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Econ > 4.1.6 The labour market > Flashcards

4.1.6 The labour market Flashcards

1
Q

What type of demand is labour?

A

derived demand

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2
Q

What is meant by labour being derived demand?

A

the demand for labour results from businesses need to produce goods and services demanded by consumers

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3
Q

What is the marginal productivity theory of the demand for labour?

A

that the demand for labour is dependent on the marginal revenue product (MRP)

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4
Q

How do you calculate MRP?

A

marginal (physical) product multiplied by marginal revenue

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5
Q

What is the marginal product of labour?

A

the additional output each unit of labour can produce

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6
Q

What is the marginal revenue of labour?

A

the additional revenue derived per extra unit of labour

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7
Q

How does the MRP relate to the demand curve?

A

the demand curve shows the MRP

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8
Q

Give factors that affect the demand for labour?

A
  • the wage rate
  • demand for products
  • productivity of labour
  • substitues for labour
  • number of firms in the market
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9
Q

State and explain factors that affect the wage elasticity of demand for labour?

A
  • labour costs as a % of total costs. When labour costs are a high % of total costs, then the labour demand is more wage elastic
  • ease and cost of factor substitution. Demand is more elastic when firms can easily substitute between labour and capital inputs
  • the PED of the product. The more price elastic the product, the more price elastic the demand for labour
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10
Q

What are the assumptions of a perfectly competitive labour market?

A

-all factors of production (apart from labour are fixed)
-workers are homogeneous, all add the same marginal product
-labour market is perfectly competitive - so supply is horizontal and wage rate is given
-the marginal revenue product is very difficult to measure, particularly for a service

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11
Q

A perfectly competitive labour market diagram analysis

A

A firm will employ up to the point where MRPL=MCL at Q
Below Q, the marginal cost of labour, which is the wage the business pays the additional worker, is less than the revenue that additional worker generates (MRPL).
Hence the business is making a profit from employing that additional worker.
Beyond Q, the MCL>MRPL and the business will be making a loss from employing the additional worker. Thus, the profit from labour is maximised where MCL=MRPL.

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12
Q

What is the difference between the labour market model we use and the real labour market?

A
  • Keynes described ‘sticky wages’ - wages in an economy do not adjust quickly or easily to changes in demand
  • the minimum wage makes wages sticky and means that during a recession, rather than lowering the wages of several workers, a few workers may be sacked instead
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13
Q

Define the labour supply / the supply of labour

A

the number of hours individuals are willing and able to supply at a given wage rate

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14
Q

Give possible causes of an outward shift in the supply of labour

A
  • net inward migration of suitable qualified and/or experienced workers
  • lower entry barriers to this particular job
  • fall in relative pay in substitute jobs
  • demographic factors causing a rise in the active labour supply
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15
Q

Give possible causes of an inward shift in the supply of labour

A
  • brain drain effects - when an economy loses skilled workers overseas
  • decline in non-monetary rewards associated with the job, e.g. job dissatisfaction
  • fall in relative pay in this occupation compared with other jobs
  • rise in minimum qualifications needed to work in an occupation
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16
Q

Give factors that affect the wage elasticity of supply of labour

A
  • the level of skill required
  • time taken for the necessary skills to be acquired
  • the extent of employment/unemployment in that sector
  • the availability of suitable labour in other industries
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17
Q

Describe the substitution effect in relation to labour

A

as the wage rate increases, the opportunity cost of not working increases - thus the worker substitutes leisure for work

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18
Q

Describe the income effect in relation to labour

A

as wage increases, so does one’s ability to enjoy leisure. Thus workers may supply less labour at higher wage rates to enjoy more leisure time

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19
Q

When we model labour markets, what do we assume about the substitution and income effect in relation to labour?

A

that the substitution effect outweighs the income effect

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20
Q

What is a monopsony?

A

a sole dominant buyer of labour that has the ability to set wages

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21
Q

At point will a monopsony employ?

