Labour Market Flashcards
What value determines the demand for labour
The marginal revenue product
What is the calculation for MRP? (and how to explain it)
MRP = Marginal output x price (extra total revenue given by each worker)
What is demand for labour derived from?
Demand for a businesses product
What factors affect demand for labour (6)
- Wage rates - As wages increase MRP decreases
- Demand for the product - Labour is derived demand
- Price of other factors of production - Capital replace labour
- Wages in other country - import labour
- Technology - Technology means capital can replace labour
- Regulation - Some jobs are protected by law and other laws making hiring/firing easier can increase employment
Factors affecting PED of labour
- PED of the product - If PED of product is high then a rise in wages -> rise in prices of product -> large decrease in quantity demanded -> large decrease in demand for labour
- Proportion of wages as a cost of production - high proportion means small increase in wages large increase in cost to company
- Substitues - If capital can easily replace labour they’ll fire them quicker and replace them
- Time - always elastic in long run
Who determines supply of labour?
The WORKERS
What affects supply of labour?
- Wages - As wages increase more people are willing to work or can work longer ours
- Demographics - As population grows supply of labour grows, also ageing population means less workforce
- Non-monetary benefits - If there is high job satisfaction, or even perks like free membership to societies can tempt people into work
- Education - More educated workers means better quality of labour
- Wages and conditions of other jobs - Are alternatives better?
- Barriers to entry - Trade unions might restrict supply, or governments might require a qualification, or firms might require work experience
- Legislation - school leaving age
What are is failures in the labour market?
Immobility of labour
How does geographical immobility of labour affect supply and demand for areas in certain areas?
It can lead to excess supply and demand in certain areas
Why might a worker be geographically immobile?
Higher house prices, inability to get to interviews
What is occupational immobility
When a worker lacks transferrable skills to move between jobs
What is the Elasticity of supply?
Responsiveness of supply to a change in wage rates
What determines elasticity of supply?
- The immobility of labour - low immobility equals hard for workers to tranfer jobs
- Time
- Size of the unemployed
What are the 4 different types of labour markets that exist?
- Perfect Competition - wasges decided by supply and demand
- Monopsony - Only one buyer of labour
- Monopoly - One provider of labour
- Bilateral Monopoly - Battle of wages between supplier and demander
Is there any wage inequality in the same labour market if the market is perfectly competitive?
No all workers are paid the same because if they were paid below the market rates they would just move
What determines the wage rate in a perfectly competitive market?
The forces of supply and demand for labour
On the monopsony labour graph, does demand refer to the employees or firms?
Firms
On the monopsony labour graph, does supply refer to the employees or firms?
Employees
How does a monopsony buyer of labour attract more labour?
They have to raise the wage rates, which will be for all workers or some workers will get annoyed
Why is the Marginal Cost (MC) of labour higher than the Average Cost (AC) in a monopsony labour market?
Because to employ more labour the monopsonist has to waise the wage rates of all workers
What does the Monopsony labour market graph look like?
What does the Demand curve also represent in the monopsony labour graph?
Labour demand = MRPL
How does a monopsonist buyer of labour decide what level of workers to employ? (and the formula form)
They employ up to where the value added by the worker (MRP) equals the cost of adding the worker (MC) so where D = MC
Compared to perfect competition does a monopsony labour market pay a higher or lower wage rates? (and why)
Higher wage rates (because it’s where MC = D not where AC = D)
Compared to perfect competition does a monopsony labour market employ more or less people? (and why)
Less people (because it’s where MC = D not where AC = D)
What organisation can often act as a monopoly in a labour market?
Trade unions
How do trade unions use barriers to entry to increase wages? (2)
They can require certain qualifications to be a part of the labour force, or they can have compulsory membership to the union with a subscription fee
How do trade unions stop wages from dropping to market optimum?
Workers can refuse to work for less than trade union level and use strike action and union pressure to stop businesses from lowering wages
What shaped demand curve does the union refusing to work for below a certain wage create?
And describe supply and demand for labour graph this creates
It creates a kinked curve, with wages fixed up where the typical supply of labour intersects and then it increases with that.
What is the minimum wage set by the trade union here?
And what would happen if a firm offered more than that minimum wage?
£4.20
The number of workers would rise to meet it
What is the downside of trade union measures to increase wages?
They decrease employment
What happens when there is a bilateral monopoly in the labour market and the monopolist refuses to work below a certain level?
A bargaining battle occurs and whoever has the more bargaining power will win
In what period of the economic cycle do unions (monopolists) have less power?
Recession because workers are desperate
How can a trade union setting a minimum wage actually help market efficiency?
They could force companies to employ at allocatively efficient level (MRP=AC) rather than at profit maximising level (MRP=MC)
