4.1.6 The Labour Market

Question 1

Who is labour demanded and supplied by?

Answer 1

Demanded by firms and employers
Supplied by individuals, or the ‘economically active population’

Question 2

Why is labour a derived demand?

Answer 2

Because when the demand for a product increases, so does the demand for labour, therefore the demand for labour is derived from the demand for goods/services.

Question 3

What occurs when the demand for labour = the supply of labour?

Answer 3

-Equilibrium wage rate
-Equilibrium quantity of workers

Question 4

What is the theory relating to the demand for labour?

Answer 4

Marginal Productivity Theory
- That a firm will only employ labour if it thinks it will increase profits through this employment, so the labour must bring in more revenues than it costs.

Question 5

What will firms base their demand decisions for labour on?

Answer 5

MRP - Marginal Revenue Product of labour
The extra revenue generated for each additional hired worker

Question 6

How is MRP calculated?

Answer 6

MPP x MR
Marginal Physical Product X Marginal Revenue

MPP = The output produced by the extra worker

Question 7

What is MCL?

Answer 7

Marginal Cost of Labour
-The cost of hiring one additional unit of labour

Question 8

What is labour demand?

Answer 8

The number of workers an employer is willing and able to employ at a given wage rate in a given period of time.

Question 9

What is the demand for labout curves in both the short and long run?

Answer 9

see flashcard
Both sloping down, SR has a little curve up and then down

Question 10

Why does the labour demand curve slope down in the SR?

Answer 10

Due to the law of diminishing marginal returns:
In the SR (where at least one factor of production is fixed), as variable factors of production are added to a stock of fixed factors of production, total/marginal output will initially rise then fall.

Question 11

Why does a workers MRP determain whether or not they would be hired?

Answer 11

Because Marginal Productivity Theory states that a firm will only hire workers up until the MRP of the last worker hired is equal to the wage rate.

Question 12

Why does the labour demand curve slope down in the LR?

Answer 12

Because of the substitutable nature between workers and capital machinery.

At higher wage rates, firms will begin to think that labour is not so cost effective and its more cost efective to employ cheaper capital (machinery)

Question 13

What is the MRP curve equal to?

Answer 13

The demand for labour curve.

Question 14

In the SR, the wage rate has fallen, why has demand for labour increased?

Answer 14

Because if the wage rate decrease, the cost of hiring additional workers (MCL) falls, meaning firms will be incsentivised to hire more workers as they can afford to do so.

Question 15

In the SR, the wage rate his risen, why has there been a contracion of demand for labour?

Answer 15

Because firms can now only hire workers with a higher MRP, reducing demand.

Question 16

What are the evuation points of Marginal Productivity Theory? (4)

Answer 16

Difficult to measure in certain jobs - Like teaching and nursing, where physical products are not being produced, so it is difficult to measure the workers ‘output’

Many jobs are not individual - They are team based, meaning measuring individual productivity is difficuly

Trade Unions - Can create imperfections in the labour market, bargaining for higher wages that have nothing to do with worker productivity, meaning employment wont be based on MRP at a given wage rate

Self-Employed = Don’t pay themselves according to their MRP as their objectives are different to a larger organisation

Question 17

What non-wage factors shift the Labour Demand Curve?

Answer 17

Think Please Dont Press Charges

Productivity - Directly affects individuals MRP as it influences their MP. Rise in productivity = rise in mrp = increase in firms willigness and ability to hire workers at a given wage rate (workers cheaper in comparison to MRP) = Demand shift right.

Demand for final product - Labour is derived demand, if more people want the good = demand for product rises = demand for labour rises = increasing firms willigness and ability to hiren workers at a given wage rate = demand shifts right.

Price of final product - Affects MRP as it influences MR. IF price of final product rises, MRP of workers rise = increasing willigness and ability to hire workers at a given wage rate = demand shifts right

Cost of Capital - Important in long run. If cost of capital (machines) rises, workers become less subsitituable for capital, increasing willignesss and ability of firms to hire workers at a given wage rate = demand shifts right.

Question 18

What is elasticity of labour demand?
How is it calculated?
What does elastic and inelastic labour demand mean?

