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Theme 3 > 3.5.1 & 3.5.2 & 3.5.3 Demand and Supply for/of labour & Wage determination > Flashcards

3.5.1 & 3.5.2 & 3.5.3 Demand and Supply for/of labour & Wage determination Flashcards

1
Q

Where does the supply of labour come from?

A

People in households

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2
Q

Where does the demand of labour come from and what type of demand is it?

A
  • comes from businesses
  • derived demand (dependent on demand for g/s)
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3
Q

What will demand for labour be like in economic boom?

A

When demand for a final good falls the demand for labour will fall.

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4
Q

What determines the supply of labour?

A
  • changes in migration
  • income tax
  • benefits
  • presence of trade unions
  • social trends
  • required skills and qualifications.
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5
Q

What is geographical immobility?

A
  • workers being unable to move to different places to seek and find work.
  • This may be due to social reasons, such as not wanting to move away from family.
  • It may also be due to the cost of travel or cost of accommodation.
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6
Q

What is occupational immobility?

A
  • workers being unable to move between jobs as they lack the appropriate skills or training
  • As an economy shifts from having a manufacturing base to a service-sector base, many manufacturing workers find it difficult to transfer to jobs in the service sector as they lack the required skills.
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7
Q

How does wages determine labour?

A
  • If wages are too high, labour supply will be high but labour demand will be low
  • there is excess supply leading to unemployment
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8
Q

What are wages like in a competitive market?

A

In a competitive market, workers will have to accept lower wages or go without a job = the wage rate will tend to fall to the market clearing wage rate.

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9
Q

What happens if wages are too low?

A
  • If wages are too low, labour demand will be high but supply will be low
  • there is excess demand = labour shortage.
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10
Q

What happens if workers aren’t paid enough?

A
  • Workers will not work if they are not paid enough to do so.
  • Firms will have to pay workers more to convince them to work = the wage rate will rise towards the market clearing wage
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11
Q

Current labour market issues

A
  • skills shortages
  • young people
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12
Q

What happens if demand for labour is elastic?

A
  • If demand for labour is elastic, businesses cut back aggressively on employment if wage rates increase and will expand rapidly
  • when labour becomes cheaper relative to other factor inputs.
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13
Q

What does the wage elasticity of demand for labour depend on?

A
  • the proportion of labour costs in the total costs of a business
  • the ease and cost of factor substitution
  • the price elasticity of demand for the final output produced by a business and the time period under consideration
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14
Q

What is the elasticity of labour supply to an occupation?

A

measures the responsiveness of labour supply to a change in the wage rate.

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15
Q

When is labour supply elastic?

A

In low-skilled occupations, labour supply is elastic since a pool of labour is available to take the job.

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16
Q

When is labour supply inelastic?

A

Where jobs require specific skills, training or qualifications, the labour supply will be more inelastic because it is hard to expand the workforce in a short period of time when demand for workers has increased.

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17
Q

Example of geographical immobility

A
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18
Q

UK in terms of skills

A
  • 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. E
  • engineering is one industry suffering particularly badly from skills shortages.
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19
Q

How does the availability of suitable labour impact the elasticity of supply of labour?

A

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

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20
Q

How does time influenced the elasticity of supply of labour?

A
  • 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.
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21
Q

How does govt spending and tax affect the supply of labour?

A
  • high tax rates & high welfare benefits can reduce incentives = lower supply
  • this affects the entire workforce = impact on individual occupations
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22
Q

How does the level of unemployment impact the elasticity of supply?

A

High levels of unemployment = supply more elastic as firm can increase the no people it employs iwhtout having to raise wages rate significantly

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23
Q

What are wages like in perfect competition?

A
  • wages are determined by purely demand and supply
  • all workers paid the same
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24
Q

What was wage like in a monopsony labour market?

A
  • if businesses want to increase labour force, they need to increase wage
  • compared to a perfectly comeptitive market, they employ less people at a lower wage rate
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25
Q

Diagram for wage rate in monopsony

A
  • 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.
  • 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).
26
Q

Trade union

A

an organisation with members who are usually workers or employees, which protects the rights and pay of workers through a process of collective bargaining.

27
Q

How can monopolies increase wages?

A
  • set barriers of entry = reduce supply
  • set wages at a specific wage and ensure workers are not prepared to work for less
28
Q

Example of monopolies setting barriers to entry to increase wages

A

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

29
Q

How can monopolies set wages at a specific wage to increase wages?

A
  • 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.
30
Q

How have the government reduced the power of trade unions?

A
  • through acts which have introduced postal ballots, outlawed secondary picketing, restricted the size of the picket line and forced unions to provide 14 days’ notice of action.
31
Q

Example of govt reducing trade union power

A
  • The Trade Union Act 2016 was the most recent act, and this included a clause saying that at least 50% of people must vote in the ballot; the most recent teachers union ballot only had 28% voting turnout.
32
Q

How do young workers present labour market issues?

A
  • Workers who join the workforce during recessions tend to receive lower lifetime earnings than those who enter the labour force in better times.
  • Youth unemployment can be a particular issue; during hard times, firms are unlikely to employ new workers but are reluctant to let go of their current workers and so the young struggle to get a job
33
Q

How does retirement present issues in the labour market?

