Labour Market

Question 1

Define demand for labour

Answer 1

The amount that firms are willing to pay for a certain amount of workers. Demand varies inversely to wage.

Question 2

What is the demand for labour influenced by? (4)

Answer 2

1. Worker Productivity - when workers become productive, output becomes more efficient and firms may be prepared to pay workers more.
2. The cost of capital (a substitute) - firms can choose to use capital if it is cheaper, more efficient or more reliable.
3. The level of consumer demand for the product being made - The marginal revenue product is the extra output made by any one worker multiplied by the amount that output can be sold. This is a key determinant of wages.
4. Labour costs as a percentage of total costs - the demand for labour is less elastic when labour costs overall are small.

Question 3

What is a derived demand? Give an example

Answer 3

Labour is a derived demand.

Derived demand means that the demand for labour is dependent on demand for the final goods and services that the workers produce.

Question 4

Define the supply of labour

Answer 4

Supply of labour is the number of workers willing and able to work at any given wage.

Question 5

What is the supply of labour influenced by? (5)

Answer 5

1. Quality of education and training
2. Migration
3. Income tax and out-of-work benefits
4. The strength of trade unions
5. The opportunity cost of leisure

Question 6

Explain why is market failure common in the supply of labour ? (2)

Answer 6

Because it is often difficult for workers to move easily between jobs compared to the other factor inputs. Reasons include:

1. Geographical immobility - Some workers find it hard to move between jobs, and seek work. This may be due to family reasons, cost of travel, accommodation etc…
2. Occupational immobility - Some workers find it hard to move between jobs as they lack the appropriate skills and training.

Question 7

What is the wage rate in competitive markets?

Answer 7

The price of labour, where the demand and supply of labour meet.

Question 8

What happens if wages are too high in competitive markets? And what is done to solve this? (2)

Answer 8

1. Labour supply will be too high, and demand will be too low (excess supply leading to unemployment)
2. To clear the market, workers will have to accept lower wages without a job, meaning that wage rate will tend to fall to the market clearing wage rate.

Question 9

What happens if wages are lower than the equilibrium? (2)

Answer 9

1. Labour demand will be high but supply will be low (excess demand, leading to labour shortage).
2. The deficit will not disappear until wages rise, and firms will have to pay workers more (demand contracts) to convince pole to work (expansion in supply).

Question 10

What is the labour force?

What is the labour force participation rate? How is it calculated?

Answer 10

The labour force is the sum of people employed and unemployed.
The labour force participation rate is calculated as the labour force divided by the total working-age population.

Question 11

Define unemployment

Answer 11

Measures the number of people who are willing and able to work but are not currently employed.

Question 12

Define underemployment

Answer 12

This occurs when there are workers who are highly skilled, but are working in a low-skill job. And when there are part-time workers who would prefer to work full-time or work more hours.

Question 13

Why can we not assume that an employer pays the employee the value that the worker adds to the firm in a non-competitive market (e.g. monopsony, the NHS)?

Answer 13

Essentially the firm ‘exploits’ the workers, or takes advantage of their weak markets power, and forces wages down.

Question 14

What are the current labour market issues? (6)

Answer 14

1. Skills shortages e.g. teaching
2. Unemployment (especially amongst the youth)
3. Increasing retirement ages, to cope with the problems in funding pensions because we live so much longer.
4. Temporary, flexible or zero-hour contracts - these make it hard for people to make investments, and there are problems with delays in benefits for people moving in and out of work.
5. Underemployment
6. Tax credits

Question 15

Define the national minimum wage.

Answer 15

The minimum firms are allowed to pay their workers, by law.

Question 16

Why are some economist in favour of a maximum wage?

Answer 16

In order to reduce the rate at which the top earnings are moving away from the median earnings.
E.g. footballers, bankers

Question 17

What is the main aim of minimum and maximum wages?

Answer 17

To reduce income inequality

Question 18

How do minimum wages reduce income inequality?

Answer 18

They prevent very low wages, which can mean poverty, people struggling to stay in work, and an employment trap, where it is financially better not to go to work and to res on benefits.

Question 19

How do maximum wages reduce income inequality?

Answer 19

They are seen as a way to prevent the top 1% of earners ‘creaming off’ the profits in the business, and would allow higher wages to be earned by a wider group of the workers.

Question 20

What are some issues with minimum wages? (2)

Answer 20

1. Lead to a surplus of a worker, in competitive markets

2. The don’t reflect the cost of living

Question 21

What are some issues with maximum wages? (2)

Answer 21

1. Leads to a shortage of certain types of workers.

2. Destroy incentives

Question 22

Define the elasticity of demand for labour?

Answer 22

The responsiveness of demand for labour to a change in wages.

Question 23

What will businesses do if the price elasticity of demand for labour is relatively elastic (i.e. -1 to minus infinity)?

Answer 23

Businesses will cut back aggressively on employment if wage rates increase, and will expand rapidly when labour becomes cheaper relative to the other factor inputs.

Question 24

What will firms do if the price elasticity of demand for labour is relatively inelastic (i.e. 0 to -1)?

Answer 24

The response by firms to changes in wage rates will be smaller.

Question 25

What determines the PED of labour? (4)

Answer 25

1. Proportion of labour costs in the tool costs of business
2. The ease and cost of factor substitution
3. The PED for the final output produced by a business
4. The time period under consideration

Question 26

Define price elasticity of labour supply.

Answer 26

(To an occupation) is the responsiveness of labour supply to a change in wage rate.

Question 27

What do workers do if PES of labour is relatively elastic (1 to infinity)?

Answer 27

Workers respond quickly if wage rates increase and supply will expand rapidly when wages rise.

Question 28

What do workers do if PES of labour is relatively inelastic (0 to 1)?

Answer 28

The response by workers to changes to wage rates will be smaller.

Question 29

What determines PES of labour? (2)

Answer 29

1. In low-skilled occupations, labour supply is elastic because a pool of labour is available to take the job.
2. Where jobs require specific skills, training or qualifications, the labour supply will be more inelastic because it’s hard to expand the workforce in a short period of time when the wage for workers has increased.

Question 30

What is the significance of PES and PED of labour with regards to wage rates?

Answer 30

Generally, the higher the elasticities, the lower the wages will tend to be.