A

When MC(L) (marginal cost of labour) = MRP(L)

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22
Q

For a monopsony employer, the supply of labour equals…?

A

the average cost of labour

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23
Q

A monopsony employer can use their buying power…?

A

to pay a lower wage than the value of the marginal revenue product of workers employed

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24
Q

What negative outcome can a monopsony lead to?

A

the exploitation of employed labour

25
Q

Give an example of a monopsony

A
  • the UK government
  • teachers and NHS (nurses)
26
Q

For a monopsony, why is the MC(L) greater than the AC(L)?

A

because in order to employ another employee, the firm has to raise its wage rate, but it has to do this for all its workers

27
Q

Monopsony diagram analysis

A

On this diagram, a monopsony will maximise profit by employing up to the point where MC=MRP at Q2. In order to employ Q2 they need to pay a wage of W2.
In contrast, a competitive labour market would lead to a level of employment and wage where D=S at W1/Q1.
Hence a monopsony employer leads to a lower level of employment and wage. The greater the difference between MRP and wage, the greater the monopsony power and exploitation of workers.

28
Q

Define a trade union

A

an organisation that aims to protect workers, secure jobs, improve working conditions, and try to achieve higher wages

29
Q

What is the effect of a trade union on a perfectly competitive labour market?

A
  • the increase in wage rates from trade union influence increases unemployment in the industry
  • trade unions distorts market, and market loses efficiency (for perfectly competitive)
30
Q

What is the name for the type of unemployment caused by a minimum wage in a perfectly competitive labour market?

A

real wage unemployment

31
Q

What is the effect of a trade union on a monopsony employer?

A
  • the increase in wage rates from trade union influence pushes wages and employment closer to a competitive equilibrium
  • trade union improves market efficiency
32
Q

The impact of a TU in a perfectly competitive market diagram analysis

A

A competitive market will establish a wage rate of Wc and Qc employed
A key aim of the unions is to negotiate a minimum price for labour at Wtu which will reduce employment to Qtu
Thus the trade union activity creates a kinked supply curve of labour as shown (Stu)
At union wage of Wtu unemployment rises as illustrated because more join the labour market due to higher wage negotiated

33
Q

The impact of a TU in a monopsonistic labour market diagram analysis

A

A TU bargains for a minimum wage of Wtu. This wage becomes the AC and MC of labour up to the point where it meets the S curve, at which point it reverts back to the original AC and MC curves. The monopsonistic employer will look to maximise its profit from labour by employing where the MC=MRP at Qtu.
Hence the existence of a TU in a monopsony labour market has led to an increase in wage (Wm to Wtu) and employment (Qm to Qtu), and moves the market closer to the point of a perfectly competitive market outcome where D=S.

34
Q

What is economic rent?

A
  • earnings over and above that necessary to keep the factor in its present use
  • in the case of wages, it is the difference between the market wage rate above that which an individual would have been willing to work at
35
Q

Define transfer earnings

A
  • the minimum payment necessary to keep the factor in its present use
  • i.e. the opportunity cost of employing a factor
36
Q

List causes of occupational immobility

A
  • the education and training needed
  • the cost of training
  • the level of skill required
37
Q

List causes of geographical immobility

A
  • family and social ties
  • regional variations in house prices
  • cultural and language barriers
  • lack of infrastructure
  • cost of infrastructure
38
Q

Why does geographical and occupational immobility represent a case of imperfect labour markets?

