4.1.6 The labour market Flashcards
1
Q
Who demands labour?
A
Employers
2
Q
Who supplies labour?
A
Those who want to be employees (the employees)
3
Q
What type of demand is the demand for labour?
A
Derived demand
4
Q
Why is labour a derived demand?
A
The demand for labour comes from the demand for what it produces, the product.
5
Q
What type of market is a labour market?
A
A factor market
6
Q
What is the demand for a factor derived from?
A
The demand for the product
7
Q
What are the determinants of the demand for labour?
A
- Wage rate
- Demand for products
- Productivity of labour
- Substitutes for labour
- Price of product
- Firm profitability
- Number of firms in the market
- Government intervention
8
Q
How does the wage rate affect the demand for labour?
A
When wages get higher, firms might consider switching production to capital, which might be cheaper and more productive than labour.
9
Q
How does the demand for products affect the demand for labour?
A
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.
10
Q
How does the productivity of labour affect the demand for labour?
A
The more productive workers are, the higher the demand for them, as the output per unit of labour per time period of the firm will be greater.
11
Q
What affects the productivity of labour?
A
- Technology advancements
- Specialisation
- Management techniques
- Motivation
- High skilled immigrants
12
Q
How do substitutes for labour affect the demand for labour?
A
If the cost of other FOP increases, the demand for labour will increase depending on the substitutability of the FOP.
If labour can be replaced for cheaper capital, demand for labour will fall.
13
Q
How does firm profitability affect the demand for labour?
A
The higher the profits of the firm, the more labour they can afford to employ.
14
Q
How does the number of firms in the market affect the demand for labour?
A
This determines how many buyers of labour there is, so if there is only one employer, such as the NHS, the demand for labour is lower than if there are many employers.
15
Q
How does government intervention affect the demand for labour?
A
For example, subsidies for firms or the industry will increase the demand for labour.
16
Q
What is the demand for labour dependent on?
A
The marginal revenue product (MRP)
17
Q
What is marginal revenue product (MRP)?
A
The market value of one additional unit of output.
18
Q
How is MRP calculated?
A
Marginal product of labour (marginal physical product) x marginal revenue for sale of product
MRP = MPP x MR
19
Q
What is the marginal product of labour?
A
The additional output each unit of labour can produce
20
Q
What is the marginal revenue of labour?
A
The additional revenue derived per extra unit of labour
21
Q
Where does equilibrium occur in a labour market?
A
Where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour, MRP = MCL.
22
Q
Why do firms hire at the quantity where MRP = MCL?
A
To maximise profit
23
Q
What does the demand curve show?
A
The marginal revenue product
24
Q
What does the downward sloping demand for labour curve show?
A
The inverse relationship between how much the worker is paid and the number of workers employed
25
What is the wage elasticity of demand (WED)?
- The responsiveness of quantity of labour demanded to changes in wage rate
- WED = %ΔQD/%ΔW
26
What are the determinants of the wage elasticity of demand for labour?
- Ease of substitution between other FOP, such as capital
- The percentage of costs taken by wages
- Time period
- The PED of the product
27
What is the supply of labour?
The number of workers willing and able to work at the current wage rate, multiplied by the number of hours they can work
28
What non-monetary considerations influence the supply of labour?
How satisfied workers are with their job and their working conditions.
29
What are the determinants of the supply of labour?
- Wage rate in other professions
- Demographics of the population
- Migration
- Advantages of work
- Leisure time (substitute)
- Trade unions
- Taxes and benefits
- Barriers to entry (training)
30
How does the wage rate in other professions affect the supply of labour?
If the wage rate is greater in another profession, depending on barriers to entry, workers will leave this industry to the one with the higher wage rate.
31
How do the demographics of the population affect the supply of labour?
The more people there are who are willing and able to work, the higher the supply of labour, determined by retirement and school leaving ages, the number of university students and immigration.
32
How does migration affect the supply of labour?
Migrants are usually of working age, so the supply of labour at all wage rates tends to increase, but particularly lower wage rates, as migrants are usually from economies with average wages lower than the UK minimum wage.
33
How do advantages of work affect the supply of labour?
Influences how much people prefer to work, linked to non-monetary advantages, such as job satisfaction and working conditions.
34
How does leisure time affect the supply of labour?
Leisure is a substitute for work, which is why part-time work and early retirements are attractive options for some people, so people have to choose whether to spend their time on work or leisure, influenced by age, taxes, how many dependents the worker has and income from not working.