Answer 18

It measures the responsiveness of labour demanded given a change in wage rate. (how much the labour demand curve slopes)

%change in labour demanded / %change in wages

Elastic = %change in wages will result in a GREATER %change in labour demanded

Question 19

What are the determinants of Labour Elasticity of Demand

Answer 19

SECT

Substitutability between labour and capital - If easily substitutable, wages will be more demand elastic because if wages rise, easier for firms to swap you for machines and demand for labour will fall more

Elasticity (ped) of final product - If PED for final product is inelastic, then a higher wage rate can be passed onto the consumer aas a higher price with a minimal change in demand, meaning revenue and profits will increase, meaning MRP for workers will increase, meaning demand for labour will decrease proportionally less than the increase in wages, making LED inelastic

Costs, labour costs as a proportion of total costs - If labour costs are a large proportion of total costs, as wages rise, firms need to reduce employment to stay profitable, meaning LED will be elastic.

Time Period - In the SR normally 2 factors of production are fixed, land and capital, therefore workers cannot easily be substituted for capital as wages rise, making LED more inelastic.
In the LR the opposite is true, making LED more elastic.

Question 20

What is Labour Supply?

Answer 20

The number of workers willing and able to work in a profession at a given wage rate in a given period of time.

Question 21

What does an indivdual consider when deciding whether or not they should supply their labour?

Answer 21

Work or leisure? One is the opportunity cost of the other.

Question 22

Why does the labour supply curve slope upwards?

Answer 22

Income effect = Incomes rise as wage rate rises, increasing inscentive to work more hours and make more money. HOWEVER individuals can have a target income, which once reached individuals choose to work less, meaning the income effect can become negative at very high wage rates. HOWEVER this is offset in the labour supply curve for an industry

Substitution effect = The opportunity cost of leisure time rises as wages rise, increasing inscentive to work

Question 23

Can the income effect cause the labour supply curve to become negative in that of an industry?

Answer 23

No, because the negative income effect is OFFSET by inactive workers who decide to re-enter the market becasure of the higher wages being offered, whos target incomes differ from those of the individuals who are working less.

Question 24

What are non-wage factors that shift the supply of labour curve?

Answer 24

Thinka SIMBaPOV

Substitutes wages- Wage in substitue occupation, if it decreases, supply of labour for this occupation will increase as they will be attracted by the higher wages, shifting curve right

Incentives - If there are non-monetary benefits to the job more workers will be attracted, increasing supply of labour

Mobility of labour - If more workers in different professions gain the skills/quals to move into this profession, supply will increase

Barriers to entry- Such as years of education, if high then supply will decrease

Size of the working POPULATION - If increases, supply of labour increases

Ability to work OVERTIME - If these exist in an abundance, labour supply increases

Value of leisure time - If high, then willigness and ability to work decreases, decreasing supply of labour

Question 25

Explain the labour market in equilibrium using a diagram

Answer 25

see flashcard for diagram
The labour market is in equilirium where the demand for labour is equal to the supply of labour. D = S at wage rate W1 and employment level Q1.
At this point there is a perfect allocation of labour, with no excess demand or supply.

This illustrates the reward to labour with total earnings equal to the area W1AQ10. This area is made of 2 specific rewards to labout.

• Transfer earnings = The min. income required for a worker to remain in a certain profesion. It represents the next best income that workers could have earned in alternative profesions because in each case workers are earning at least that income level.

-Economic Rent = The income earned above the min.level a worker is willing to work for.

Question 26

Explain a demand shift right in the labour market using a diagram

Answer 26

see flashcard for diagram

-Market initiall at equilibirum with employmeny at Q1 and wages at W1
-Demand curve shifts right from D1 to D2 due to for example an increase in demand for final product
-At the same wage rate of W1 there is excess demand (Q1Q2) for labour; firms are demanding more workers than those that are available
-This puts upwards pressure on wages to attract more workers, wages rise from W1 to W2
-Higher wages signal excess demand
-At higher wages there is inscentive for workers to work longer hours and more to enter the market, shown by an extension along the labour supply curve
-Higher wages ration labour resources, they discourage demand for labour as firms will only employ workers with high enough MRP, contracting the demand curve
-A new equilibirum is formed at W2Q2 with higher wages from W1 to W2 and more labour allocated to producing goods/services in this market from Q1 to Q2.
-This is long term equilibrium without excess supply/demand, an efficient allocation of labour.

