4.1.6 - The Labour Market

Question 1

What is the demand for labour derived from

Give an example

Answer 1

The demand for labour is a derived demand , the demand for labour is driven by demand for the products and services that the labour produces

The demand for bus drivers is derived from the demand for public transport

Question 2

What does the demand curve for Labour show

Draw it

Answer 2

Shows how many workers will be hired at any given wage rate over a particular time

Question 3

Define the marginal cost for labour

Answer 3

Is the additional cost of hiring an extra employee

Question 4

Define marginal product

Answer 4

Is the additional output from a hiring an extra employee

Question 5

Define marginal revenue product

What is the formula

Answer 5

Is the additional revenue of employing an extra worker

MRP= Marginal revenue x marginal product

Question 6

What is the profit maximising ouput

Answer 6

Where Marginal revenue product = Marginal Cost

Question 7

What is the demand for labour in the short run

What is the demand for labour in the long run

Answer 7

Leads to diminishing returns, assuming labour is not fixed. If more labour is demanded for fixed factors of land and capital eventually the next worker will be less productive than the previous

Changes depending on location. In a developing country there is a high demand for labour, due to labour being cheaper than capital, however in a developed country demand for labour is less, due to capital being cheaper than labour

Question 8

What are the determinants of labour demanded (4)

Explain

Answer 8

Wage rates- as wages are a price of labour, a change in wages will lead to a movement across the demand curve for labour

Labour productivity- as productivity increases, they become more valuable to the employer and leads to an increase in demand for labour

The price of substitute factors- if capital becomes cheaper this will lead to a reduction in demand for labour

Other labour costs - if employers national insurance and pension contributions increase , the demand for labour will fall

Question 9

Define the Elasticity of demand for labour

What is the formula

Answer 9

Measures the responsiveness of the quantity demanded of labour to changes in the price of labour

= % change in quantity of labour demanded / % change in wage rate

Question 10

What are the determinants of elasticity of demand for labour (4)

Answer 10

Time- the longer the time period , the easier it is to substitute labour for capital , making it more elastic

Availability of substitutes - the easier it is to substitute labour for other factors of production, the more elastic demand for labour

Elasticity of demand for the product - as labour has a derived demand , if the elasticity of the good is inelastic, the demand for labour will also be inelastic

Proportion of labour costs to total costs of production- the larger the proportion the greater the elasticity of demand

Question 11

Define labour supply

Answer 11

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

Question 12

What does the labour supply graph show

Draw it

Answer 12

As wages rise , workers are attracted to work in the industry, increasing the supply for labour

Question 13

What are the determinants of supply of labour (3)

Answer 13

Size of working population- if the number of people of working age increase, the potential supply of labour increases

Monetary factors- higher wages for employees leads to an extension along the supply curve for labour

Non-monetary factors: (increase the supply for labour if met)
Job satisfaction- how satisfied employees are with their job
Job recognition- recognised for their work by senior employees
Promotion prospects- chance of progression
Job security- protection of employees jobs
Working conditions- safe and enjoyable working environment
Location- time and cost of commuting to the workplace

Question 14

Draw the substitution and income effect on a labour supply graph

Answer 14

Upwards sloping- Substitution effect > income effect
Vertical - Substitution effect = income effect
Downwards bend - substitution effect < income effect

Question 15

Explain the substitution effect

What effect does it have on labour supply

Answer 15

Explains the upwards slope of the labour supply curve.
As the wage rate increases, workers are willing to work more hours and substitute away from their leisure time, as the opportunity cost of leisure time rises with higher wages.

Has a positive effect on the supply labour as there is more of an incentive to work

Question 16

Explain the income effect

What effect does it have on labour supply

Answer 16

Explains the downward bending part of the labour supply curve. Above a certain wage, as wage rates increase, workers can afford to work fewer hours whilst maintaining their level of income.

Has a negative effect on the supply on labour as people take away from their work time and increase their leisure time.

Question 17

Google offer a number of non- monetary perks to their employees.

From an economic and business point of view what is the justification for providing all of these perks and having such well designed workplaces?