A

Rising life expectancy & an increase in the number of people reaching retirement age = negative effects on the govt budget

34
Q

Advantages of minimum wages

A
  • reduce poverty
  • reduce wage gap
  • employees more loyal to businesses
  • *
35
Q

How will an increased minimum wage help employees be more loyal?

A
  • It may make employees less likely to leave their job as they feel more loyal to the businesses = decrease labour turnover = decrease recruitment & training costs = increase profit
  • also more content more motivated = business more productive = more profits
36
Q

Evaluation of minimum wage making employees feel loyal

A
  • but is a weak argument since if they are offered a higher wage elsewhere, then they will leave.
  • However, this assumes all people are motivated by money and this is not necessarily the case.
37
Q

Disadvantages of minimum wage

A
  • loss of profit (due to increase costs)
  • wage spiral
38
Q

How could minimum wage lead to wage spiral?

A
  • as individuals will try to protect wage differentials between them and the lowest price workers.
  • An increase in the wage of the lowest paid = others expect theirs to rise too.
  • This will reduce profit and further reduce competitiveness.
39
Q

Evaluation of minimum wage impact

A
  • depend on where it is set (whether this is above or below the current wage)
  • The level of job losses is dependent on the elasticity of supply and demand.
  • If both are relatively elastic, there will be large job losses but if both are relatively inelastic, the losses will be small.
40
Q

Macro effects of minimum wage

A
  • reduce inequality
  • rise in AD
41
Q

Evaluation of the impact of maximum wage

A
  • depend on the elasticities of supply & demand: inelastic = little impact.
  • it is argued that supply and demand for the highest paid workers = very inelastic since there is a small supply of them & firms only need one = their cost is a very small part of total costs.
  • this could mean maximum wages will have almost no effect on the market, other than causing a reduction in wages
42
Q

Public sector workers in 2010-2015

A
  • Between 2010 and 2015, public sector workers experienced a pay freeze
  • This put downward pressure on private sector wages since few people were likely to leave the private sector for the public sector and private sector employers could use this as evidence to limit pay rises for their workers
43
Q

What will happen if public sector wages don’t increase?

A
  • However, in the long run, if private sector workers receive pay rises and public sector workers don’t, people will move from the public sector to the private sector
  • this will force the government to increase public sector wages in order to expand supply.
44
Q

Relationship between public sector wage and private sector wage

A
  • in short run, the govt decide what wages to improve govt budget
  • in long run, public wages rise by the same percentage and private
45
Q

How can the govt improve immobility?

A
  • improve supply of houses
  • improve transport
  • subsidies
  • move public agencies
46
Q

How can improving the supply of houses improve immobility?

A
  • reduce the price of properties making it easier for people to move.
  • They could make renting cheaper to help people working in temporary jobs.
47
Q

How could subsidies help immobility?

A

introduce subsidies on houses, taxes etc. in areas where
there are labour shortages to encourage people to move to the area and take up jobs.

48
Q

Example of moving public agencies

A
  • DVLA was moved to Swansea
  • However, this doesn’t improve the mobility of labour, it helps to prevent excess demand for labour in one place & excess supply in another
49
Q

How to improve occupational mobility of labour?

A
  • education
  • vocational training
50
Q

Some biggest trade unions in UK

A
  • Unite the Union
  • UNISON
  • Percentage of employees in trade unions has been decreasing
51
Q

Why are trade union membershsips in long term decline?

A
  • long term decline reflects the growing flexibility of the UK labour market e.g zero hour contracts
52
Q

What does trade union influence depend on?

A
  • depends on trade union density
  • the threat power they have (e.g London tube)
53
Q

New Unionism

A
  • focuses less of wage bargaining and more on protecting employment, pension rights, health & safety
54
Q

Trade union and game theory

A
  • Trade unions may negotiate a combined pay & productivity deal with employers
  • a positive sum game
55
Q

Union negotiated pay diagram

A
56
Q

wages in monopsony

A
  • profit maximising employer will employ E1 workers
  • the value to employer is MRPL but only have to pay wage of W1 (below the MRPL)
  • leading to wage exploitation
  • however, trade union can step in (negotiate a higher wage which becomes the MRPL = higher equilibrium)
57
Q

What is a flexible labour market?

A
  • flexible employment contracts (zero hour, temporary)
  • flexible working arrangements
  • flexible rewards
  • flexible tasks and roles
  • UK is ranked 8th in terms of labour markets
58
Q

Advantages of flexible labour market

A
  • can increase female labour market participation/young ppl
  • reduce structural unemployment
  • improve trade-off between unemployment and inflation (flattening the SR Phillips curve)
59
Q

Drawbacks of labour market flexibility

A
  • these markets tend to underprovide training = limit growth of human capital/productivity (temporary staff might not get enough training)
  • rising inequality (gap in wages)
  • increased cost of agency staff (NHS spends huge ammounts on this = increase taxpayer burden)
60
Q

Micro effects of fall in labour mgirations

A
  • business costs e.g. rising wage/labour costs if shortages of workers occur
  • Impact on the housing market (to buy and to rent) if there is a slowdown in population growth – will it make renting more affordable?

Theme 3 (15 decks)

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