Question 27

Explain downwards pressure on wages in the context of a shift in the labour supply/demand curve

Answer 27

-Downwards pressure on wages from W1 to W2
-Lower wages signal excess supply to firms and the need for fewer labour resources in the market
-Lower wages provide an inscentive for workers to work fewer hours or to leave the market entirely, shown by a contraction in supply
-Lower wages ration labour demand as workers with lower MRPs now justify employment shown by an extension in the labour demand curve
-A new equilibrium is formed…….an efficient allocation of labour resources

Question 28

What points do we touch on in an essay about perfectly competitive labout markets?

Answer 28

-Characteristics
-Diagram
-Labour market outcomes
-Why there is labour market imperfections in real life

Question 29

What are the characteristics of a perfectly competitive labour market?

Answer 29

-Infinite suppliers of labour (workers) and many buyers of workers (employers). Meaning firms must compete to attract workers AND workers have no bargaining power with trade unions

-All workers are homogenous with identical skill sets. This makes firms wage takers. Higher wage rate = unnecessarily losing profit
Lower wage rate = Noone will join
This makes MC and AC for a firm equal to the wage and horizontal

-No barriers to entry and exit for workers

-Perfect knowledge of market conditions and perfect mobility of labour

-Firms are profit maximisers, hiring only up until MRP = MCL.

Question 30

What is the diagram for a firm in a perfectly competitive labour market?

Answer 30

see flashcard

Question 31

What are the outcomes in Perfectly Competitive Labour Markets? (5)

Answer 31

1) Wages = MRP
Workers are paid according to their productivity = efficient wages

2) Employment is maximised at Q1
Provides maximum job opportunities for workers to enter work, earn income and raise their living standards = efficient employment

3) No wage differentiatials
between professions given perfect labour mobility and no barriers

4) Markets are flexible
with perfect labour mobility and easy hiring for firms

5) Transfer earnings and economic rent are maximised

Question 32

In real life, why do wages differ?

Answer 32

Because of labour market imperfections=

1) Labour is not homogenous
Workers differ in many ways: MRPs, Skills, Education, Training
This leads to differences in pay.

2) Labour is not perfectly mobile and information is imperfect
There is occupational imobility of labour, where workers do not posses the skills to transfer to other jobs.
There is geogrpahic imobility of labout, where workers cannot move to areas where wages are higher
Information is imperfect, meaning workers may not know about wages being higher elsewhere

3) Barriers to entry and exit
These can be high to enter a profesion such as qualifications and exit a profesions such as notice periods. These make it harder for workers to leave jobs where wages are low and move to where they are higher

4) Trade unions
Can push up wages beyond MRP aned cause wage differentials between profesions where TUs dont exist

5) Monopsony Power
Some employers have monopsony power so can set their own wages and ignore competitive rates as there is little competition. These employers can offer wages below MRP that can exist overtime and cause wage differentiatials

6) Compensation to account for difference in job enviroment
Workers in dangerous conditions or anti-social hours can recieve higher wages to compensate, causing a positive compensating wage differential.

Question 33

What is a monopsony labour market?

Answer 33

A market in which there is a sole, dominant buyer of labour in a given profesion.

Question 34

What is the monpsony labour market diagram?
Explain the outcomes.

Answer 34

see flashcard
-Monopsony power in the labour market suggests an imperfect labour market where buying power over labour exists
-Monopsonist is a wage maker, able to set wages to maximise profits, employing workers at Qm where MRP = MCL
-Reading wage of the ACL curve, monopsony labour outcomes are at wage Wm and employment Qm
-These vastly differ from competitive labour market outcomes at Qc and Qc found where demand = supply
-Clear that monosponist employers exploit workers by offering wages much lower than MRP at Qm and they under employ workers compared to competitive levels
-They use their market power to distort efficient labour market outcomes.