Answer 17

Providing all the perks that Google and other technology firms offer helps improve productivity of employees and therefore profitability.
This is because providing free transport, free meals, facilities and more motivates employees to work harder in their job, as they feel valued by the company. This could lead to increased innovation and productivity of workers, improving the firm’s revenue and therefore profit.
Furthermore all the benefits of working for a firm like Google means they are more likely to gain the most skilled and experienced employees, giving them a competitive advantage.
In addition, having all these perks and well designed workplaces gives the firm an improved reputation and encourages customers to buy from the firm instead of competitors, improving profitability.

Question 18

Define the elasticity of supply for labour

What is the formula

Answer 18

Is a measure of the responsiveness of the quantity of labour supplied following a change in the wage rate

% change in quantity of labour supplied/ % change in wage rate

Question 19

What are the determinants of the elasticity of supply for labour (5)

Explain them

Answer 19

Geographical mobility of labour- a job offered in a remote location with a difficult environment will have a more inelastic supply of labour
Occupational mobility - if its difficult to transfer from one industry to another (doctor to pilot), due to the specific skills needed , inelastic supply of labour.

Availability of substitutes - plenty of competition in the same industry leads to a more elastic supply for labour

Time- supply for labour is more inelastic in the short run and more elastic in the long run. For example the NHS may not have large numbers in the short run but in the long run they can increase training to increase labour pool

Extent of unemployment- the higher the level of unemployment the more elastic supply is , as firms can recruit workers at a lower wage rate

Question 20

Define wage differentials

Answer 20

Are the differences in wages arising between individuals , occupations, industries and regions

Question 21

What are the characteristics of a perfectly competitive labour market (6)

Answer 21

Each unit of labour is homogenous and unable to influence the wage rate
Workers are wage takers , determined by supply and demand at market level
Firms are wage takers, if they pay a wage below average they will leave for other firms
Firms maximise profits by employing quantity of labour at MRP=MC
Perfect information
Freedom of entry and exit from the industry

Question 22

Define a monopsony

Give an example

Answer 22

Is a market with a single dominant buyer , giving the employer market power to reduce the wage rate in an imperfectly competitive market

An example, the NHS is the only main buyer of employment for doctors and nurses , allowing them to give out low wages. Mostly happens in the public sector.

Question 23

Draw a monopsony labour graph

Answer 23

X

Question 24

Explain the characteristics of an imperfectly competitive labour market

Answer 24

Employers are wage makers due to their significant buying power in the market
Employers will maximise revenue by hiring workers up to the point where MRP= MC
Distorts efficient labour outcomes, lower wages and quantity of labour than competitive labour market

Question 25

Define trade unions

Answer 25

Is a group of workers that bargain collectively with employers to increase its members wages

Question 26

Define economic rent

Answer 26

Is the payment received by a factor of production (labour) needed to keep it in its occupation

Question 27

Explain a bilateral monopoly

Answer 27

Occurs when a sole seller of labour (trade union) faces a sole buyer of labour (monopsonist)

Question 28

Define individual bargaining

Answer 28

Occurs when an individual worker bargains with an employer over pay and work conditions, have less negotiating power

Question 29

Define collective bargaining

Answer 29

Occurs when a trade union bargains with employers on behalf of its members, giving them more negotiating power

Question 30

Explain trade union mark up

Answer 30

Is the addition of wages secured by members of a trade union compared to if they were not part of the union

Question 31

Draw and explain the effect of trade unions on a perfectly competitive labour market

Answer 31

To attract more workers, a higher wage rate has to be offered, leading to a kinked supply curve
Effect of trade union leads to an excess supply for labour, causing unemployment.
In a perfectly competitive labour market, trade unions cause higher wages and a lower quantity of labour.

Question 32

Draw and explain the effect of trade unions on a monopsony

Answer 32

Trade unions cause employers to become wage takers (assuming trade union is strong) up until a point
If a firm wants to employ more workers after a point, wages offered increase for the whole workforce, leading to a kinked supply curve and vertical increase in marginal costs
In a monopsony labour market, trade unions lead to higher wages and higher quantity of labour

Question 33

Explain why the power of trade unions depends on the firm

Answer 33

If the firm has inelastic demand for labour, the trade union will be able to negotiate quicker and easier to get higher wages.

