4.1.6 The labour market Flashcards
Who demands labour?
Employers
Who supplies labour?
Those who want to be employees (the employees)
What type of demand is the demand for labour?
Derived demand
Why is labour a derived demand?
The demand for labour comes from the demand for what it produces, the product.
What type of market is a labour market?
A factor market
What is the demand for a factor derived from?
The demand for the product
What are the determinants of the demand for labour?
- Wage rate
- Demand for products
- Productivity of labour
- Substitutes for labour
- Price of product
- Firm profitability
- Number of firms in the market
- Government intervention
How does the wage rate affect the demand for labour?
When wages get higher, firms might consider switching production to capital, which might be cheaper and more productive than labour.
How does the demand for products affect the demand for labour?
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.
How does the productivity of labour affect the demand for labour?
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.
What affects the productivity of labour?
- Technology advancements
- Specialisation
- Management techniques
- Motivation
- High skilled immigrants
How do substitutes for labour affect the demand for labour?
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.
How does firm profitability affect the demand for labour?
The higher the profits of the firm, the more labour they can afford to employ.
How does the number of firms in the market affect the demand for labour?
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.
How does government intervention affect the demand for labour?
For example, subsidies for firms or the industry will increase the demand for labour.
What is the demand for labour dependent on?
The marginal revenue product (MRP)
What is marginal revenue product (MRP)?
The market value of one additional unit of output.
How is MRP calculated?
Marginal product of labour (marginal physical product) x marginal revenue for sale of product
MRP = MPP x MR
What is the marginal product of labour?
The additional output each unit of labour can produce
What is the marginal revenue of labour?
The additional revenue derived per extra unit of labour
Where does equilibrium occur in a labour market?
Where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour, MRP = MCL.
Why do firms hire at the quantity where MRP = MCL?
To maximise profit
What does the demand curve show?
The marginal revenue product
What does the downward sloping demand for labour curve show?
The inverse relationship between how much the worker is paid and the number of workers employed
What is the wage elasticity of demand (WED)?
- The responsiveness of quantity of labour demanded to changes in wage rate
- WED = %ΔQD/%ΔW
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
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
What non-monetary considerations influence the supply of labour?
How satisfied workers are with their job and their working conditions.
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)
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.
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.
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.
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.
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.
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.
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.
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.
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
What is the wage elasticity of supply (WES)?
- The responsiveness of quantity of labour supplied to changes in wage rate
- WES = %ΔQS/%ΔW
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
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
Where is labour market equilibrium?
Where the supply of labour and the demand for labour meet
What does the labour market equilibrium determine?
The price of labour, i.e. the wage rate
Where is the labour market equilibrium for a perfectly competitive firm?
MCL/ACL (SL) = MRP (DL)
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
What is the impact to the wage rate if the demand for labour falls?
The wage rate falls
What is the impact to the wage rate if the demand for labour increases?
The wage rate increases
What is the impact to the wage rate if the supply of labour falls?
The wage rate increases
What is the impact to the wage rate if the supply of labour increases?
The wage rate falls
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.
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.
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.
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.
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.
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
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.
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.
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.
