Labour Market Flashcards
Define the labour market
a factor market that deals with the dd and ss of labour to determine wage rate
Define labour
mental and physical contribution of a worker towards production
What is the dd for labour
no of hrs for which an employer is willing and able to employ a person at the prevailing wr over a given time period
What type of dd is dd for labour and explain
derived dd where dd for labour depends on dd for the finished good it helps in producing
Define MR
addition to TR generated from sale of an extra unit of output
Define MRP
addition to TR from sale of an extra unit of output produced by an extra unit of variable factor/labour
What is the MRP theory
relates the wage payable to worker to his/her productivity
workers are rewarded based on their contribution
fair and just
What are the 7 assumptions of the MRP theory
1.Mkt[labour n product] is in perfect competition-many firms demanding labour and many workers willing to work
- Productivity can be measured to reward worker
- Labour is homogeneous-equally productive-no difference in skills
4.Workers and employees- perfect knowledge of mkt
- labour is perfectly mobile within the country
6.everything is determined by mkt forces- no govt intervention.
- prodn is subject to the law of diminishing returns- MP rises then falls
Explain the MRP THEORY
demonstrates how WR can be related to productivity and how dd curve is generated
How is the Mrp calculated
MPP * PRICE
mpp= marginal physical product, output produced by last unit of labour employed
price is of the finished good
What happens when an extra unit of labour is employed
- It add to TC in terms of the WR
- addition to TC is the MC
2 it add to TR interms of revenue received from sale of the output produced by the last unit of labour employed
-addition to TR is the MRP
When will a firm employ more workers
and when will he reduce level of employment
When MRP is greater than MC
workers are bringing in more revenue than what they cost
When MRP is less
Where will producer attain equilibrium
GIVE DIAGRAM
MC = MRP and MRP Is falling
Why is the MRP shaped such that is rises initially and then falls
Since we are in a perfect mkt, firms are price takers and there is a single price.
MRP= MPP/MP * Price
since price is constant, MRP depend solely on the MP
MP is subject to the law of variable proportion
rises at start - excess capacity, specialisation gains, more productivity
but then falls because of constraint of the fixed factor, lower productivity
Where is the level of employment determined at
MC = MRP
MC=WR
MC=MRP
but 2 pts,
equilibrium is therefore where mrp is falling as so long that mrp is till rising, firm should take full adv
What is the dd curve of labour
the falling portion of the MRP CURVE
What are the criticisms of the MRP theory
- No PC in factor and product mkt
- dd side imperfection- monopsony
ss side- trade union
2.Labour is not equally productive and should not be rewarded at the same wage rate.
3.Govt may intervene through the national min wage
4.Productivity is not always measurable- teachers
5.workers may be immobile
- WR depend on productivity of last labour employed which is wrong
Why is the dd curve downward sloping
- Profit motive- profit maximisers
employ workers till profit is being maximised
higher wr ,^ cost, reduce profit - Income effect, higher wr , decreases income of employers and their ability to employ more workers.
3.Substitution effect
WR increases, cost of labour compared to capital ^, producers switch to capital is substitutable
4.least cost combination of labour and capital
Factors determining dd for labour
assumptions
1. pc- many buyers n sellers
2. profit maximisers
1.WR ^ -increase labour cost - movement
2.DD finished good
3. Productivity labour ^, more attractive, MP ^, MRP^, shift in dd curve
4. Price of finished good
5. cost of capital and its availability
define wr
rate at which an employer rewards an employee for his mental and physical contribution towards production.
Define elasticity of demand of labour
change in QDD of labour following a change in WR
Factors affecting elasticity of dd of labour
- Elasticity of dd of finished good
- if inelastic, dd workers also inelastic as producers can increase price of finished good to absorb the higher WR to prevent great fall in employment
2.if large proportion of labour cost in total cost- a small increase will cause a great rise in the TC
3.Ease with which labour can be replaced- ready to replace workers with capital
4.Availability of substitution
- TIME PERIOD
LR- elastic - easily replace labour and increase capital, new substitutes can emerge such as capital goods and improved tech
Define ss of labour
no of hrs for which labour is willing n able to work at the prevailing wr over a given time period ceteris paribus
How will ss change when WR ^
- Income effect [-ve]
purchasing power ^, real Y ^, able to afford most gns , work less and take more leisure
2, Substitution effect [+ve]
wr ^, want to work more, ss more efforts to earn more / ss labour ^
opp cost of leisure is high- could have earned more
Explain the ss curve of labour
+ give diagram
ss ^ initially but then falls - backward bending ss curve
1st part: +SE IE GREATER THAN -ve IE
- low WR- work not attractive
WR ^
- ss ^- preference for work
opp to improve SOL by working harder
2nd part
AS WR keeps on ^, ss fall, IE greater than se
can earn high amt while still enjoying leisure
Give diagram of how a worker can earn more while still working less
Limitations of the ss curve
- LOW-Y COUNTRY, wages are really low, higher wr will increase ss, encourage them to work more
- If higher wr makes workers worse off due to higher prices. Lower real y n purchasing power, continue to work harder to increase sol
3,Contractual obligation- forced to work a certain no of hrs
4.WR ^, positive attitude towards work, ss still ^, eg chinese and japanese
Define the labour ss to a firm
no of hrs for which workers taken together are willing and able to work in an occupation at the prevailing wr, ceteris paribus.
