4.1.6 The Labour Market

Question 1

Define Labour Market

Answer 1

The labour market is a factor market. The supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers.

Question 2

What type of demand is Labour

Answer 2

Labour is a derived demand. This means that the demand for labour comes from the demand for what it produces. For example, the demand for people who make cars is derived from the demand for cars. With no demand for cars, there will be no demand for car manufacturers.

Demand is related to how productive labour is and how much the product is demanded. The elasticity of demand for labour is linked to how price elastic the demand for the product is. The wage rate will lead to movements along the supply and demand curves for labour. All other factors will shift the curves.

Question 3

Outline what the demand for labour is affected by

Answer 3

The wage rate- The downward sloping demand curve shows the inverse relationship between how much the worker is paid and the number of workers employed. When wages get higher, firms might consider switching production to capital,
which might be cheaper and more productive than labour.

Demand for products- Since the demand for labour is derived from the demand for products, the higher the demand for the products, the higher the demand for labour.

Productivity of labour- The more productive workers are, the higher the demand for them and This can be increased with education and training, and by using technology.

Substitutes for labour- If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left

How profitable the firm is- The higher the profits of the firm, the more labour they can afford to employ.

The number of firms in the market- This determines how many buyers of labour there is. If there is only one employer, for example the NHS, the demand for labour is lower than if there are many employers, such as in the supermarket industry. AND The lower demand for labour can mean wages are lower, so trade unions try
to encourage higher wages.

Question 4

Outline the marginal productivity theory of demand for labour

Answer 4

This theory states that the demand for labour is dependent on the marginal revenue product (MRP).

MRP is calculated by marginal product multiplied by marginal revenue. MRP = MP x MR.

The marginal product of labour is the additional output each unit of labour can produce. The marginal revenue of labour is the additional revenue derived per extra unit of labour. Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour. The demand curve shows the MRP.

Question 5

Outline the determinants of the elasticity of demand for labour

Answer 5

The wage rate and level of employment is affected by shifting the demand or supply
curve differently, depending on how elastic the other curve is.
If labour demand is inelastic, because there are few or no substitutes, strikes will increase the wage rate but not affect the employment rate significantly. Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate (P1 - P3), than where there is a more elastic demand (P1- P2)

Question 6

How is the elasticity of demand for labour measures the responsive the demand for labour

Answer 6

The elasticity of demand for labour measures how responsive the demand for labour is when the market wage rate changes. This is affected by:

o How much labour costs as a proportion of total costs. The higher the cost of labour as a proportion of total costs, the more elastic the demand. Labour costs are high as a proportion of total costs in the services.
o The easier it is to substitute factors, the more elastic the demand for labour, because firms can easily to switch to cheaper forms of production, such as capital.
o The PED of the product also affects labour. The more price elastic the product, the more price elastic the demand for labour.

Question 7

How is the supply of labour calculated

Answer 7

The supply of labour is calculated by the number of workers willing and able to work at the current wage rate, multiplied by the number of hours they can work. It is
influenced by monetary and non-monetary considerations

Question 8

How is the supply of labour affected by

Answer 8

The wage rate: The upward sloping supply curve shows the proportional relationship between how much the worker is paid and the number of workers willing and
able to work.

Demographics of the population: The more people there who are able and willing to work, the higher the supply of labour. This changes with retirement and school leaving ages, the number of university students and immigration. It can be illustrated with a shift to the right of the supply curve.

Migration: Migrants are usually of working age, so the supply of labour at all wage rates tends to increase. Migration particularly affects the supply of labour at the
lower wage rates, because migrants are usually from economies with average wages lower than the UK minimum wage.

Advantages of work: This can influence how much people prefer to work, and is linked to non monetary advantages. If the cost of working is lower, so families can afford childcare, people are more likely to work. If the benefits of working are high, such as holiday entitlements and the potential to be promoted, the supply of labour is likely to increase. It also considers job satisfaction and how good the working conditions are.

Question 9

Outline Trade Unions in The labour market

Answer 9

Trade unions provide an organisation for workers to have joint representation with their employers. Trade unions have several functions:

1. Represent workers with regard to pay and working conditions.
   2.Bargain for higher wages with the possibility of going on strike to target higher wages.
2. Co-ordinate with firms to implement new working practises and negotiations with workers

Question 10

Outline Trades Unions in a Competitive Labour Market and a matching diagram

Answer 10

In a competitive labour market, wages were W1. If a trade union successfully bargains for a higher wage of W2, then employment falls to Q2
This situation can lead to real wage unemployment of Q3-Q2.
This is why economists who believe labour markets are generally competitive argue that trade unions can cause inefficiency and unemployment.
Therefore, trade unions can increase wages for members – but those outside the union may be more likely to experience unemployment.

Question 11

Outline Trades Unions in a Monopsony and a matching diagram

Answer 11

Initially, a monopsony can pay a wage of W2 and employ just Q2. Note this profit maximising level is a lower wage and lower employment level than a competitive equilibrium of Q1, W1.
In this situation, if a trade union bargains for W3, it does not create unemployment, but employment stays at Q2.
We can say that a trade union is counter-balancing the monopsony power of employers.

Question 12

Do trade unions cause unemployment?

