A2 Labour Markets Flashcards
Why is labour a derived demand?
The demand for labour is not for its own sake but for the output that it produces (selling this output brings the firm revenue)
What are sub-markets?
A large market often can be split into several smaller markets. This is somewhat because workers vary in their skills and characteristics of the job that they do.
What are the different examples of sub-markets in the labour market?
There are different markets for different forms of labour, e.g dentists, doctors, teachers, cleaners.
If labour is immobile, there may be geo-graphical sub-markets as well.
There may be a sub-market for different skills within an industry, it’s possible for firms to operate in several sub-markets.
What is the marginal physical product of labour (MPP)?
The additional output that is produced from an additional unit of labour (while capital is kept constant).
Why is it that the Marginal Physical Product of Labour is expected to fall, ceteris paribus.
As according to the law of diminishing returns, the additional unit of labour will not produce as much output as the previous. Since all other constants are kept equal, the additional unit of labour has less capital to work with (than the previous) and without an increase in capital, relative capital continues to become scarcer as labour increases.
What is the Marginal Revenue Product( MRP)?
This is the additional revenue made by the firm from selling the output produced from an additional unit of labour.
What is the equation for MRP?
MPP*MR
What is another way of writing the equation of Marginal Revenue Product if the firm is operating under perfect competition?
MPP*Price (Price=MR=AR in perfect)
What is the marginal cost of labour?
The wages paid to workers
What is the marginal productivity theory?
The idea that firms demand labour by balancing the revenue gained from inputting an additional unit of labour with the marginal cost of that unit of labour.
(MRP=MC)
At what point will a profit-maximising firm produce?
Where MC=MRP or wage =MPP*MR
what is the position of the demand curve (labour) dependent on?
A change in Marginal Physical Product will also affect MRP (demand curve), for example if new technological advances mean that workers can use capital more efficiently MPP increases and considering marginal revenue is constant MRP shifts outwards.
Any change in MR will also affect labour demand (since MRP=MPP+MR), so in a perfectly competitive market a change in price of the product will impact demand for labour.
Why do we hold capital constant when measuring the marginal physical product?
Because capital cannot be increased in the short term while labour can.
What are the influences on the wage elasticity of demand for labour? (List them)
Substitutes.
Flexibility of Capital-
Share of labour costs
PED of product
How does the degree to which labour can be substituted by another factor of production influence wage elasticity of the demand for labour?
the extent to which labour can be substituted by another factor of production e.g. capital will depict how sensitive the firms demand for labour is to a change in wage rate.
The extent to which labour and capital are substitutable varies with economic activity, depending on the technology of the production.
How does the flexibility of capital influence wage elasticity of the demand for labour?
- Capital is often inflexible in the short run meaning only in the short run labour can be replaced by capital.
Meaning demand for labour is likely to be more inelastic in the short run.
How does the share of labour costs of the firms total costs influence the wage elasticity of the demand for labour?
-the share o labour costs in the firms total costs is important, in many service activities labour costs take up a large portion of total costs so the firm is more sensitive to a change of cost in labour.
How does the price elasticity of demand of the product produced by the workers influence wage elasticity of the demand for labour?
- Since labour is a derived demand the price elasticity of demand for the product that workers produce must be taken into account. The more price elastic the demand for the product is, the more sensitive the firm is to a change in wage rate as a high degree of price elasticity of the product limits the extent to which the firm can pass on a higher wage rate to consumers n the firm of higher prices.
How would a fall in the selling price of a firms product affect a firms demand for labour?
The demand curve would shift to the left, however the extent to which this would happen is dependent on the elasticity of the labour demand curve, which is quite inelastic in the short term as it is difficult to substitute labour with capital as capital is inflexible in the short term.
If the industry is capital intensive and so labour only makes up a tiny portion of the firms total costs the firm is likely to be more wage inelastic.
PED of the product will also influence the steepness of the labour demand curve.
Also, if there is a technological advancement that allows the workers to be more efficient and MPP rises the demand curve for labour will remain constant or even shift to the right.
What is wage elasticity of demand?
How sensitive a firms demand for labour is to changes in the wage rate.
What is labour supply described as on a graph?
Marginal cost (of labour) which is the same as the wage.
