Labour market Flashcards
Demand for labour
The demand for labour shows hoe many workers an employer is willing and able to hire at a given wage rate in a given time period
- There is an inverse relationship between demand for labour & the wage rate
- If the wage rate is high - more costly to hire extra employees
- When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might create a substitution effect and lead to an expansion in labour demand
Factors that shift demand for labour
- Change in the conditions of demand in the jobs
- A rise in consumer demand meaning a business will need to take on more workers
- An increase in the productivity of labour which makes labour more cost efficient than capital
- A government employment subsidy which allows a business to employ more workers
- The labour demand curve would shift inwards during a recession as businesses shed labour
- Shifts in labour demand are caused by factors other than wage rate
Factors CAUSING shifts in the demand for labour
Changes in productivity
- Compared to other factors of production, if labour becomes more productive, there will be an increase in demand for this factor input
Changes in the price of substitutes
- Other factors of production
Changes in supplementary labour costs
- E.g. National insurance contributions which employers have to pay increasing will lead to a fall in the demand for labour
Marginal revenue product theory
The main idea is that, to profit maximise, the firm should employ workers up to the point at which the extra cost of employing a worker is equal to the extra revenue generated by employing that worker
Marginal revenue product of labour (MRPL)
- Marginal revenue productivity of labour (MRPL) is a theory of the demand for labour where it is assumed firms will look at the revenue that the extra worker employed will generate for them, compared to the wage they must be paid
- MRPL measures the change in total revenue for a firm from selling the extra output produced by extra worker
- Marginal physical product (MPP) is the change in output resulting from employing one extra worker
- MRPL = MPP x Price per unit
Problems with the MRPL theory
- Can all firms use this theory to help them decide how many workers to hire? Why or why not?
- Will all items which are made, be sold?
- Would it be fair to assume that all the workers are equally as good and that the eleventh worker should or shouldn’t be hired without considering if he/she is worse or better than the other workers currently employed
- Does this theory work for people who own their own business and employ themselves?
Limitation of the MRPL theory
It assumes
- Measuring productivity is possible
- That workers are homogenous
- That the self employed are able to calculate their MRPL
- That firm have no buying power when it comes to setting wages
Diminishing marginal returns
- When adding a variable factor to a fixed factor, the increase in total product eventually starts to get smaller and smaller
Fixed factor
- Can not be changed in the short term
- E.g. Factory space
Variable factor
- Can be changed in the short term
- E.g. Workers
How to overcome diminishing marginal returns
- The short term division of labour can be used to delay the onset of diminishing returns
- In the long run, it is assumed that the fixed factor can be increased, such as by moving to a larger premises
- This will mean diminishing returns will not set in as quickly, but they are ultimately unavoidable as will still set in at a higher level
The supply curve for an individual worker
- A supply curve shows the quantity which will be supplied at any given price
- For an individual worker, the quantity of labour supplied is the total number of hours worked over a time period
- A worker will decide how many hours to work based on the real wage rate
The individuals supply curve
- The backward bending labour supply curve
- This theory states that high wage levels will actually lead to a reduction in supply
The individuals choice between work and leisure
- When a worker is deciding whether the wage rate is high enough for them to supply their labour, they will be considering the leisure time they will have to give up in order to work, and consider of the wage rate is compensating them enough
- For each hour that an individual works, they must give up an hour of leisure
- An hour of leisure is therefore the opportunity cost of the decision to supply
The substitution effect
As wages increases leisure time becomes relatively more expensive, therefore there will be a tendency to substitute extra hours of work, replacing hours of leisure
The income effect
- At a particular wage level, increases in the wage rate lead to the workers income at current hours worked rising. The worker may now decide that they can afford more leisure time while maintaining an acceptable level of income
Factors affecting the supply of labour
Real wage rate
- On offer from the industry itself
Extra pay
- E.g. Overtime payments, productivity pay, share options
Wages in substitute occupations
- E.g. increase in the earnings for plumbers and electricians may cause people to switch their jobs
Barriers to entry
