Demand and Supply in labour markets

Question 1

Labour demand

Answer 1

• The labour demand curve represents the number of workers firms wish to hire at any given wage.
• It also represents the maximum wage that a firm would be willing to pay for a unit of labour.

Question 2

Why is the labour demand curve downwards sloping

Answer 2

• Marginal revenue product theory
• Capital substitutability, substitution effect.
• At lower wages firms are more willing to hire workers than at hire wages.

Question 3

Factors that shift demand

Answer 3

• Derived demand, demand for labour is dependant on the demand for the final goods and service that they produce. High demand for the final goods and services, will mean firms demand more labour. E.G Increased demand for technological change has increased the demand for software engineers.
• Increases in productivity, demand for labour also increases when workers become more productive, if they have better skills. Workers are more productive and so the revenue they generate for the firm increases.
• Increases in price of the final product, demand for labour increases when the product workers produce can be sold at a higher price. The revenue that each workers production generates for the firm increases.
• Changes In capital/technology prices, firms can choose to use capital or labour so if capital becomes more expensive these firms will demand more.
• Increase in wages

Question 4

Factors effeting Elasticity of demand for labour

Answer 4

How responsive is a firms demand for labour to a inrease in wages?

• The length of time, In the short-run firms may have little choice but to employ the same number of workers even if wages rise. In the short run demand for labour is likely to be wage inelastic, contracts govern employment, in the long run its more likely to be elastic.
• Availability of substitutes, the easier it is to substitute with capital, then demand for labour will be more wage elastic.
• The PED of the product, the demand for labour is derived from the good it produces. This means the PED for the product is correlated with the elasticity of demand for labour.
• Proportion of labour to total costs, the bigger the proportion of labour costs to total costs, the more elastic the demand for labour. If wages make up 80% of a firms costs, they will be more sensitive to rises.
  Football clubs, schools, law firms etc.

Question 5

Labour supply curve

Answer 5

• The labour supply curve represents the quantity of labour (number of workers or the hours worked) that will be supplied at any given wage.
• It also represents the minimum wage that a worker would be willing to accept for working.

Question 6

The subsitution effect

Answer 6

Increased wages incentives workers to supply more labour hours, the opportunity costs of leisure activities increases. People will work more hours and take less leisure time, they substitute leisure time for work.

Question 7

The income effect

Answer 7

As workers are paid more they can afford the luxury of leisure time, while still maintaining a good standard of living. So wages go up, people will work less as fewer hours give them a sufficient income.

Question 8

Elasticity of supply for labour

Answer 8

• Measures the responsiveness of supply of labour due to the change in the wage rate.
• The availability of suitable labour In other industries, an engineering company wanting to recruit unskilled workers will be able to poach workers relatively easily from other industries because there is a large pull of unskilled workers. Therefore their supply is wage elastic.
• Time-labour is likely to be more inelastic in the short run, for example it may be difficult to appoint a large number of teachers in the short run because of labour contracts.
• In the long run however firms will be more likely to recruit workers at the existing rate.
• Extent of unemployment and underemployment, the higher the level of unemployment the more elastic the supply for labour is.
• Income tax

Question 9

What is a perfectly competitive labour market?

Answer 9

• Many employers, no single employer dominates the market, workers have a choice between employers.
• Many identical workers, this means firms have many workers to choose from.
• Both workers and employers are price takers, they must accept the equilibrium market wage. There are many substitutes.
• Wages are determined by supply and demand.

Question 10

Why are their wage differentials

Answer 10

Wage differentials is described as the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or localities.

• Compensating wage differentials, higher pay can often be some reward for risk taking in certain jobs, working in poor conditions and having to work anti-social hours.
• A reward for human capital, in a competitive labour market equilibrium, wage differentials compensate workers for cost of human capital acquisition. There is an opportunity cost in acquiring qualifications, measured by the current earnings foregone by staying in full or part-time education. E.G PILOTS AND DOCTORS
• Different skill levels, the gap between poorly skilled and highly skilled workers gets wider each year, this is because the market demand for skilled workers rise and this pushes up pay levels. There is also less supply of skilled workers.
• Differences in labour productivity and revenue creation, workers whose efficiency is highest and ability to generate revenue for a firm should be rewarded with higher pay. Sports stars claim the highest wages as they have the potential to create extra revenue through shirt sales and merchandising.
• Trade unions and their collective bargaining power, unions might exercise their bargaining power to offset the power of an employer in a particular occupation and in doing so achieve a higher wage.
• Globalisation, global shift and manufacturing in the UK.

Question 11

Miniumum wage

Answer 11

• A minimum hourly wage set by the government, employers are not legally allowed to pay below the minimum wage.
• Raises the equilibrium wage and stops wages being determined by the free market.
• EVAL, the minimum wage only effects the lower paid industries and has no effect in industries that operate far above the minimum wage.

Question 12

Trade Unions

Answer 12

• Wages will always return to equilibrium due to competitive pressures in the market, UNLESS there are rigidities such as trade unions.
• Trade unions may refuse to accept the market equilibrium wage, so disrupt competitive market forces in the labour market.
• Trade Unions have COLLECTIVE BARGAINING POWER.
• They essentially create a minimum wage, by threatening to strike if wages are below the wage they think is acceptable. They may also impede the use of labour-saving capital by firms.
• Through collective action, trade unions create a monopoly over the supply of labour.

Question 13

EVAL TU impact

Answer 13

• Depends of level of unionisation and militancy of union, propensity to engage in striker action and other firms industrial action.
• Depends on government legislation restricting trade union power, legislation makes it harder for people to strike.
• Depends on the profitability of a employer, could be profitable, may be more tolerant to trade union.
• Supply of labour

Question 14

Monopsony

Answer 14

A monopsony occurs when there is one firm In the market that provides work and labour. Therefore they can set wages below equilibrium. They can do this to a certain extent as if they set too low people will instead rely on benefits and not work.

Question 15

Pubiic sector wage setting

Answer 15

• Government can influence wages through the wages they pay public sector workers through unemployment benefits.
• The government employs a huge number of workers in the economy, for example rubbish collection, gritting roads and street cleaning etc.
• A firm cannot provide a lower income than a person would receive taking unemployment benefits, they must pay at least as much, or more to incentivise workers.