A
  • as it creates barriers to entry into a labour market
  • labour is not mobile
  • labour is not homogenous
39
Q

Define wage differentials

A

the differences that exist in wages between different groups of workers, or between workers in the same occupation

40
Q

Give reasons why wage differentials exist

A
  • difference in skill
  • difference in regions or industries
  • trade union influence can influence the wage rate paid to a group of workers
41
Q

LIST 4 arguments for wage differentials

A
  • provides an incentive to work harder
  • encourages the trickle down effect
  • encourages enterprise
  • encourages work not welfare
42
Q

Explain how wage differentials provide an incentive for individuals to work harder, and how this affects the macroeconomy

A
  • if wages are higher elsewhere, individuals are incentivised to gain new skills & qualifications to get the higher wages
  • this increases productivity, long-run growth, international competitiveness, and FDI
  • it’s also good for the individual
43
Q

Explain how wage differentials encourage the trickle down effect, and how this affects the macroeconomy

A
  • higher wage earners spend their money, setting off the multiplier effect
  • this leads to incomes created elsewhere and job creation
44
Q

Explain how wage differentials encourage enterprise, and how this affects the macroeconomy?

A
  • wage differentials provide an incentive to take risks to raise your MRP, in order to chase the reward of high wages
  • this increases long-run growth, job creation, productivity, and FDI
45
Q

Explain how wage differentials encourage work and not welfare, and how this affects the macroeconomy?

A
  • wage differentials incentivise individuals to not be on welfare payments, and instead to seek employment
  • this means gov revenue can be used elsewhere, and may reduce taxes on individuals
46
Q

LIST 2 arguments against (large) wage differentials

A
  • the trickle down effect may not occur
  • may increase income inequality
47
Q

Explain why the trickle down effect may not occur

A
  • higher earners may save a lot of their money (are likely to have a low MPC)
  • or they may spend it abroad
48
Q

Explain why income inequality is bad for the macroeconomy

A
  • government may have to give out more unemployment related benefits and welfare spending (less spending elsewhere)
  • more social costs are likely to occur, e.g. high crime, divorce, etc
  • (bad for the individual as well)
49
Q

List and explain 2 points when evaluating wage differentials

A
  • how much inequality? - compare costs and benefits, i.e. do the incentive benefits trump the social costs? Is the income inequality large or small?
  • SR vs LR - is it worth it in the LR? - increased entrepreneurship, productivity, innovation, etc all happen in the LR
50
Q

What is your conclusion when considering wage differnetials?

A
  • wage differentials are worth it if the income inequality is relatively small - such that the incentive benefits still outweigh the social costs
  • moreover, these benefit of these differentials are worth it in the LR, but may not be in the SR, so it is dependent on the economic objectives of the country/government
51
Q

Define a national minimum wage

A

a statutory pay floor that cannot be undercut

52
Q

List and briefly explain advantages of a minimum / national living wage

A
  • improves labour productivity - workers are more motivated
  • increases incentive for people to enter labour market and accept jobs, leads to less welfare payments and benefits and more opportunity for spending elsewhere
  • reduces wage differentials
  • firms have a greater incentive to invest in labour productivity (invest in workers)
53
Q

Give disadvantages of a minimum / national living wage

A
  • can cause unemployment in competitive labour markets
  • some firms may not be able to afford the wages
  • could lead to higher prices as firms pass on the wage increases
  • there are regional differences, the north minimum wage shouldn’t be the same as the south minimum wage
54
Q

Give 2 points for when evaluating a minimum wage

A
  • depends on the wage elasticity of supply and demand for labour, the more inelastic, the less unemployment
  • depends on the labour market, benefits for a monopsony, but not for a perfectly competitive labour market
55
Q

Give ways an employer may discriminate

A
  • in the form of:
  • age, disability, gender, race, religion
56
Q

Give 2 examples of regulations/laws that tackle discrimination

A
  • Equal Pay Act 1970
  • Equality Act 2010
57
Q

Explain the labour market diagram that shows discrimination

A
  • employers who are influenced by their own prejudices believe that the MRP of the discriminated group of workers is lower than it really is
  • this means they demand fewer of these workers
58
Q

List and briefly explain 3 costs of discrimination for the government and the economy

A
  • gov need to increase welfare payments to support discriminated workers
  • discriminated workers get unfairly low wages which will reduce the government’s tax revenue
  • if discriminated workers are overqualified, their levels of productivity can fall, which leads to a loss of international competitiveness

Econ (12 decks)

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