Question 35

What is a trade union?

Answer 35

An organisation of workers that uses collective bargaining to improve wage and non-wage working conditions of workers in an industry.

Question 36

What does a trade union do?

Answer 36

-Collective bargaining
-The pay of a large group of workers is determained through one negotiation
-An assumption is made that there is a closed shop agreement whereby all workers in a profesion are members of one TU, giving that TU maximum market power
-It essentially becomes a monopoly supplier of labour, able to control the labour supply at given wage rates

Question 37

What is the diagram for a trade union?
Explain the outcomes

Answer 37

see flashcard
- Labour market is operating efficiently at competitive levels, W1 and Q1
- Workers through their TU are unsatisfied with pay, they bargain for higher wages a Wtu
-This adjusts the supply of labour curve, meaning instead of S1 it now becomes S = ACLtu
- This is because any workers below the dot are more than happy to work at the higher wage, and above the dot the supply curve is the same because the firm would have to raise wages to attract more workers. All workers being payed below the asked for wage rate are under the control of the TU.
- Firms are likely to accept the new wage rate given the number of workers they can lose, threat of strike action and negative publicity.
- Firm becomes a wage taker at Wtu.

Question 38

What are the Pros of a trade union? (2)

Answer 38

1) Improve both wage and non-wage conditions for workers.
Unions have the power to increase wages and improve non-wage conditions such as longer paid leave, stricter firing regulation ETC.
This achieves greater equity, improved distribution of income with lower income inequality that can boost living standards, especially for those on lower incomes. They can also help fight wage differntials and discrimination

2) Trade unions in a monopsony controlled labour market promote more efficient outcomes. see other card for more
This argument is especially strong in markets with strong monosponist power in which wages and quanities far below competitive outcomes are being achieved. Unions can significantly improve labour market outcomes in such a scenario with no negative outcomes to workers.

Question 39

What diagram explains the effects of a trade union on a monopsony labour market?
Explain the outcomes

Answer 39

see flashcard for diagram
DIAGRAM DOESNT INCREASE WAGES TO COMPETITIVE OUTCOMES, GOES IN THE MIDDLE

-Diagram shows monpsony labour market where wages and employment are below competitive levels at Wm and Qm, with employment determaind at MRP =MC and wage rate is read of ACL curve
- TU bargains for wage increase to Wtu, now controlling supply up until Qtu the firm becomes a wage taker at that rate. The firms supply curve changes from S=ACL to S=ACLtu. The firms maginal cost curve changes from MCL to MCLtu
-At this new wage of Wtu and new ACL and MCL curves, the monopsonist will employ workers where MCL = MRP therefore at Qtu.
-Compared to previous monopsonist wages and employment, the firm is now closer to acheiving competitive efficient outcomes as both wages and employment have increased

Question 40

What are the cons of a trade union? (3)

Answer 40

1) In a competitive market, TUs can increase unemployment.
By pushing wage rates beyond compeitive levels, an excess supply of labour is created…real wage employment between Qs and Qd.
This is because labour supply has extended given positive income and substitution effects but labour demand has contracted as a firms willigness and ability to employ workers has decreased as they can only employ workers with an MRP equal to or greater than the Wtu.
Those that remain in worlk can experience higher pay and living standards and other can be left without a job, distorting efficient labour market outcomes and even widening inequality.

2) Increase costs of production for firms
Through : Wage increases, impact of strikes, longer maternity/paternity leave, longer holidays, extra perks, ETC.
As a consequence firms may shut down if they become too unprofitable, may leave the country and operate in one in which TUs aren’t too prevalent, harming employment prospects.
It is likely firms will pass on higher costs to consumers in the form of higher prices, harming cost push inflation.
The goverment is also an employer that can be affected by trade unions, if their costs go up this can cause tax increases on future generations

3) TUs can constrain the productive capacity of the economy.
By increasing LR costs of production, labour market flexibility and efficiency is reduced. Workers, in particular low skilled, find it ahrder to find work and it is harder for exisitng workers to transfer.
This will increase structural unemployment, harming the living standards of individuals and potentially increasing income inequality.