- Artificial limits to an industry’s labour supply can restrict supply and increase wages
- E.g. Minimum entry requirements
Improvements in the occupational mobility of labour
- E.g. as result of expansion of apprenticeships and other forms of work experience
Non- monetary characterises of specific jobs
- E.g. Risk, requirement to work anti-social hours, job security, working conditions, opportunities for promotion, chance to live and work oversea, employer-provided in-work training, occupational pension schemes
Net migration of labour
- E.g. Net inward migration boosts the active/ available labour supply in many occupations such as skilled professionals working in the NHS
Labour supply
The labour supply is the number of hours people are willing and able to supply at a given wage rate
Shifts in the supply curve
- Better training
> This attracts more people to work in this industry. The opportunity for training and/or progression in an industry will increase supply - Better working conditions
- Worse working conditions in alternative industry
- Government incentive schemes
All these factors would lead to an increase in the supply of labour to a particular industry. The opposite of these factors would lead to a decrease in supply
Wage determination
- The equilibrium market wage rate is at the intersection of the supply and demand for labour. Employees are hired up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling their output
Causes of wage differentials
Compensating wage differentials
- A reward for risk taking working in poor conditions and during unsocial hours
Reward for human capital
- Differentials compensate workers for (opportunity and direct) costs of human capital acquisition
Different skill levels
- Market demand for skilled labour (with inelastic supply) grows more quickly than for semi-skilled workers
Differences in labour productivity and revenue creation
- Workers whose efficiency is highest and ability to generate revenue for a firm often rewarded with higher pay
Trade unions
- Who might use their collective bargaining power to achieve a mark up on wages compared to non-union members
Other artificial barriers to labour supply
- E.g. professional exams
Employer discrimination
- A factor that cannot be ignored despite over twenty years of equal pay legislation in place
What is a trade union
- A trade union is an organisation of workers who join together to further their own interests
What are their aims
- Higher wages
- Better working conditions
- Protecting workers, their jobs and their rights
- Improve training
What is collective bargaining
- The union represents workers as a group (collective) and negotiates (or ‘bargains’) with the employer on their behalf. The trade union becomes a monopoly supplier of labour and thus has some power over the employer
Factors affecting the power of trade union and their ability to change wage rates
- Membership and militancy
- The elasticity of the demand curve for labour
- Profitability of the employer
- Economic climate - level of unemployment
- Public support for unions
- Legislation
Monopsony power
- Monopsonist has buying power in their market
- This buying power can exploit their bargaining power with a supplier to negotiate lower prices
- Reduced costs of purchasing inputs increases their potential profit margins
-Monopsony exists in both product and labour markets
Monopsony in a market without trade unions
- As a monopsonist, the employer is not a wage taker
- As the industry’s sole employer, it is faced with the industry’s labour supply curve, which is upward sloping
- With its powerful position it can choose any point on the labour supply curve
- However the implications is that if it wishes to employ an extra worker it will have to offer higher wage rate
- The MC of employing an extra worker is therefore greater than the average cost of employing labour because the increased wage rate must be now be paid to not just the extra work but also all other workers in the industry
- The employer will hire extra workers as long as that worker adds more revenue than to costs
Wage differentials
Wage differentials is described as the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or localities
Why do wages differ
- Skilled workers receive higher wages than unskilled workers because the demand for skilled workers is higher and they are in fewer supply
Wage differentials between genders
- Men are paid more than women
- In part due to more women working part time
- MRP of women is less than men, therefore firms demand more men
- Greater percentage of women work in lower paid jobs
- More men attended university in the past, however now female participation is greater
Wage differentials between part and full time
- Part time workers tend to receive lower pay than full time
- Supply of part time workers is relatively high compared to demand (MRP is low)
- Smaller percentage of PT workers are members of trade union
Wage differentials between ethnicity
- Workers from ethnic minority groups are paid less on average than white people
- High % are employed in part time jobs such as restaurants, hospitality and retail where pay is low
