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