Labour Demand, Supply and Wage Determination Flashcards
LDMR
As each unit of a variable factor is increased to a fixed factor, output increases at first, then it will decrease and become negative, due to the restraints of that factor.
Marginal Product
The change in total product from employing one more variable factor.
Derived Demand
Demand for one item depending on the demand for another. Labour depends upon the revenue gained from what is being produced.
Show Derived Demand
Supply and demand, increasing quantity from Q1 to Q2. Increased demand needs labour to meet it.
MRP
Change in a firms revenue from employing one more worker.
MRP Labour Required
Labour determined where the cost of employing one more worker equals the MRP of the worker.
Show MRP
MRP - diminishing returns, where the MCL=MRP
Why employ at MRP
Not efficient to produce less and if they employed more the cost of workers would exceed the MRP of the worker. If MCL > MRPL makes a loss, profit maximisers won’t hire.
Capital MRP
Complementary to workers. Increases productivity cause ↑ in MPP, ↑ MRP, therefore it will require more workers in order to meet the MRP ↑ the demand for workers.
Evaluation of MRP
Difficult to calculate the contribution of one worker, very difficult in tertiary sector 1 brain transplant vs 10 patients seen to.
Elasticity Demand for Labour Equation
% change in labour demanded
% change in wage rate
Price Elasticity of Product (Lab)
If demand is inelastic, the demand for the labour likely to be inelastic. Rise in the price of product that results from the rise in the wage rate won’t effect output much, so employment will not fall much
Ease of substituted labour
If it’s easy to substitute labour with capital, then demand for labour will be elastic. The skill level required.
The elasticity of supply of other factors
If it is easy to obtain more of the factors that are used alongside labour, demand for labour will be elastic
The time period - elasticity
Demand for labour is more elastic in the long run, when there is time for firms to reorganise their production methods.
SR Labour Supply Curve
Backwards bending, as in the short run people don’t have time to change occupation.
SR LabSupCur Explain
SR influence - wage-rate. Low wage, rise in wage causes worker work ↑ (extension in supply of labour) Offer of high wages worker works ↓ (contraction in the supply of labour) Workers income meets financial needs, want more leisure.
Income effect
The income effect states that a higher wage means workers can achieve a target income by working less hours. Therefore, because it is easier to get enough money they work less.
Substitution effect
The Substitution effect states that a higher wage makes work more attractive than leisure. Therefore, supply increases.
Pecuniary Factors
Wage rate and the opportunity of bonus’s and working overtime.
Non Pecuniary Factors
Non monetary advantages/disadvantages of doing a job.
Elasticity Supply of Labour
How the supply of labour changes as a result of a change in the wage rate.
Elast Sup Lab Determin
The qualifications/skills required - The supply of skilled workers is more inelastic than unskilled
Length of training - Longer training more inelastic supply. Mobility - Ease workers moving, the more elastic supply.
Demand High Wage Reason
Demand is inelastic in the SR, rise in the wage rate won’t attract many new brain surgeons.
High MRP, no substitute brain surgeons in operating teams.
Demand Low Wage Reason
Supply high and elastic, no qualifications, large number of people capable. A rise in the wage rate will attract an extension in supply. MRP is low, so demand is low.
Bargaining Power
Brain surgeons members of BMA, industrial action, significant consequences, brain surgeons cannot be replaced easily by capital. Waiters have low bargaining power, as few belong to a trade union, replaced easily.
Economic Rent
The surplus over transfer earnings, and so is: (total earnings – transfer earnings)
Transfer payments
What a worker could earn in their best paid alternative employment – the opportunity cost of performing the current job
Unit Labour Costs (ULC)
The cost of labour per unit of output.
Impact of high ULC
Higher inflation from cost push, as cost of production increases. Reduced international competitiveness, as prices rise.
Unit labour costs will rise when…
wages rise faster than the annual improvement in productivity
Productivity and ULC
ULC is determined by the cost of labour for the output, if productivity increased the workers will produce more, for the same labour wage, more product is spread over cost, reducing ULC.
MRP Determinant of Wage Demand
How much labour will be employed at each wage rate by a profit maximising firm in a competitive market. MRP gives demand for labour, D/S determine price MRP a significant determinant. MRP changes D does and wage rate changes.
MRP Determinant of Wage Supply
Wage changes in response to MRP, change dependant on PES. MRP not only determinant. S crosses D determines wage. S affected by non/pencuniary, shift S to effect wage. Inelastic S and High D, wages are high.
MRP Market Structure
If market is monopolistic MRP is likely to determine employment but S will determine the wage rate.
MRP Investment
Increase in MRP by Investment leads to substitution of Capital for labour and lower wages so higher MRP not leading to higher wage.
Monopsony Definition
They are the sole buyer of labour in the market and can exploit their bargaining power to reduce costs.
Monopsony Diagram
MRP=D to show value of employer, S=AC individuals supply more labour wage rises, MCL. MCL=MRP wage set by Supply .
Monopsony Wage Rule
Choose the quantity of labour where the MCL = MRP. If above inefficient, spending more on labour than the value of the labour. If below MRP>MCL can hire more labour.
Monopsony Trade Union
Trade Union increase wage, creates new supply curve at A,B,C, but MCL curve is above requiring a discontinuity, so new MCL is A,B,D,E.
Monopsony Trade Union Wage Rule
If the Union went for Wu>We>(MCL=MRP) they went for money over jobs.
Geo Immo of Labour Definition
The level of freedom that workers have to relocate in order to be able to find employment.
Occu Immo of Labour Definition
The ease to which workers can switch career fields in order to find employment.
Elasticity Dem Lab AS WAGES RISE
S ubstitutability of capital for labour - Wages rise, capital
E lasticity of D for the product - Inelastic pass on cost
C ost as a percentage of total cost - High employ less
T ime period - LR elastic time to change factors variable
Labour Market flexibility
Ease to which people can move in order to match excess demand. Geo - Subsidies/affordable homes Occu - Training + education.
Lorenz Curve / Gini coefficient Definition
Illustrates the extent of income and wealth inequality in a society. Gini used to make international comparisons.
Lorenz Curve Explain
Percentage of income Y axis
Percentage of population X axis
Shows how far from being perfectly equal, not straight lower groups don’t earn as much. Governments can use progressive taxation and amount of benefits paid.
