Labour Market

Question 1

What type of demand is the demand for labour? And why?

Answer 1

Derived demand. Because when consumers demand more of a firms good, firms will demand more labour (workers) in order to produce more goods.

Question 2

What is the Marginal Revenue Product of labour?

Answer 2

The extra revenue gained by a firm from employing one additional worker

Question 3

What is the Marginal Physical Product of Labour?

Answer 3

The extra output produced by employing one additional worker

Question 4

What is the Marginal Cost of Labour?

Answer 4

The cost of employing one additional worker

Question 5

In what scenario would a firm choose not to employ a worker, in terms of costs and revenue?

Answer 5

The additional worker costs more to employ, than what their labour makes for the company, in terms of revenue

Question 6

What is happening in a firm, when the Marginal Revenue Product of Labour is equal to the Marginal Cost of labour?

Answer 6

The firm is employing the optimum number of workers needed to maximise profits (MR = MC)

Question 7

How would a firm know if it is employing too many workers?

Answer 7

When the marginal revenue product of labour is less than the marginal cost of labour (the wage rate)

Question 8

The Marginal physical product of labour curve is downward sloping, because of which law? And why is this?

Answer 8

The law of diminishing returns, because as each new worker is employed, the amount of additional output produced falls

Question 9

What curve is also represented by the marginal revenue product for labour curve? (What is it the same as basically?)

Answer 9

The demand curve for labour

Question 10

If wages rise, what is generally expected to happen to a firms demand for labour? What counter factor will prevent this from happening however?

Answer 10

A firms demand for labour is expected to decrease as wages rise, however this can be countered by an increase in productivity as the same time

Question 11

What are unit labour costs?

Answer 11

Labour costs per unit of output

Question 12

What do high unit labour costs suggest about a firms productivity? And what other effect will this have on the firm?

Answer 12

That there’s LOW productivity, which would reduce a firm’s competitiveness

Question 13

What are the three things demand for labour depends on?

Answer 13

• The productivity of labour (MPP)
• The demand for the good
• The wage rate

Question 14

What are the 3 main functions of trade unions?

Answer 14

1. Represent workers
2. Bargain for higher wages
3. Coordinate with firms to implement new working practices and increase productivity

Question 15

Trade unions work to push the wage rate above the equilibrium wage rate, what effect can this have on employment and why?

Answer 15

This can lead to a decrease in unemployment (real wage unemployment) because firms are less willing/or cannot afford to pay workers a higher wage rate and so have to make redundancies/demand less labour

Question 16

The impact of unions on wage rates is not certain. What does this relationship depend on?

Answer 16

• The employer (trade unions can counterbalance monopsony power)
• Efficiency wage theory (higher wages lead to higher productivity)
• Productivity deals (trade unions negotiating with firms to increase productivity in return for higher wages)

Question 17

What is the result of trade unions bargaining for higher wages in a competitive labour market?

Answer 17

Unemployment (real-wage unemployment)

Question 18

Suggest 3 factors the success of trade unions is dependent on?

Answer 18

Any 3:

1. The number of workers from the workforce who are members of trade unions (i.e. the density)
2. Bargaining power of workers, for example power plant workers have much more economic leverage than supermarket workers
3. Economic climate (highly profitable firms or struggling to survive?)
4. Government Legislation, since 1970’s the UK government has reduced the power of unions

Question 19

Trade union membership has nearly halved since its peak in 1980. What is the MAIN reason for this?

Answer 19

The decline of heavy manufacturing industries like steel and coal. Unions played a big role in these industries.

Question 20

What is a monopsony? And what power does a monopsony have?

Answer 20

A monopsony is a single buyer of labour in a market. This firm therefore has wage setting power.

Question 21

How do monopsonists exploit workers?

Answer 21

They set the wage rate below what the equilibrium wage rate would be in a competitive labour market

Question 22

State 3 advantages of trade unions

Answer 22

Any 3:

1. Counterbalance monopsony power
2. Increase wages for its members
3. Represents workers and their rights
4. Can strike productivity deals

Question 23

State 3 disadvantages of trade unions

Answer 23

Any 3:

1. Create unemployment - because of bargaining for higher wages in a competitive labour market causing real wage unemployment
2. Ignore non-members (or the self employed)
3. Lost productivity because of strike action
4. Can contribute to wage inflation (like in the 1970s when the UK had 27% inflation at one point)