Chapter 3 - Labour Demand, Supply And Wage Determination

Question 1

Give 5 determinants of demand for labour

Answer 1

Demand and expected demand for the products produced, and the revenue that can be earned by the output
Productivity of the worker
Wage rate
Complementary labour costs, eg national insurance
The price of other factors of production that can can be substitutes or complements to labour

Question 2

According to marginal revenue productivity theory, what determines the quantity of any factor of production?

Answer 2

Where it’s MC=MRP

Question 3

What is marginal revenue product?

Answer 3

The change in a firms revenue resulting from employing one more worker

Question 4

Why is it difficult to measure MRP?

Answer 4

It’s difficult to isolate the contribution one individual worker makes to changes in output, as workers work in teams etc, with capital.

Question 5

Why is it difficult to measure marginal productivity in the tertiary sector?

Answer 5

It’s very hard to measure what productivity is when different people are performing different tasks, each with differing skill.

Question 6

How is the elasticity of demand for labour calculated?

Answer 6

As percentage change in QD of labour demanded, divided by percentage change in wage rate

Question 7

List the 5 factors which influence the elasticity of demand for labour

Answer 7

Price elasticity of demand for the product produced
The proportion of wage costs in the total costs
The ease with which labour can be substituted by other factors

Question 8

How does the PED for the product produced influence the PED for labour?

Answer 8

Because the changes in demand for the product are reacted to by changes in output, and hence labour

Question 9

Why does the demand of labour in capital intensive industries tend to be Inelastic?

Answer 9

The labour typically forms a small percentage of total costs

Question 10

What is a flexible labour market?

Answer 10

A labour market which adjusts quickly and smoothly to changes in the demand for, and supply of labour

Question 11

Explain the significance of elasticity of demand for labour

Answer 11

Elasticity of demand influences a trade unions bargaining strength, as if the demand for labour is Inelastic they can chase wage rises without risking mass unemployment.
It’s important when making government decisions to minimum wage rises

Question 12

What is the shape of a short run supply curve of labour? Why?

Answer 12

An arrow shape >. This is because at low wages, a rise in wage rate will cause an increase in supply of labour, as worker is encouraged to work more. However once a certain wage rate is reached, they may begin to reduce their hours worked, as they may feel financially satisfied

Question 13

What is the substitution effect of a wage rise? When does it occur?

Answer 13

It’s the effect on the supply of labour caused by a change in the opportunity cost of leisure. Occurs at low wages which are rising, making the worker substitute leisure for work.

Question 14

What is the income effect of a wage rise?

Answer 14

The effect on the supply of labour caused by the change in the ability to by leisure

Question 15

What are the financial longterm factors influencing supply of labour?

Answer 15

The wage rate, the opportunity to work overtime, possibility of bonuses

Question 16

List some non-financial factors influencing long term supply of labour

Answer 16

Convenience and flexibility of hours 
Status
Promotion chances
Flexibility of location
Qualifications and skills
Job security
Pleasantness of the job 
Holidays
Perks and fringe benefits
Quantity and quality of training on offer
Location
Recent performance of firm/occupation

Question 17

What is the elasticity of supply of labour?

Answer 17

The responsiveness of the supply of labour to a change in the wage rate

Question 18

Give factors influencing the elasticity of supply of labour?

Answer 18

The qualifications and skills required
The length of training
The immobility of labour
The time period

Question 19

What are the main wage determinants?

Answer 19

Supply and demand

Question 20

What are the other factors influencing wage determination, aside from S&D?

Answer 20

Relative bargaining power of employer and worker, government policy, public opinion

Question 21

How does government policy influence wage rates?

Answer 21

Government is a major employer, it also passes legislation which alters the bargaining power of workers and employers, and determines the national minimum wage

Question 22

Why is there a large wage differential between skilled and unskilled workers?

Answer 22

Skilled workers have a higher MRP because they skills they possess lead them to have a high output per worker. They also have a high human capital, further raising their productivity

Question 23

Explain why there is a wage differential between men and women,

Answer 23

On average, MRP of women is lower than that of men. This is because in the past, men were more able to access better qualifications.
Women are disproportionally concentrated in low paid occupations, generating low marginal revenue, such as cleaning.

Question 24

Explain why there is a wage differential between part time and full time workers

Answer 24

The supply of people wanting to work part time is high relative to the demand, as it’s convenient for bringing up children, pursuing interests and careers. Part time workers are also less likely to receive training as those offering it to them receive less benefit

Question 25

What are transfer earning?

Answer 25

What a worker could earn in their best paid alternative employment

Question 26

What is economic rent?

Answer 26

The surplus over transfer earnings.

Question 27

How are economic rent and transfer earnings shown on a diagram?

Answer 27

Transfer earnings is the area beneath the supply curve, economic rent is that above it.

Question 28

How does the elasticity of supply influence transfer earning and economic rent?

Answer 28

The more elastic supply is, the greater the proportion of earnings is accounted for by transfer earnings

Question 29

What is derived demand?

Answer 29

Demand for one item depending on the demand for another item