4.1.6 - The Labour Market Flashcards
What is the demand for labour derived from
Give an example
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
What does the demand curve for Labour show
Draw it
Shows how many workers will be hired at any given wage rate over a particular time
Define the marginal cost for labour
Is the additional cost of hiring an extra employee
Define marginal product
Is the additional output from a hiring an extra employee
Define marginal revenue product
What is the formula
Is the additional revenue of employing an extra worker
MRP= Marginal revenue x marginal product
What is the profit maximising ouput
Where Marginal revenue product = Marginal Cost
What is the demand for labour in the short run
What is the demand for labour in the long run
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
What are the determinants of labour demanded (4)
Explain
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
Define the Elasticity of demand for labour
What is the formula
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
What are the determinants of elasticity of demand for labour (4)
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
Define labour supply
Is the number of hours people are willing and able to supply at a given wage rate
What does the labour supply graph show
Draw it
As wages rise , workers are attracted to work in the industry, increasing the supply for labour
What are the determinants of supply of labour (3)
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
Draw the substitution and income effect on a labour supply graph
Upwards sloping- Substitution effect > income effect
Vertical - Substitution effect = income effect
Downwards bend - substitution effect < income effect
Explain the substitution effect
What effect does it have on labour supply
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
Explain the income effect
What effect does it have on labour supply
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.
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?
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.
Define the elasticity of supply for labour
What is the formula
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
What are the determinants of the elasticity of supply for labour (5)
Explain them
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
Define wage differentials
Are the differences in wages arising between individuals , occupations, industries and regions
What are the characteristics of a perfectly competitive labour market (6)
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
Define a monopsony
Give an example
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.
Draw a monopsony labour graph
X
Explain the characteristics of an imperfectly competitive labour market
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
Define trade unions
Is a group of workers that bargain collectively with employers to increase its members wages
Define economic rent
Is the payment received by a factor of production (labour) needed to keep it in its occupation
Explain a bilateral monopoly
Occurs when a sole seller of labour (trade union) faces a sole buyer of labour (monopsonist)
Define individual bargaining
Occurs when an individual worker bargains with an employer over pay and work conditions, have less negotiating power
Define collective bargaining
Occurs when a trade union bargains with employers on behalf of its members, giving them more negotiating power
Explain trade union mark up
Is the addition of wages secured by members of a trade union compared to if they were not part of the union
Draw and explain the effect of trade unions on a perfectly competitive labour market
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.
Draw and explain the effect of trade unions on a monopsony
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
Explain why the power of trade unions depends on the firm
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.
Define the national minimum wage
Is a statutory minimum wage used to increase the earnings of the low paid
Draw the effect of national minimum wage on labour markets
X
State the advantages of national minimum wage (7)
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
State the disadvantages of national minimum wage (5)
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)
Define wage discrimination
Involves an employer paying lower wages to an employee than others doing the same job, due to their race, gender, age or region.
Define negative discrimination
Occurs where employers treat a specific group of workers less favourably than others in terms of pay and employment.
What are the conditions necessary for wage discrimination to take place (3)
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.
Draw a labour market with the effect of wage discrimination
X
Explain the reasons for growing inequalities in wages (5)
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-
Explain the wage discrimination by gender
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
Explain the wage discrimination by age
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
Explain the wage discrimination buy a part-time and full-time work
Part-time workers hold less responsible jobs within an organisation
Part-time workers earn far less on average per hour than full-time workers
Explain wage discrimination by ethnicity
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
Explain which discrimination by region
Average wages differ in UK regions, wages in are higher than in Northern Ireland
Explain the disadvantages of wage discrimination (5)
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
How do you market forces working against wage discrimination? (3)
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