35
How do trade unions affect the supply of labour?
They can attract workers to the labour market, as they know their employment rights will be defended, but the limits on workers, such as limiting their ability to strike, might cause some people to withdraw from the labour market.
36
How do taxes and benefits affect the supply of labour?
If taxes are too high and benefits are too generous, people might be more inclined to withdraw from the labour market.
37
How does training affect the supply of labour?
If a lot of training or high qualifications are required for a job, the supply of labour may fall, but if the government subsidises training, it is easier for workers to gain the necessary skills for a job, so the supply of labour could increase.
38
What does the upward sloping supply of labour curve show?
The proportional relationship between how much the worker is paid and the number of workers willing and able to work
39
What is the wage elasticity of supply (WES)?
- The responsiveness of quantity of labour supplied to changes in wage rate
- WES = %ΔQS/%ΔW
40
What are the determinants of the wage elasticity of supply (WES)?
- Ease of switching profession (training times or skills needed)
- Intervention, such as government rules, labour unions or licenses and qualifications
- How vocational the profession is, such as nurses, artists or charity workers
- Time period
- Labour mobility
41
What are characteristics of perfectly competitive labour markets?
- Many workers and employers
- Wage takers
- Homogenous workers
- Low barriers to entry
- Full information
- Flexible or freely moving wages
42
Where is labour market equilibrium?
Where the supply of labour and the demand for labour meet
43
What does the labour market equilibrium determine?
The price of labour, i.e. the wage rate
44
Where is the labour market equilibrium for a perfectly competitive firm?
MCL/ACL (SL) = MRP (DL)
45
Explain why firms in a perfectly competitive labour market hire the quantity of labour where MRP = MCL?
- If the firm hires less than Qe, MRP is greater than MCL, so they should hire more workers
- If the firm hires more than Qe, MRP is less than MCL, so they should fire workers
- So firms should hire at Qe to maximise profit from labour
46
What is the impact to the wage rate if the demand for labour falls?
The wage rate falls
47
What is the impact to the wage rate if the demand for labour increases?
The wage rate increases
48
What is the impact to the wage rate if the supply of labour falls?
The wage rate increases
49
What is the impact to the wage rate if the supply of labour increases?
The wage rate falls
50
What is the impact of changes to the demand for labour if WES is low?
Changes in the demand for labour result in large changes in the wage rate, but small changes in the quantity of labour employed.
51
What is the impact of changes to the demand for labour if WES is high?
Changes in the demand for labour result in small changes in the wage rate, but large changes in the quantity of labour employed.
52
What is the impact of changes to the supply of labour if WED is low?
Changes in the supply of labour result in large changes in the wage rate, but small changes in the quantity of labour employed.
53
What is the impact of changes to the supply of labour if WED is high?
Changes in the supply of labour result in small changes in the wage rate, but large changes in the quantity of labour employed.
54
What is the difference between perfectly competitive labour markets and the real labour market?
In the real labour market, wages are not as flexible as they are in perfectly competitive labour markets.
55
Why are wages not as flexible in the real labour market (‘sticky wages’) as they are in perfectly competitive labour markets?
- Wages in an economy do not adjust to changes in demand
- Instead the minimum wage makes wages sticky
- This means that during a recession, rather than lowering the wages of several workers, a few workers might be fired instead
56
What is monopsony power?
When there is only one buyer (employer) of labour in the market, meaning the firm has the ability to set wages.
57
What is the relationship between MCL and ACL for a firm with monopsony power?
The marginal cost of adding an extra worker is more than the average cost.
58
Why is the marginal cost of adding an extra worker more than the average cost for a firm with monopsony power?
In order to employ another employee, the firm has to pay all of their workers more.
59
What quantity of labour do monopsonies employ?
Where MCL = MRP
60
Why do monopsonies employ the quantity of labour where MCL = MRP?
To maximise profit
61
What wage do monopsonies pay their workers?
Where quantity (MCL=MRP) meets ACL, below the free market equilibrium wage
62
How does the wage rate and quantity of labour differ between a perfectly competitive market and a monopsony?
The employment rate and wage rate in a monopsony are below those that would exist in a perfectly competitive labour market.
63
What determines monopsony power?
- Trade union power
- WED and WES
- Capital and labour interchangeability
- Ability to offshore or outsource labour
- Economy performance
- Monopsony funding
64
How does WED affect monopsony power?
The greater WED is, the greater the extent of unemployment caused.
65
How does WES affect monopsony power?
