Labour Market Flashcards
Demand for labour and any factor of production is based on?
- MRP (marginal revenue product).
- The marginal revenue product of labour is the extra revenue gained by the firm from employing one more worker.
- MRPL is calculated by multiplying the marginal physical product of labour (MPPL
, which is the output produced by the additional worker) by the marginal revenue (MR, price per unit), which is fixed.
To what point will there be demand for labour?
A firm will employ extra workers up to the point where MCL = MRPL.
MRPL curve is the Same Shape as the MPPL curve?
MRPL = MPPL × MR. This means that the values that make up the MRPL curve are the same as the ones that make up the MPPL
curve multiplied by the MR (which is assumed to be constant).
As the values on the MPPL
curve are multiplied by the MR to form the MRPL curve, the curves are the same shape.
The MPPL curve is downward sloping because of the law of diminishing returns. In other words, as each new worker is employed the amount of additional output that’s produced falls.
Trade Union Wage Negotiations
may not result in Unemployment?
1) Trade unions can help to increase the wages of their members without causing unemployment. To do this the productivity
of trade union members must
increase — this would increase demand for workers from firms and help
prevent the situation of an excess supply
of labour described on the previous page.
2) Trade unions can help persuade their members to agree to more efficient working practices which increase worker productivity. This is good for firms as a more productive workforce may increase their profits. Workers will benefit from higher wages and trade union membership won’t be reduced by unemployment.
3) When workers become more productive
a firm’s MRP (demand) curve shifts to the
right. Firms can afford to pay wages that are equal to a worker’s MRP, so if a trade union can help raise the MRP of workers, then an increased wage can be justified.
What causes a shift in Demand for Labour?
1) A change to the price of goods sold (MR) — if demand falls for a firm’s product and its price falls,
this would decrease the firm’s demand for labour and the MRPL curve would shift to the left.
2) Factors that affect labour productivity — e.g. if new technology or training increases the productivity of workers, this would increase the demand for labour and cause the MRPL curve to shift to the right.
3) Changes in the demand for the final product.
There are several factors that can influence the elasticity of demand for labour:
(Elasticity of demand for labour measures the change in demand for labour when the wage level changes. It’s calculated
by dividing the percentage change in the quantity of labour demanded by the percentage change in the wage rate).
- The demand for labour is always more elastic in the long run as firms can make plans for the future to replace labour
(or take on more). In the short run, changes are more difficult to make, so demand for labour is more inelastic. - If labour can be substituted easily by capital (e.g. machines), then the demand for labour will be elastic.
- If wages are a small proportion of a firm’s total costs then the demand for labour will be more inelastic — this is
because a wage increase will have little impact on total costs. If wages are a large proportion of a firm’s total costs
then demand for labour will be more elastic — even small wage increases will have a large impact on total costs. - It’s important to consider the price elasticity of demand (PED) of the product being made. The more price elastic
the demand for the product is, the more elastic the demand for labour will be. In this situation, when wages rise
firms aren’t able to pass the increase in costs (higher wages) to consumers by increasing prices. If they did, their
sales would decrease by a greater proportion than the increase in price — so overall their sales revenue would fall.
What is the supply curve and why is it upward sloping?
- Labour supply is the number of workers willing to work in that occupation at a given wage rate.
- As the wage rate for an occupation rises, the quantity of labour supplied increases:
- Usually, individuals are prepared to work more hours as the wage
rate increases. However, there’ll be a limit to how many hours an
individual will be prepared to work, even if wages continue to rise. - Although individual workers have a limit to the amount of
labour they’re willing to supply, high wages will attract more
workers to an occupation and increase the labour supply. - This means that the supply curve for labour in an occupation slopes upwards.
Meaning of Brain drain?
When an economy loses skilled workers overseas.
Factors that affect the supply of labour include:
1) Non-monetary benefits
2) Barriers of entry for job (qualification needed?)
3) The size of the working population in an area or the country as a whole.
For example, if there’s an ageing population with a large proportion of people in
retirement then there may be insufficient workers to meet demand for labour.
4) The competitiveness of wages — workers may pick the job that will pay them the highest
wage. Firms/industries that pay poor wages may struggle to attract enough labour.
5) The publicising of job opportunities — it may be difficult to attract sufficient
workers to a particular job/industry if jobs are not advertised effectively.
Factors influencing the elasticity of labour supply:
1) The main determinant of the elasticity of labour supply is the level of skills and qualifications needed for a job.
(Length of training period)
2) The mobility of labour is also another important factor that affects the elasticity of labour supply.
3) Rate of unemployment
Trade Union Wage Negotiations may result in Unemployment?
Trade unions can cause labour market failure by forcing wages up to a level higher than the market equilibrium wage — causing a surplus of labour (i.e. unemployment) because firm cannot afford to pay the same amount of workers.
(similar things happens with a rise in NMW).
What effect does a Monopsonistic Labour Markets have?
- W1 is the wage that the monopsonist would have paid its workers without a union.
- The presence of a union may increase wages to W2 In doing this it will change the shape of the supply/average cost of labour (ACL) curve, and that’ll then change the shape of the marginal cost of labour (MCL) curve.
- The profit maximising level of workers is still where the MCL curve crosses the marginal revenue product (MRP) curve. This is now at point U , giving a new increased level of employment of L2
- The union has managed to increase wages
from W1 to W2, and increase employment from L1 to L2.
Advantages of NMW?
- Introducing a NMW may help those on very low incomes and reduce the level of poverty in a country.
- A NMW may also boost the morale of workers as they’ll receive better wages. Happier workers tend to be more productive, so output may increase as a result.
- A NMW means the re’s greater reward for
doing a job that pays the NMW.
It gives people more incentive to get a job rather than be unemployed. - The government’s tax revenue is likely to be greater if a NMW is introduced.
Disadvantages of NMW?
- A NMW can increase wage costs for
firms. This might mean they have to cut jobs, resulting in increased unemployment. - A NMW could decrease the competitiveness of UK firms compared to firms in other countries that have lower wage costs.
- UK firms may have to pass on increased wage costs to consumers by increasing their prices, and this could contribute to inflation.
- There are doubts about whether introducing a NMW really decreases poverty. This is because many of the poorest members of society, such as
the elderly and disabled, are not in work (so
aren’t able to benefit from an increased wage rate).
