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ECON (MACRO & MICRO) > 6 The Labour Market (MICRO) > Flashcards

6 The Labour Market (MICRO) 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

it means that the demand for labour comes from the demand for what is being produced

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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 3 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 2 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 3 assumptions of a perfectly competitive labour market?

A
  • no barriers to entry or exit
  • perfect information on wages
  • labour is homogenous
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11
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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12
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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13
Q

Give 3 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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14
Q

Give 3 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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15
Q

Give 3 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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16
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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17
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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18
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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19
Q

What is a monopsony?

A

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

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20
Q

At point will a monopsony employ?

A

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

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21
Q

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

A

the average cost of labour

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22
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

23
Q

What negative outcome can a monopsony lead to?

A

the exploitation of employed labour

24
Q

Give an example of a monopsony

A
  • the UK government
  • teachers and NHS (nurses)
25
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

26
Q

Define a trade union

A

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

27
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)
28
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

29
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
30
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
31
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
32
Q

List 3 causes of occupational immobility

A
  • the education and training needed
  • the cost of training
  • the level of skill required
33
Q

List 3 causes of geographical immobility

A
  • family and social ties
  • regional variations in house prices
  • cultural and language barriers
  • lack of infrastructure
  • cost of infrastructure
34
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
35
Q

Define wage differentials

A

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

36
Q

Give 2 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
37
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
38
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
39
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
40
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
41
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
42
Q

LIST 2 arguments against (large) wage differentials

A
  • the trickle down effect may not occur
  • may increase income inequality
43
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
44
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)
45
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
46
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
47
Q

List and briefly explain 3 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)
48
Q

Give 3 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
49
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
50
Q

Give 3 ways an employer may discriminate

A
  • in the form of:
  • age, disability, gender, race, religion
51
Q

Give 2 examples of regulations/laws that tackle discrimination

A
  • Equal Pay Act 1970
  • Equality Act 2010
52
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
53
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
54
Q

Define Supply of Labour

A

the number of hours workers are willing and able to work in a given time period.

ECON (MACRO & MICRO) (19 decks)

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