8.3 Labour market forces and gov intervention Flashcards
Labour being a derived demand
Labour is a derived demand. This means that the demand for labour comes from the
demand for what it produces. For example, the demand for people who make cars is
derived from the demand for cars. With no demand for cars, there will be no
demand for car manufacturers.
What will lead to a movement along the demand curve for labour
Wage rates
diagram shows an inverse relationship. As wage rate decreases, more workers are employed
What will lead to shifts of the demand curve for labour?
Demand for products:
o 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.
Productivity of labour:
o The more productive workers are, the higher the demand for them.
o This can be increased with education and training, and by using technology.
Substitutes for labour:
o If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left:
How profitable the firm is:
o The higher the profits of the firm, the more labour they can afford to employ.
The number of firms in the market:
o This determines how many buyers of labour there is. If there is only one employer, for example the NHS, the demand for labour is lower than if there are many employers, such as in the supermarket industry.
o The lower demand for labour can mean wages are lower, so trade unions try to encourage higher wages.
What is the marginal revenue product (MRP) theory?
This theory states that the demand for labour is dependent on the marginal revenue product (MRP).
This is the extra revenue a firm gains from employing an extra worker
MRP is calculated by marginal product multiplied by marginal revenue.
MRP = MP x MR.
The marginal product of labour is the additional output each unit of labour can produce.
The marginal revenue of labour is the additional revenue derived per extra unit of labour.
Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour.
The demand curve shows the MRP.
Factors that affect the supply of labour
The wage rate:
o The upward sloping supply curve shows the proportional relationship
between how much the worker is paid and the number of workers willing and
able to work.
Demographics of the population:
o The more people there who are able and willing to work, the higher the supply of labour. This changes with retirement and school leaving ages, the number of university students and immigration.
o It can be illustrated with a shift to the right of the supply curve
Migration:
o Migrants are usually of working age, so the supply of labour at all wage rates tends to increase. Migration particularly affects the supply of labour at the lower wage rates, because migrants are usually from economies with average wages lower than the UK minimum wage.
Advantages of work:
o This can influence how much people prefer to work, and is linked to nonmonetary advantages. If the cost of working is lower, so families can afford childcare, people are more likely to work. If the benefits of working are high, such as holiday entitlements and the potential to be promoted, the supply of labour is likely to increase. It also considers job satisfaction and how good the working conditions are.
Leisure time:
o Leisure is a substitute for work, which is why part-time work and early retirements are attractive options for some people.
o People have to choose whether to spend their time on work or leisure. This is influence by age, the amount of taxes paid, how many dependents the worker has and income from not working.
Trade unions:
o These could attract workers to the labour market, because they know their employment rights will be defended. However, the limits on workers, such as limiting their ability to strike, might cause some people to withdraw from the labour market.
Taxes and benefits:
o If taxes are too high and benefits are too generous, people might be more inclined to withdraw from the labour market.
Training:
o If a lot of training or high qualifications are required for a job, then the supply of labour may fall. However, if the government subsidise training, it is easier for workers to gain the necessary skills for a job, so the supply of labour could increase.
Wage determination in perfect markets
Labour market equilibrium:
The labour market is a factor market. The supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers.
Labour market equilibrium is determined where the supply of labour and the demand for labour meet. This determines the equilibrium price of labour, i.e. the wage rate.
When the demand for labour falls, such as during a recession, in a free market the wage rate would fall from W to W1.
If the supply of labour increases, such as if the retirement age was raised, the wage rate would fall from W to W1.
However, in the real labour market, wages are not this flexible. Keynes coined the phrase ‘sticky wages’. Wages in an economy do not adjust to changes in demand. The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead.
Wage determination in imperfect markets
How various factors, such as monopsony power, trade unions and imperfect information contribute to imperfections in a labour market?
Monopsony power: When there is only one buyer of labour in the market, there is said to be monopsony power. It means the firm has the ability to set wages.
Trade union power: If trade unions are pushing for higher wages above the market equilibrium, the labour market is likely to be more flexible. Trade unions can also increase job security. Higher wages can be demanded by limiting the supply of labour, by closing firms, or by threatening strike action. Higher wages could cause unemployment, however. Trade unions can counter-balance exploitative monopsony power.
Imperfect information: Some qualified workers might not be aware of higher paying jobs in other industries or with other firms. Some workers might not understand the long term benefits of investing in improving their skills and education. This can limit the productivity and potential progression of workers. It makes the market inefficient.
What does the demand curve for labour show? Why is it shaped like that?
