, it forces individuals to return to the labour market in order to obtain a satisfactory standard of living.

25
Q

Explain how the presence of trade unions determine individuals’ supply of labour

A

If a TU is in operation in a particular industry, it may increase the labour supply, as the promise of collective (rather than individual) bargaining creates certainty for the worker in terms of pay and conditions.​

26
Q

Explain how social trends determine individuals’ supply of labour

A

For example, changes in attitudes towards equality in the workplace can cause the supply of labour to rise over time.

27
Q

State the factors that affect the trade off between work and leisure

A

1) Substitution effect
2) Income effect
3) Age
4) Direct taxes
5) Dependency ratio
6) Non-labour income

[3-6 EVAL POINTS TO 1-2 WHICH ASSUME THAT WE HAVE THE FLEXIBILTY TO CHOOSE THE NO. OF HRS WE WORK]

28
Q

Explain how age affects the trade off between work and leisure

A

Older workers often gain more utility from leisure, therefore willing to supply less labour.

29
Q

Explain how direct taxes affect the trade off between work and leisure

A

Higher income tax rates may increase the utility of leisure and reduce the supply of labour supply.

30
Q

Explain how the dependency ratio affects the trade off between work and leisure

A
  • Having children may increase the utility of work, and increase the labour supply.
  • Conversely, it may decrease the labour supply if childcare expenses make it more worthwhile to look after the child instead.
31
Q

Explain how non-labour income affects the trade off between work and leisure

A

Some individuals may have:
- Company pensions
- Asset income (e.g. sale or rental of property)
- Cash benefits (such as JSA & UC)
- Fringe benefits

these all may increase the want to gain utility from leisure.

32
Q

State the factors that affect the elasticity of demand for labour

A

1) Labour costs as a proportion of total costs

2) The ease and cost of substitution

3) The price elasticity of demand for the final output produced by a business

33
Q

Explain how labour costs as a proportion of total costs is a factor that affects the elasticity of demand for labour

A

When labour expenses are a high proportion of total costs (for e.g. in service jobs such as customer service centres or gas boiler repairs) then labour demand is more ELASTIC.

34
Q

Define the elasticity of demand/supply for labour

A

The responsiveness of the demand/supply of labour to a change in a wage rates.

35
Q

Explain an elastic demand for labour

A

Following a outwards/inwards shift in the supply of labour, a fall/rise in wage rates causes the demand for labour to rise/fall MORE than proportionately.

36
Q

Explain an inelastic demand for labour

A

Following a outwards/inwards shift in the supply of labour, a fall/rise in wage rates causes the demand for labour to rise/fall LESS than proportionately.

37
Q

Explain how the ease and cost of substitution is a factor that affects the elasticity of demand for labour

A

Labour demand will be more ELASTIC where labour and capital inputs are close substitutes. When specialised labour or capital is needed, then the demand for labour will be more INELASTIC with respect to the wage rate.

38
Q

State the difference between national and living minimum wage, the purpose + state the current rates

A

NATIONAL = The lowest hourly payment that can be legally paid for workers in the UK aged 21 and under.

Current rate - £11.44 and over

LIVING = “ “ aged 23 and over

Current rate - £10.42 and over

Purpose: To reduce inequality and the exploitation of workers un-skilled jobs.

39
Q

Define maximum wage + state its purpose

A

A cap on the level of hourly payment that can be legally paid for workers.

40
Q

Define geographical immobility

A

When workers find it difficult to move from one geographic area to another.

41
Q

State the reasons for geographical immobility

A
  • Not aware of available jobs in another place
  • Not able to afford to travel to another place
  • Not able to afford private accom in another place
  • Not able to move across borders, due to strict immigration policy
  • Family and cultural ties
  • The lower the income of an individual, the greater that housing is a barrier to mobility.
42
Q

Define occupational mobility

A

The ability of workers to transfer from one occupation to another.

43
Q

State the reason for occupational immobility of labour

A

Where a high degree of education, skill and training is required in a particular profession.

44
Q

State the imperfectly competitive labour markets

A
  1. The firm is a monopsonist i.e. a dominant buyer of labour, where there’s a large no. of workers.
  2. The firm is faced with a monopoly supplier of labour i.e. trade union
  3. Both i.e. bilateral monopoly
45
Q

State the characteristics/assumptions of perfectly competitive labour marker

A
  • Labour is homogenous e.g. age, skill​
  • There is perfect knowledge regarding terms and conditions​
  • Perfect mobility of labour​
  • Workers and employers are price takers (industry sets the wage rate)​
  • No trade unions or monopsonist employers.​
  • Workers are all paid the same wage rate
46
Q

explain the

A

Edexcel A - Microeconomics: Theme 1 & 3 (10 decks)

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