However if a firm is not profitable and on the verge of bankruptcy, the power of trade unions will be low as firms will not be able to give higher wages.

Question 34

Define the national minimum wage

Answer 34

Is a statutory minimum wage used to increase the earnings of the low paid

Question 35

Draw the effect of national minimum wage on labour markets

Answer 35

X

Question 36

State the advantages of national minimum wage (7)

Answer 36

Reduces poverty
Reduces wage differentials
Incentivises people to work
Reduces benefits payments and increases tax income
Increases employee motivation and productivity
Employees are seen more as an asset
Counters monopsonist power

Question 37

State the disadvantages of national minimum wage (5)

Answer 37

Creates an excess supply of labour, leading to unemployment
Lower demand for jobs
Employees above minimum wage will demand higher wages
Increased business costs, bankruptcy and offshoring
Does not take into account regional differences in the cost of living (Newcastle and London)

Question 38

Define wage discrimination

Answer 38

Involves an employer paying lower wages to an employee than others doing the same job, due to their race, gender, age or region.

Question 39

Define negative discrimination

Answer 39

Occurs where employers treat a specific group of workers less favourably than others in terms of pay and employment.

Question 40

What are the conditions necessary for wage discrimination to take place (3)

Answer 40

Firms must have wage maker power, the labour market must be imperfect

Distinct labour market, workers are not able to offer their labour elsewhere

Lack of protection and imperfect information on the discrimination within the market.

Question 41

Draw a labour market with the effect of wage discrimination

Answer 41

X

Question 42

Explain the reasons for growing inequalities in wages (5)

Answer 42

Decline in primary and secondary industries - decline of jobs done by men

Decline of trade union membership- led to wage discrimination for male manual workers

Immigration- increase in supply of workers willing to take low paid jobs

Technology- a decrease in demand for low skilled jobs and increased demand for high skilled workers

Government policy- some countries, like USA and UK, have made policies putting a downward pressure on low wages by weakening trade union power and upward pressure on high wages by reducing income tax for high earners
Technology-

Question 43

Explain the wage discrimination by gender

Answer 43

Females traditionally earn less than men , in the past they were denied the same education and job opportunities.

The equal pay act 1970 and sex discrimination act 1975 made it illegal to pay women less than men if they were doing the same job.

Growing population of well qualified women, constant membership of women in trade unions and social awareness of wage discrimination against women has made the gender pay gap less

Question 44

Explain the wage discrimination by age

Answer 44

Younger workers are paid less due to their lack of experience, all the workers are paid less due to being less physically able for manual work.

Economic theory suggests workers aged 30 to 60 or paid the most due to having the most education, training and experience

Question 45

Explain the wage discrimination buy a part-time and full-time work

Answer 45

Part-time workers hold less responsible jobs within an organisation

Part-time workers earn far less on average per hour than full-time workers

Question 46

Explain wage discrimination by ethnicity

Answer 46

On average white British workers in the UK have higher earnings than ethnic minorities

Ethnic minorities are more likely to have jobs in manual labour and less jobs in managerial positions. More likely to have jobs in the service sector, hotels and restaurants which are less paid

There is also discrimination against ethnic minorities in recruitment, selection, promotion and training

Question 47

Explain which discrimination by region

Answer 47

Average wages differ in UK regions, wages in are higher than in Northern Ireland

Question 48

Explain the disadvantages of wage discrimination (5)

Answer 48

Leads to a dead weight welfare loss, certain groups will be unemployed or have wages below their marginal revenue productivity

In competitive markets, firms will have higher costs as non-discriminative rival firms will hire workers at lower wages

Is a waste of scarce , valuable resources

Lack of cultural diversity in the workplace

Causes a sense of frustration and injustice, leading to social tensions and discriminated workers going on strike

Question 49

How do you market forces working against wage discrimination? (3)

Answer 49

If a firm only wants to employ white workers, it would increase the wages for white workers and therefore the cost of production
This leads to…
Rival firms can enter the market and employ ethnic minorities, have higher average earnings and lower costs
This leads to…
Market forces put pressure on the discriminative firm to cut wages and employ all workers