Labour demand, supply and wage determination Flashcards
Derived demand
Demand for one item depending on another item
Examples of derived demand
The factors of production
Impact of derived D
FoPs are wanted for what they can produce and what the output can be sold for
No. of workers a firm wishes to employ depends on the revenue that can be earned from what is produced
If demand rises/price of product increases, firm will seek to employ more
Aggregate demand for labour depends on:
Level of economic activity
Business confidence about state of growth
Growing tech/education and training means firms may match higher AD w/ existing/less workers
A firm’s demand for L:
- Demand & expected future demand
- Productivity (higher hourly worker output, more attractive labour is)
- Wage rate
- Complementary labour costs e.g. NI
- Price of other FoPs that can substitute labour
MRP
The change in a firm’s revenue as a result of employing one more worker
MPL
Change in output that results from employing one more worker
MRP theory
Demand for any FoP depends on its MRProductivity
Law of diminishing returns
If one FoP is increased while the others remain fixed (ceteris paribus), it will reach a point where the marginal returns decline and become negative
Upside down U graph
According to MRP theory, what will the q. of any FoP employed be?
When marginal cost of employing one more unit = marginal revenue product of that factor
MRP in practice
difficult to measure
difficult to isolate the contribution of one worker (workers work in teams etc.)
Hard to measure tertiary sector productivity e.g. different kinds of doctors MP
Elasticity of demand for labour
% Change in wage rate
Factors that influence the EoD for L
- Price elasticity of demand for the product produced
- Proportion of wage costs in total costs
- Ease with which labour can be substituted by capital
- Elasticity of supply of complementary factors
- Time period
Flexible labour market
a LM that adjusts quickly and smoothly to changes in the demand for and supply of labour
Degrees of elasticity of demand for labour
- More flexible a labour market is, the more elastic demand will be
- Demand for L in capital intensive industries tends to be inelastic (small amount of total costs)
- Demand for L in labour intensive industries e.g. builders tends to be elastic
- Higher elasticity for young & unskilled
Significance of Eod for L
Influences a union’s bargaining strength
influences government’s decisions for NMW etc.
Backwards sloping labour supply curve
A labour supply curve showing the income and substitution effects
Income effect of a wage rise
Reduction in the no. of hours worked due to a wage rise
Substitution effect of a wage rise
Increase in the no. of hours worked due to a wage rise
Pecuniary factors of a job
Wage rate
Opportunity for overtime
Possibility of bonuses
Non-pecuniary factors of a job
Convenience and flexibility of hours Status Promotion chances Flexibility of location e.g. increase in home working Qualifications and skills required Job security Pleasantness of the job Holiday time e.g. teachers Perks and fringe benefits - gym, cars, trips abroad Quantity and quality of training offered Location Recent performance of the firm/occupation
Elasticity of supply of labour
% change in wage rate
EoS of L definition
The responsiveness of the SoL to a change in the wage rate
Factors influencing EoS of L
Qualifications and skills required
Length of training
Immobility of labour
Time period
Wage determination
Wages are likely to be high when demand is high and inelastic and supply is low and inelastic e.g. lawyers, brain surgeons
Wages likely to be low when supply is high relative to demand and both demand and supply are elastic e.g. waiters, baristas.
CONSIDER D&S CURVES
Other influences on wage determination
Wages likely to be higher when:
Strong bargaining power relative to employers
Government policy - government is a major employer (direct), passes legislation that affects bargaining power (union reform), directly affects wage rates e.g. NMW
Social attitudes towards “what people deserve to be paid” - influenced by study time period, stress of job, work dominated by white middle class men
Other influences on pay of brain surgeons and waiters
- Relative bargaining strength; most brain surgeons members of the BMA, waiters have very low union power
- Government policy; ageing population, advances in tech and increasing quality of life expectations have increased public spending on healthcare, Government policy influences the pay of waiters who receive the NMW
- Public opinion; brain surgeons held in high public esteem, waiters not (they are females and ethnic minorities)
Where do wage differentials occur?
Between: Occupations Industries Firms Regions
Why are skilled workers paid more?
Higher demand, lower supply
Higher MRP, skills possessed by skilled workers lead to high output per worker
Difficult to substitute skilled labour with capital
Human capital
The skills, knowledge and experience a worker possesses
Why are men paid more?
Comparing weekly pay - more women work part time
On average - MRP of women lower than men
(Reason is that men were better qualified than women, slowly changing as more women go to uni)
MRP of women remains lower than men as women are disproportionately concentrated in low-paid occupations that generate low MRP e.g. catering
Transfer earnings
The amount a worker could earn in the best paid alternative employment - the opportunity cost of performing the current job
Equivalent to the minimum amount that has to be paid to ensure the worker stays in their present job
Economic rent
A surplus over transfer earnings
Elasticity effects on transfer/rent
Economic rent forms a large proportion when supply is inelastic e.g. footballers
Transfer earnings form a large proportion of earnings when supply is elastic e.g. bar staff
Negative economic rent
Some people may stay in jobs for non pecuniary reasons and earn negative economic rent