It shows us how many workers will be hired at any given wage rate over a given period of time.
Important to remember that the demand for labour is a derived demand
The first few workers are all bringing in more revenue than the previous worker. This is as excess capital and land can be used up and are more productive. Can also get specialisation gains out of these workers. Then the curve begins to fall. This due to lower productivity due to the constraint of our fixed FOP’s which reduced MRP for these workers. Firms will hire workers until the MRP = Wage. Anything past that means that the worker will cost more to the firm than they bring in
The wage rate is the MC of labour.
What is MRP?
It is the extra revenue generated when an additional worker is hired
MRP = Marginal physical product x Marginal revenue
Workers are paid according to MRP and the number of workers firms are willing to employ are determined by MRP
Why is there an inverse relationship between wage and the Q of workers?
SR - This is because of the law of diminishing marginal returns
LR - All FOP’s are variable which means capitals can be employed for a firm which is a substitute for labour. More cost effective to employ cheaper capital than labour
What are the criticisms of the MRP theory?
How do you measure productivity? Teaching profession for example. Output is not marketed as there are no price on the ids. For schools to know the number of workers to employ is very difficult
Teamwork makes it difficult to measure individual productivity
The self employed? Distorts the theory as they don’t use MRP to pay themselves
We make the assumption we are working with perfectly competitive markets. What if that is not the case and we are working with markets that have trade unions who ask for higher wages. This goes against the theory that workers are aways paid according to their MRP
What causes labour demand curves to shift? (pneuomnoic)
PDPC
Change in the final price of the product that te labour is making. If the price of that product changes, it affects MRP. If price of the product goes up then MRP shifts right
Change in demand for the final product. If demand increases then demand for the labour will also increase
Change in labour productivity affects the MP of labour which shifts the MRP.
Changes in the price of capital - in the LR do you hire more capital or more workers? If price of capital falls, demand for labour decreases
)What is the Elasticity of the labour demand and what factors can affect it (pneumonic)
Measures the responsiveness of labour demanded given a change in the wage rate
SECT
Substitutability of capital for labour - the more substitutable, the more wage elastic demand for labour will be. If wages rise, you don’t need to hire so many workers and you can get rid of workers and get capital instead
Elasticity of demand for the final product - if it is inelastic and wages go up firms won’t respond by cutting their workforce. This is because they can just pass on those higher costs via higher prices
Cost of labour as a percentage of the total cost - the higher of a percentage they are of that labour costs are as a percentage of total costs, the more elastic labour demand will be. Labour demand can reduce significantly
Time period - In the LR all FOP’s are variable which means it is easier to bring in capital for a firm which means wage demand becomes more wage elastic
What is the individual labour supply curve? What determines the shape?
You make a key choice between work and leisure. One is the opp cost of the other
Income effect: it is as wages go up, incomes will rise at the same time. The effect can be negative as if wages rise we decide to work less if we have a target income
Substitution effect: As wages rise, the opp cost of leisure time increases. You could’ve earned a crazy high wage instead of lazing around relaxing
In the first section, wages are increasing at a very low rate. Individuals tend to responds by working more. Opp cost of leisure time is increasing which means substitution effect is positive and the income effect is also positive as they have to work in order to get to a certain income to live a better life. This means the overall wage effect is positive. Thus with higher wages you see a highe rnumber of hours worked
In the second section, real wages raise even more. This mean opp cost raises too. This mean substitution effect is positive. Number of hours worked are increasing but the rate at which they are working more is slowing down. This suggests that these people are reaching a target income. You can say the income effect is kind of becoming negative but not enough to outweigh the substitution effect which means the overall wage effect is still positive
In the third section, curve bends back on itself. Substitution effect is positive as wages get really high, the opp cos of leisure is very high. However the income effect becomes negative. Thi sis as we make the assumption that workers have reached their target incomes. Not willing to work more with higher wages and sacrifice even more leisure time. At this point leisure time becomes important to them and they realise they don’t need to work as much anymore. This dominates the substitution effect which means the overall effect is negative
What shifts the labour supply curve
Non wage determinants
Wage on offer in substitute occupations - if it’s really high then a lot of workers in this profession will leave and go work in other professions
Barriers to entry - min entry requirements and skill sand qualifications. The less supply of labour there will be if these are high
Non - monetary characteristics of the job. Company cars holidays etc
Improvements in occupational mobility of labour - shift supply curve right if more people get skills required to enter a specific profession
Ability of workers to chose or have the option of overtime will increase the supply of labour
Size of the working population
Value of leisure time. If people value leisure more, then supply shifts to the left
