Labour Market- DEMAND Flashcards
Define Derived Demand
Demand for Labour stems from the Demand for the Firm’s G+S
What assumptions do we make when analysing the Demand for Labour?
Firms are Competitive
- Price Takers- in both Input + Output Market
- Profit Maximisers
What is VMPL?
Value Marginal Product of Labour
How is VMPL calculated?
VMPL = P x MPL
What is the equation for Marginal Profit?
Marginal Profit = VMPL - Wage (=w =MC)
Define VMPL
Value of Output produced by a worker
What does the Downward Slope of VMPL show?
Diminishing MPL
What does VMPL show?
A Firm’s Competitive, Profit Maximising Demand for Labour
Where do Firms hire workers up too?
Hire workers up to where MC = VMPL
What 3 Main factors cause Demand for Labour to Shift?
- Output Prices
- Factors affecting Productivity- e.g. Technological Change
- Changes in other FoPs- e.g. Supply of Complementary Factors
How do you find the Industry Demand for Labour in the SR?
Start Point–> Wage drops from w1 to w2–> Firm hires more workers–> Increased Output (Q)–> Increased Supply of Good–> Decreased Price from P1 to P2–> Decreased Demand for Labour (Left Shift)— Industry Demand joins start + end point.
When Demand for Labour Increases- what happens to the Wage and Quantity of Labour?
Wage- Increases
Quantity of Labour- Increases
Allows Market to Clear
When Supply of Labour Increases- what happens to the Wage and Quantity of Labour?
Wage- Decreases
Quantity of Labour- Increases
Allows Market to Clear
What 3 factors can push wages Above Equilibrium?
- Minimum Wage Laws
- Trade Unions
- Efficiency Wages
What is the main factor that can Push wages Below Equilibrium?
Monopsony- One buyer of Labour–> Lower Wages
What happens if you set a Minimum wage above Wm in a Monopsony Market?
Employment increases from Lm, above the Equilibrium Quantity L* to Lmin
In Practice- Why does Min. Wage NOT always lead to Unemployment?
Many Employers have Power in the Labour Market–> So they already get away with Paying a Wage that is less than the worker’s worth
What are 3 other Factors affecting Earnings?
- Compensating Differentials
- Human Capital
- Signalling
What are Compensating Differentials?
Difference in Wages to off-set Non-Monetary Characteristics of a Different job
-e.g. better holiday in other jobs
What is Human Capital and how does it affect Earnings
Accumulation of Investments in People
Employers pay more for the Worker’s extra Productivity–> Incentive for Workers to defer earnings + undertake Training/Education
What do Higher Earnings often refelct?
Higher Productivity (Human Capital) and Compensating Differentials
What is Signalling
Employers lack info. about worker’s ability before hiring- Education signals to employer that worker is suitable to job
Signal- an action that costs you less the more able you are to do it-e.g. Education