Draw the ss curve of labour to a firm or industry
upward sloping
Define elasticity of ss and gives it determinants
ease with which ss can be altered
- Skills and qualifications required
- Unemployment
3.length of training
4.mobility of labour - time period
Factors causing an increase in ss of labour to a firm or industry
- Barriers to entry- [specific] skills and qualifications required, minimum contractual obligation
2.Geographical and occupational mobility of labour
- High unemp - ss of labour is high, more workers will be available for unemp
4.Non monetary benefits- working conditions, status of the industry, pension plans, work overseas, promotion prospects
- In competitive labour mkt- relative WR in different industries.
Define the LR ss of labour
no of hrs for which workers taken together are willing and able to work in the different sectors of the economy at the prevailing wr over a given time period.
Factors affecting national ss of labour
- size of population- India and China - modest rate of ^ / decling
-age composition- younger population ensure higher labour ss in LR - Retirement age- extension from 60 to 65
- School leaving age- extension will decrease labour ss in the SR but improve quality in the LR
- Migration policy- high y countries such as uk canada have higher lr/national labour ss from immigration
- Female participation rate/ attitude towards female employment
- Labour force participation rate
7.+ve Attitude towards work- such as china and japan
- Wages and working conditions
- Taxes and benefits - higher taxes and greater unem benefits, discourage work , shift LR ss curve to the left
- More geographical and occupational mobility
Wage and non wage factors affecting ss of labour to a firm
WAGE:
earnings- total pay received
- Weekly wage
- Salary
- Bonus
4.Overtime
5.Commision
NON WAGE
1.Size of firm
2. Job satisfaction
3.Distance to be travelled
4.job security
5 hrs of wrk
6 Holidays
7promotion prospects
8.nature of the job
9.wrking conditions
10.fringe benefits
11.pensions
How is WR determined in perfectly competitive mkt
no intervention by govt, TU, employers
1. MRP theory
2. DD SS of labour
How is WR determined in PC using the MRP theory
-a worker is paid a wage to his MRP
wage= MRP
single price
MRP is determined solely by the MP
WR is determined by mkt where Dl[MRP CURVE]= SS of labour
wage is then accepted by all firms
ss becomes perfectly elastic because of homogenenous labour
MRP ^, DD shifts to right, WR ^, employment ^
the higher the productivity, higher the WR
DRAW DIAGRAM
Define MP
output produced by last unit of labour employed
How is WR determined in PC using mkt forces of dd n ss of labour
Lower the WR- higher the dd
Higher the WR- higher the ss
in free labour mkt, wr is determined by the interaction of dd ss
GIVE DIAGRAM
Labour mkt is dynamic
changes in mkt conditions lead to changes in the WR
Define a monopsony
when employers group themselves in an association such that there is only 1 buyer.
How is the ss curve in a monopsony
An upward sloping one
they are wage makers- in order to attract more workers they have to ^ the WR
What rises as level of employment in a monopsony rises
WR, AC , MC
Why MC is greater than AC in monop
as, a worker gets hired, wage rate for every worker increases not only for the additional labour employed
Where does a worker attain equilibrium in a monop
where MRP[ DD] = MC L
BUT in a monopsony[ WR is determined by the ss curve[AC]
workers are paid a lower wage-not the full value of their MRP
worker exploitation
give diagram
Evaluation for monopsony
The greater the difference between equilibrium wage and wage paid, the greater the degree of monopsony power
Aim of a trade union[+ve -ve}
- to increase WR as far as possible [even more than the MRP]
- wc, prevent unfair dismissal, job security, training of workers, minimun wages, maximum working hrs
BUT
if WR greater than MRP - unemployment
When is TU intervention beneficial
in a monopsony
known as bilateral monopoly
monopoly supplier- Tu
monosonistic buyer of labour
wr and emp can both increase till dd[MRP]= ss[AC] - known as the perfectly competitive equilibrium point
When WR is equal to MRP, when can WR ^
When MRP ^ - improve productivity/ price ^ with advertising/improvement in quality
evaluation of the national min wage
A national min wage to reduce worker exploitation who have no bargaining power with employers
reduce inequality
increase labour ss of lower y groups. incentive to work hard for low y
poverty alleviation,
provide fewer goods to the poor
small rise in tax revenue
But effective only above equilibrium, cost push inflation
When is unemp caused by a min wage higher
dd and ss are elastic