Question 41

What are the evaluation points of a trade union? (4)

Answer 41

Eval of TUs is looking at what makes them effective or not.

1) Union density
The impact of trade unions depends on their strength and power, i.e the union density. This measures the % of workers in a given profesion that are members of the union. The greater the density, the greater the potential mark-up of wages, however the impact on unemployment is greater aswell.

2) Economy strength or turmoil.
Strong economy = more likely to be succesful as firms are more likely to increase wages due when revenues and profits are higher and labour is scarce
Weak economy = Firms are struglling for revenues and profits and less likely to increase wages, and there is also an abundant supply of labour available as employment in a recesion is low as firms have been sacking workers to cut costs.

3) Regulation reduces TU power
Gov can use regulation as a supply side policy to improve efficiency of labour, making economy more competitive and increasing potential output. As TUs increase costs for business in various ways, and increase costs for Gov as an employer, they may be regulated to prevent their effectiveness.
Making closed shop TUs illegal / making strike action illegal

4) Change in the structure of the economy can reduce Tu ability to raise wages.
Profesions with part-time hours have many employers all with different agreements and pay structures, making it hard to organise TU activity

Question 42

What is wage discrimination?

Answer 42

When workers are paid different wages for equal work with no difference in skill sets or costs of employment.

Question 43

What are the conditions for wage discrimination to occur? (4)

Answer 43

Monopsony power
Employer must have some degree of monopsony power. This is because firms must be able to set wages depending on the willigness of workers to supply labour. Firms in highly competitive labour markets will be unable to succesfully and sustainably wage discriminate.

Differentiate between groups of workers
Firms must be able to differentiate those workers who are more likely to accept lower wages. These groups are:
-Young workers (cuz theyre inexperienced, have little knowledge of competitive wage rates for profesion)
-Part time workers (often not the main wage earners of theirn household meaning they are less likely to demand higher wages from their employers)
-Immigrants (as wage rates in the UK are likely to be higher than what they earned in their home countries despite being below UK labour market MRP)

Opportunity for workers to negotiate their own pay and conditions
This makes it possible for some workers to bargain for higher wages than others despite the same work being carried out at no difference in cost of employment

Keep groups completely seperated
Employers must have the ability to do this to prevent the spread of information within the company about different wages being offered. Current anti-discrimination regulations makes this essential as the firm may find themselves in legal trouble

Question 44

What are the pros of wage discrimination? (3)

Answer 44

Benefits of wage discrimination stem from firms having more money and the effect that has on worlers, firms and economy

Workers- Wage discrimination reduces total cost for employers freeing up more expenditure on employment -> more workers frind jobs -> increasing living standards OR lower costs -> higher profits -> DE -> RnD -> Consumers benefit from lower prices/more choice ETC

Firms- Reduced costs -> boost profitability -> DE

Economy- DE -> increase quantity and quality of capital stock -> boost productive potential of economy -> long term economic growth

Question 45

2 workers, 2 employers, 1 economy

What are the cons of wage discrimination? (5)

Answer 45

Workers 1) Exploitation of vulnerable workers such as youth or immigrants -> there is no economic rent at all for discriminated against worker -> lower incomes and lower standard of life despite having same MRP as worker making higher wage

Workers 2) Can in theory reduce wages for all workers in profesion. Because higher wages on offer to non-discriminated against groups can attract more of those groups to employment, increasing supply of non-discrimnated against workers and reducing wages despite not being discriminated against. (supply shifts right)

Employers 1) Can increase costs for business as extra admin costs are needed to organise individual contracts for each worker

Employers 2) Strikes and disputes if workers find out. Lead to trade union forcing higher wages -> costly legal disputes / compensation -> higher costs

Economy) Increased income inequality, moving Gini coefficient towards 1. Goes against goverments macro economic objectives, may need to increase welfare payments -> increased taxation on future generations

Question 46

What is labour discrimination?

Answer 46

When workers are discriminated against due to differences in gender, ehtnicity, religion, sexual preference, age and disbality.