Answer 12

In theory, trades unions can push wages above the equilibrium wage rate. This rise in real wages can lead to less employment. However, the impact of unions on employment rates is not certain.

1. If a firm has monopsony power, then the monopsony can restrict labour and lower wages. In this case, a trade union can provide a counter-balance to the monopsony power of an employer. Even if labour markets are competitive – demand may be quite inelastic, meaning higher wages would not cause much decline in employment.
2. Efficiency wage theory. This states higher wages can lead to increased productivity.
3. Productivity deals. A trade union may be able to bargain for higher wages in return for improving working practices and implementing higher productivity

Question 13

What determines the success of trades unions?

Answer 13

The density (% of the workforce in the trade union)
Bargaining power of workers, e.g. power plant workers have more economic leverage than supermarket shelf stackers.

Economic climate – is the firm highly profitable or struggling to survive?

Government legislation. e.g. since the 1970s, UK government has reduced the power of trades unions, e.g. abolishing closed shops, outlawing secondary picketing.
Nature of labour markets – competitive vs monopsony.

Question 14

Potential costs of trade unions

Answer 14

Trade unions can push wages above the equilibrium. Therefore fewer people are employed by the firm – this leads to a loss of earnings to those outside the trade unions.
Time lost due to strike action.
Trade unions bargaining for higher wages can cause cost-push inflation. In the 1970s, union activity was responsible for some of the cost-push inflation of that period. Though unions were also trying to protect wages against the higher inflation.
Trade unions can increase incomes of union members, but this is only a limited approach to reducing inequality. Lowest income groups are often unemployed or not employed in a union job.

Question 15

Potential benefits of trade unions

Answer 15

Trade unions can provide counter-balance to monopsony – increasing wages and employment for their members.
Trade unions can provide greater coordination between firms and employers, e.g. introducing productivity deals.
Trade unions can develop co-operation between workers and firms.
Trade unions can represent workers in disputes over health and safety and disciplinary matters.
Trade unions can increase wages – which leads to increased spending in the economy.

Question 16

Outline the Labour market equilibrium in The economists’ model of wage determination in a perfectly
competitive labour market and the role of market forces in determining relative wage rates and a supporting diagram

Answer 16

Labour market equilibrium: The labour market is a factor market. The supply of labour is determined by those
who want to be employed (the employees), whilst the demand for labour is from employers.

Labour market equilibrium is determined where the supply of labour and the demand for labour meet. This determines the equilibrium price of labour, i.e. the wage rate.

If the supply of labour increases, such as if the retirement age was raised, the wage rate would fall from W to W1. However, in the real labour market, wages are not this flexible. Keynes coined the phrase ‘sticky wages’. Wages in an economy do not adjust to changes in demand. The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead.

Question 17

What is the aim of Trade Unions

Answer 17

Trade unions aim to protect workers, secure jobs, improve working conditions and try and
achieve higher wages.

Question 18

The various factors that affect the ability of trade unions to influence wages and the levels of employment in different labour markets

Answer 18

If trade unions try and increase wage rates too much, firms might no longer be able
to afford to employ workers. This could cause them to close down or reduce the number of workers they employ. Some workers might prefer a low paid job rather than be without employment.

Question 19

How wages and employment are likely to be affected by the
introduction of a trade union into a perfectly competitive labour market and into a monopsony labour market

Answer 19

In a market where an employer has monopsony power, workers are only paid W2, and only Q2 number of workers is employed. This is the profit maximising level.

A trade union aims to increase marginal revenue product in the market, as well as increase wages to the level of MRP (W3). This is to stop the exploitation of labour. The perfectly competitive level of employment and wage rate is W1, Q1.

Question 20

What does a National Minimum Wage look like?

Answer 20

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Question 21

What are the Advantages of a National Minimum Wage?

Answer 21

• More productive workers shifts MRP to the right
• Increases Opportunity Cost of being unemployed and thus, more people will join the workforce

Question 22

What are the Disadvantages of a National Minimum Wage?

Answer 22

• Increased Unemployment due to reduction in Labour Demand from firms (PeL likely to be elastic for MW jobs).
• Firms pass on higher costs to prices leading to higher inflation and reduced exports (Depends on PeD of product).

Question 23

Outline some of the points of discrimination in the Labour market

Answer 23

• Formal education. On average, those with a degree earn more over their lifetime than those who gain just A Levels.
• Skills, qualifications and training. Jobs which require more training and education offer higher wages. Training workers is expensive for firms, so they compensate for this by offering workers, who have already undergone education and training, higher wages.
• Pay gaps. The wage gap between skilled and unskilled workers has increased in the UK recently. This is due to technological change and globalisation, which has shifted production abroad.
• Wages and skills. Skilled workers produce higher outputs than unskilled workers because they are more productive, so the demand for their labour is higher. This means they can demand higher wages.
• Gender. Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. There are inequalities with paternity and maternity leave. 26% of 1500 workers felt that they had been held back from a promotion because they had children. Although a wage gap still exists, it is narrowing, albeit slowly.
• Discrimination- Workers might be discriminated against due to age, disabilities, gender and ethnicity. Workers from ethnic minorities have faced prejudice and discrimination. This article highlights some of the issues which