Labour Demand and Supply

Question 1

What is a labour market?

Answer 1

A labour market is where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for their production process

Question 2

What is aggregate demand?

Answer 2

The total demand for goods and services within the economy. Components are consumption (C), investment (I), government spending (G); and net exports (X-M)

Question 3

Name the factors that influence a firm’s output (x3)

Answer 3

• Most importantly general economic conditions
• Conditions in the firm’s industry
• The demand for an individual firm’s products

Question 4

How do general economic conditions (aggregate demand) influence the output of a firm? (x3)

Answer 4

• When the economy is enjoying strong growth, a firm is more likely to enjoy higher sales and will therefore need more employees.
• Only a few firms benefit from an economic downturn and employ people in bad conditions (such as a discount retailer or an accountancy practice that is specialised in company liquidations or personal bankruptcies
• Changes in economic activity don’t always lead to immediate changes in the level of employment as there is always a time lag between firms observing a pickup in the level of demand and raising their demand for labour

Question 5

Factors that determine how much labour a firm will demand at any price (x3)

Answer 5

• The output of a firm
• The productivity of labour
• The cost of other inputs

Question 6

What can firms do when aggregate demand increases?

Answer 6

Firms can satisfy the higher demand in the short run by using their existing labour and capital resources more efficiently and intensively e.g the firm may ask its workers to work overtime in return for a higher hourly wage

Question 7

What do firms do in a fall in the level of aggregate demand?

Answer 7

Businesses will usually delay making staff redundant in the hope that conditions improve soon and to avoid risks of needing to find new staff when the economy recovers

Question 8

How do conditions in a firm’s industry affect demand for labour? (x3)

Answer 8

• A change in consumer tastes and preferences for different goods and services will see a change in the allocation of labour between different industries
• A particular industry’s barriers to entry, the level of regulation or price competition can also affect the demand for labour.
• The demand labour will increase in industries that see an increase in demand for their products and decrease in those experiencing lower consumer demand.

Question 9

How is a firms output ultimately determined?

Answer 9

A firm’s output is determined by a firm’s effectiveness in selling goods and services in the marketplace, determined by factors such as the quality of its products, the reputation and size of the firm, its consumer service and its marketing efforts.

Question 10

What is the productivity of labour?

Answer 10

It can be defined as the output per unit of labour per unit of time

Labour productivity = total output/labour input

Question 11

What does labour productivity depend on? (x3)

Answer 11

• It depends on the quality of the workforce including the overall level of education, skill, health and motivation
• It also depends on how efficiently labour can be combined with other factors of production in the production process.
• It is possible for the workforce to become more productive simply through investment in technology (capital) and without any actual improvement in the skills or work patterns of employees. This could occur because the investment in technology has allowed more to be produced for each hour of labour input

Question 12

Describe what happens to productivity as a result of rising aggregate demand

Answer 12

There is higher demand for goods and services. If aggregate demand is rising at a faster rate than the increase in productivity, the higher demand will be greater than the higher production generated by the existing workers. Businesses will increase demand for labour to meet the higher level of aggregate demand in a firm or economy

Question 13

Describe what happens to demand as a result of unchanged aggregate demand and rising labour productivity

Answer 13

The existing workers will be producing more goods and services, but there won’t be any higher demand in the economy. This means that businesses will have excess capacity and will not need more labour. Demand for labour would decline because the higher productivity means businesses can cut back on workers and still produce the same output as they did before

Question 14

Describe what happens to demand when aggregate demand is falling but labour productivity is rising

Answer 14

Demand for labour will fall even more. Although existing workers will be producing more output, there will be less demand for that output in the economy. If businesses wish to maintain their profits, they will have to lower their demand for labour

Question 15

What are the effects of higher labour productivity in the short run?

Answer 15

In the short run, higher labour productivity means that a fixed number of workers will be producing more goods and services - therefore the output of a firm will be rising without the firm having to increase the number of workers

Question 16

What are the effects of higher labour productivity in the long run?

Answer 16

In the long run, higher labour productivity will make labour a more attractive input to production than the other factors of production. Higher labour productivity increases labour demand in the long term as firms substitute labour for other factors of production such as capital.

Question 17

When will a firm’s demand for labour be more elastic (x3)

Answer 17

• It is easy to substitute between labour and capital
• Labour costs are a relatively high proportion of its total costs
• It is more difficult for the firm to pass increased labour costs in the form of higher prices to consumers

Question 18

Name all the factors influencing labour demand (x5)

Answer 18

• General economic conditions
• Conditions in the firm’s industry
• Productivity of labour versus other inputs
• Cost of labour versus other inputs
• Cost of labour versus the cost of foreign labour

Question 19

What does the supply of labour depend on? (x5)

Answer 19

• Pay levels
• Working conditions
• Education, skills and experience requirements
• The mobility of labour
• The labour force participation rate

Question 20

How do pay levels affect the supply of labour?

Answer 20

The higher the wage or salary offered, the more people will be prepared to sacrifice their leisure time and supply their labour

Question 21

How do working conditions affect the supply of labour? (x2)

Answer 21

• Atttractive working conditions encourage a higher supply of labour to a workplace whereas unattractive working conditions would discourage workers from joining that workplace
• Firms and industries that offer employees more flexible working hours, the opportunity to work from home, generous holiday leave entitlements and a pleasant working environment will tend to attract more labour than those who do not

Question 22

How do education, skills and experience requirements affect the supply of labour (x2)

Answer 22

• The education, skill and experience requirements for some types of jobs can limit the supply of labour
• A country with high levels of human capital is more likely to achieve low unemployment

Question 23

How does the mobility of labour affect the supply of labour?

Answer 23

• The supply of labour will be affected by its responsiveness to changes in demand for labour in different areas or industries

Question 24

What is occupational mobility and describe the degree of it?

Answer 24

The ability of labour to move between different occupations in response to wage differentials and employment opportunities. The degree of occupational mobility mainly depends on the education and skills required for a particular occupation as well as the time taken to gain those credentials

Question 25

Describe the factors that limit geographical mobility (x2)

Answer 25

• The costs of relocating, including travel, transportation and real estate costs
• The personal upheaval associated with moving, such as breaking ties with family and friends and children changing schools

Question 26

What is geographical mobility?

Answer 26

The ability of labour to move between different locations in response to improved wage differentials and employment opportunities

Question 27

What is the labour force participation rate formula?

Answer 27

= Labour force/Population aged 15 or over * 100/1

Question 28

Factors that influence the participation rate (x4)

Answer 28

• The state of the economy - most important short term influence
• Trends in the aging population
• Changing in social attitudes
• Increased school retention rates

Question 29

How is the demand for labour a derived demand?

Answer 29

The demand for labour is a derived demand because the number of employees required by a business firm is determined by the level of output of the business

Question 30

What are a nation’s economic growth and living standards determined by in the long run? (x3)

Answer 30

• Population growth
• Productivity growth
• Participation rate