Question 47

What are 2 examples of labour discrimination?

Answer 47

-Total refusal for an employer to take on workers from certain group
-Totale refusal for an employer to promote workers from certain group

Question 48

What are the reasons for labour discrimination? (3)

Answer 48

1) Reduces costs of production
Discrimnated against workers recieve lower wages -> increased profits then BLAH BLAH BLAH HOW PROFITS MAKE MONEY

2) Prejudice
based on no economic calculations

3) Employers have imperfect information
believing that the discrimnated against group is actually less qualified / skilled and have a lower MRP than they in reality do

Question 49

What impacts does labour discrimination have? (2,1,2)

Answer 49

Workers 1) Lower wages and unemployment
Their demand shifts left from D1 to D2, reducing wages from W1 to W2 and employment from Q1 to Q2. They recieve wages far below their MRP.

Workers 2) Non-discriminated workers benefit from higher wages in the short run as their is less competition for their profesion, reducing supply, shifting left, S1 to S2, W1 to W2 and Q2 to Q1.
EVAL = In the long run any benefits are outweighed by negatives of weak economic performance. Underemployment of discriminated against workers -> economy operating below capacity -> decreaseing growth, income increases and living standards -> affects whole population

Employers 1) Despite theory suggesting costs will be reduced, in reality they will rise. Firm will fail to attract most productive workers with highest skill set and talent -> meaning productivity remains low and costs of production remain high

Economy 1) Unemployment / underemployment of discriminated against groups -> economy operates below capacity -> hampering growth, increases in income and living standards -> can experience ‘brain drain effect’ where discriminated workers leave country

Economy 2) Increase income inequality -> moving gini coefficient toward 1 -> goes against macro economic objectives -> gov may have to pay benfits to reduce income inequality -> burden on tax payers

Question 50

Why do wage differentials occur between men and women? (6) What diagram do we use?

Answer 50

1) Breaks from workforce to have children and raise family
- During period of inactivity women do not add to their MRP, male counterparts continue adding, increasing demand from D1 to D2.
*see flashcard, diagram showing labour market at equilibrium with a demand shift right, labelled ‘men’

2)Unequal opportunities in education
-Developing countries
-Women less qualified, men have higher MRP

3) Legislation has increased supply of women in labour force
-Shifting supply from S1 to S2, decreasing wages from W1 to W2

4) Statistically women are concentrated in occupations where wages tend to be lower
- Part time, service sector, public sector

5) Women are not main household earner therefore less likely to demand wage rises from employer

6) Women can fall victim to labour discrimination

7) Statistics show women find it more difficult than men to put themselves in a position to demand higher wages

Question 51

Why do wage differentials occur between premier league footballers and teachers? What diagram do we use

Answer 51

Footballers - Labour market equilibrium diagram with very inelastic supply curve and a massive shift in demand to the right
Teachers - Monopsony employer market

1) Footballers have unique talents leading to high MRP
Footballers raise huge amounts of revenues for clubs, so clubs are willing to pay very high wages for such talent, increasing demand from D1 to D2 and pushing up wages from W1 to W2

2) Low supply of talented footballers
High barriers to entry of becoming a baller, such as many hours training and time out of school. Many are not willing to make this sacrifice and many make the sacrifice and do not make it, leaving them with little alternative and resulkting in a high risk endevour. LOW SUPPLY

3) State school teachers have monospony employer
Lower wages below MRP at Qm and Wm, widening wage differntial

4) Teachers have a relucatance to strike to raise wages in a TU
Due to nature of job

5) Teaching carries vocational element making supply wage inelastic
So if wage falls supply will fall proportionally less as teachers dont teach for money…wages can be low with high number of teachers employed

Question 52

What points do we touch on in an essay about the National Minimum Wage?

Answer 52

What it is -> Why Gov. Impose it -> Diagram of National Min. Wage in competitive labour market -> Pros (monopsonist diagram w wage) -> Cons and Evaluation of cons

Question 53

What is a National Minimum Wage?

Answer 53

A wage imposed that acts as a wage floor where wages cannot fall below it.