What is the substitution effect of an increase in the wage rate?
A higher wage rate means the opportunity cost of spending time leisurely increases,leisure time becomes more costly so workers are motivated to work longer hours.
What is the income effect of an increase in the wage rate?
A higher wage rate means the worker has a higher level of real income meaning they are likely to demand the consumption of more goods and services including leisure (assuming this is a normal good). Meaning a higher wage rate can cause a worker to supply less labour
Why is the individual labour supply curve backward- bending?
As the wage rate increases the substitution effect encourages workers to supply more labour as the opportunity cost of leisure increases also. If the worker has not reached their target income or is still earning a low salary this will outweigh the income effect which encourages the consumption of more goods and services as wages increase.
However as wages continue to increase and the worker reaches their target salary the worker may loose the incentive to work more hours and instead consume more goods (including leisure) and so works less hours.
How can firms shift the labour supply curve to the right (encourage workers to supply more hours at any level of pay)
By providing non-pecuniary benefits, benefits that are not fully reflected in the wage such as a subsidised canteen, use of a gym or company car. This can cause workers to consider not only the wage rate, but the overall package offered by employers when considering where to work, good for firms if the labour market is tight.
What is the shape of the industry labour supply curve (workers in the market put together , not individual)?
Upward sloping, on the whole higher wages encourage people to supply labour.
What is wage elasticity of supply?
How sensitive workers are to a change in the wage rate e.g. the extent to which an increase in the wage rate will lead to an increase in the supply of labour,
What factors influence wage elasticity of supply?
The level of unemployment, this indicates how many people are ready to take up jobs.
Secondly- the degree of flexibility of labour supply, there may be geographical immobility of labour or the unemployed people may not have the skills needed for the job.
Labour supply tends to be more inelastic in the short term.
What are transfer earnings?
The minimum payment required to keep a factor of production in its present use, rather than it being used for an alternative activity.
What is economic rent?
The payment above what is necessary to keep a worker (or a factor of production in general) in its current occupation (transfer earnings)
How does wage elasticity of supply influence transfer earnings and economic rent?
If labour supply is perfectly elastic this means W is the minimum payment that all workers would need to be paid to stay in this occupation (transfer earnings) so no economic rent is made.
If labour supply is perfectly inelastic there is no minimum payment that is needed to keep workers in their occupation so all payment is economic rent.
The more elastic the labour supply the higher the proportion of total earnings is transfer earnings.
Evaluate the idea that the more inelastic labour supply is the higher the proportion of the income is economic rent.
The demand side of the market must be looked at as well as it is the interaction between demand and supply that determines the equilibrium wage rates. There may be inelastic supply of an occupation but if demand for it its low its workers won’t make high economic rents.
What is human capital
The stock of skills and expertise that contribute to a worker’s productivity.
How can people make the best decision of what education and training they should partake in so that they are skilled to take up a job where there is a gap in the market?
When consumers begin to demand more of a good or service (MRP shifts to the right), the wage differentials for workers producing this good increases. Once an abundance of people gaining skills in this area results in an increase o supply of such workers the wage differentials narrow.
Wages should act as a signal to workers as to what skills are in demand, in an effective labour market the system guides the allocation of resources.
Who is in the working population?
The number of people aged between 16 and 64.
What is the dependency ratio?
The ratio of dependants (people aged 15 and below or over 65) to the working population.
What is meant by someone that is economically active?
This is someone who is active in the work-force, they are either employed, self-employed or unemployed.
What is the workforce?
People that are economically active (employed, unemployed, self-employed)
What unemployment rate is used by the UK?
The ILO unemployment rate
What is the ILO unemployment rate?
The number of people who are available for work and are seeking work, but are without a job.
What is meant by someone that is economically inactive?
Someone who is not active in the workforce, they are not in a job and are not seeking a job.
E.g. students, carers , people that are ill, if they are not of working age or they are a discouraged worker
What is the participation rate?
The number of people in a given age group who are economically inactive e.g. if they are not of working age or they are a discouraged worker, carer of a family member.
Why is it important to take price changes into account when looking at earnings?
The inflation rate affects the purchasing power of earnings.
What are real earnings?
The level of earnings adjusted for the price level.