The greater WES is, the smaller the impact on wages and employment
66
What does WES being perfectly elastic mean for the supply of labour in labour markets?
The supply of labour is equal in a monopsony and perfectly competitive labour market, as ACL = MCL.
67
How does capital and labour interchangeability affect monopsony power?
If labour and capital become more interchangeable, monopsony power increases.
68
How does the ability to offshore or outsource labour affect monopsony power?
Offshoring or outsourcing labour increases monopsony power.
69
How does economy performance affect monopsony power?
If there is a recession or an increase in unemployment, monopsony power increases.
70
What factors contribute to labour market imperfections (failure)?
- Monopsony power
- Trade union power
- Imperfect information
- Structural and cyclical unemployment
- Underemployment
- Lack of wage flexibility
- Discrimination and unequal pay
- Wrong number of workers in an industry
71
How does monopsony power contribute to labour market imperfections?
- Employers with monopsony power employ below the quantity of employment in the free market, at MCL = MRP to maximise profit
- This means resources are misallocated leading to allocative inefficiency and a deadweight loss to society
72
How does trade union power contribute to labour market imperfections?
If trade unions are pushing for higher wages above the market equilibrium, a surplus of labour is created, causing unemployment, and therefore a misallocation of resources.
73
How does imperfect information contribute to labour market imperfections?
- Some qualified workers might not be aware of higher paying jobs in other industries or with other firms
- Some workers might not understand the long term benefits of investing in improving their skills and education
- This can limit the productivity and potential progression of workers, making the market inefficient
74
How does structural unemployment contribute to labour market imperfections?
Workers have the wrong skills or are in the wrong industry, possibly due to creative destruction, decreasing productivity and creating inefficiency.
75
How does cyclical unemployment contribute to labour market imperfections?
There is an inadequate demand for labour, so resources are wasted and misallocated.
76
How does under employment contribute to labour market imperfections?
People are working fewer hours or lower skilled jobs than they want, decreasing productivity and potential output and growth, misallocating resources.
77
How does lack of wage flexibility contribute to labour market imperfections?
The free market equilibrium wage and employment is not achieved, causing allocative inefficiency.
78
What are trade unions?
Workers grouping together to negotiate with employers or other authorities
79
What are the aims of trade unions?
To protect workers, secure jobs, improve working conditions or benefits, and try and achieve higher wages.
80
What actions might trade unions take?
Striking, going slow, taking legal action, working to rule or picket lines.
81
What is the impact on a perfectly competitive labour market of a trade union demanding a higher wage?
- Horizontal supply curve above equilibrium joining original supply curve
- Workers get higher wage Wu
- Number employed in industry falls from Qe to Qd
- Number unemployed is Qs-Qd
- So workers with jobs are better off, while others become worse off
- Market is no longer allocatively efficient as price (wage) is not an accurate signal due to intervention
82
Why does trade union intervention in perfectly competitive labour markets lead to labour market imperfections?
- The market is no longer allocatively efficient as price (wage) is not an accurate signal due to the intervention
- New wage exceeds equilibrium wage
- Quantity of labour demanded falls
83
What are the disadvantages of trade unions?
- May create conflict between members and non-members and members and management
- But union representation may improve industrial relations and increase productivity
- Members need to pay and give time to unions
84
What has happened to trade union membership in the UK in the last 50 years and why?
Union membership has fallen around 50%, due to political pressure from the Conservative Party, and traditional union industries have weakened, such as the closure of the mining industry.
85
What is the impact of a trade union in a monopsony?
- Wages increase closer to the free market equilibrium wage
- The quantity of labour employed increases closer to that of the free market
- Unions reclaim market influence from monopsonists
86
Why can trade unions create inflationary pressure?
Rising wages increase the cost of production for firms, causing cost-push inflation and possibly reducing profit.
87
What does the extent of the impact of a trade union depend on?
- The greater the proportion of workers in a union, the stronger its bargaining power
- If WES is elastic, union power decreases
- If WED is elastic, union power decreases as unionised labour can be too expensive
- If the economy is performing well, unions are more successful in securing wage rises
- In a recession, unions may struggle to negotiate better pay as firms prioritise cost-cutting to stay competitive
- Government legislation and labour laws
- Type of industry, as public sector unions tend to be more influential due to risk of service disruptions
88
If trade unions are beneficial or not depends on what?
- The wage elasticity of supply and demand
- Labour market structure
- Perspective
- Actions taken by unions, as a high degree of cooperation with management can increase productivity