Question 54

Why would a goverment impose a national minimum wage?

Answer 54

If the Gov feels as though wages in a labour market are not high enough for workers to sustain a satisfactory standard of living.

Question 55

What is the diagram for a National Min. Wage in a competitive labour market and how do you explain it?

Answer 55

see flashcard
-Gove feel that wages in the competitive labour market at W1 are not high enough for workers to sustain a satisfactory standard of living
-Gov imposes Min.Wage above W1 at Wmin, acting as a wage floor beneath which wages can’t fall

Question 56

What are the Pros of a national minimum wage? 6

Answer 56

1) Boost wages of lowest paid in society, reducing poverty and raising living standards
-Wage differentials can also be reduced lowering income inequality, with the Gini Coefficient tending towards 0

2) Reduce economic incativity
It provides an inscentive for those outside of the labour force to find work -> promotes a work not welfare attitude -> reduces long term burden on state finances -> boosts productive potential of economy as labour force size increases

3) Increase fiscal intake for Gov
Gov collects more tax revenue from income tax and VAT -> reduces strain on gov finances -> repay debt -> service debt interest -> spend in productive areas of economy Education, healthcare and INfrastructure

4) Boost productivity of workers
Pay increase will boost morale -> higher productivity ->greater profitability for employer -> improved productive potential of economy -> costs of production increase from wage rise can be offset by productivity gains

5) Encourages employers to boost human capital
Cuz it is in the best interest of firms to ensure all workers hired have an MRP at least equal to Min.Wage, as a result firms are more likely to provide employee training schemes to boost labour productivity

6) Powerful weapon to fight against monopsony power
see other card

Question 57

What affect does a national minimum wage have on a monopsonist employer?

Answer 57

see flashcard for diagram
got diagram wrong
-An employer with monopsony power is able to use this buying power of labour in the market to set wages below MRP and contrain emplyment below competitive levels
-Monopsonist is a profit maximiser so they employ up until MCL is equal to MRP, reading supply from the ACL curve the monopsonist is employing at Qm
-Competitive outcomes occur at equilibrium where supply of labour = demand of labour, so where MRP = ACL
-A minimum wage set at Wmin can counter monopsony power by increaseing wages from Wm to Wmin and employmeny from Qm to Qcomp
-This improves the efficiency of the labour market with competitive outcomes being achieved

Question 58

What are the cons and evaluation point of national minimum wage?

Answer 58

1) Unemployment in competitive labour markets
Because the wage is set above equilibrium in the labour market at Wmin, and supply of labour at Qs is greater than demand for labour at Qd causing an excess supply of labour and real wage unemployment.
This is because high min. wages increase costs for a business and make it harder for workers to get employed given the MRP needed to justify the higher wage, causing a contraction in labour demand.
The higher wages inscentivise economically inactive workers to re-enter the workforce and look for jobs, causing an extension in labour supply.
This can lead to the unemployment in the economy rising, though not the case in monopsony labour markets.

Eval 1) Level of unemployment is dependant on the elasticity of demand for and supply of labour
Eval 2) Whether this acc happens depends on how high the min.wage is set
Eval 3) The youth and low skilled are most likely to be underemployed despite the legislation being set to help them.
This is because they do not have MRPs high enough for a firm to justify hiring them.
This does more harm than good to those it is meant to protect leading to persistent unemployment, a HUGE GOV FAILURE

2) Unintended consequences due to negative impact on businesses
Directly increases costs -> impacts profitability -> firms shut down / emigrate -> firms take perks away from employees to mitigate costs -> firms pass higher costs on as higher prices -> increasing cost push inflation -> macroeconomic targets not met

3) Regional differences in pay that Min.Wage doesnt account for
May be succesful in reducing wage differntials in the north where costs of living are cheaper but in the south workers on min.wage may still struggle to lift themselevs out of poverty.
Therefore regional min.wages may be more effective than national ones at reducing income inequality and widespread poverty.

4) Deteriorate Gov Finances
If state is large scale employer of workers on min.wage -> deteriorate gov.finances -> borrowing / taxation may increase -> burdening current and future generations