Labour Market Integration (L7)

Question 1

What is the theory of wage rates? Assumptions

Answer 1

1. Goods are produced by combining only L + K
2. Workers have identical skills
3. Capital is fixed
4. Perfect competition in the labour market (employers hire workers only if they generate enough extra output to cover cost)

Question 2

what is MVP?

Answer 2

marginal value productivity of labour is the amount by which the output increases w each additional worker.

marginal meaning extra

all other workers employed each create more value than they cost to emply (reward to K)

Question 3

How are wage rates determined?

Answer 3

Wage rate = MVP of the marginal worker

Question 4

draw an MVP/workers diagram

Question 5

Why is MVP downward sloping?

Answer 5

With a fixed amount of capital, each extra worker adds less and less to total output.

Question 6

What determines how many workers to hire?

Answer 6

Look at x-axis on graph. Hire workers until wage rate intersects MVP.

Question 7

Where is return to capital on the diagram?

Answer 7

The triangle above wage is the profit to capital owners

Question 8

How does free movement of labour within a common market affect a country?

Answer 8

With Common Market, workers from low wage country migrate to high wage country so wages eventually converge.

Question 9

Draw a common market wage/migration diagram

Question 10

When is there no more migration on the diagram?

Answer 10

Where wage equialises, there will be no more migration as wage rates are the same so no incentive.

Question 11

If MVP increases, what increases?

Answer 11

wage rate as labour decreasees

Question 12

What are the drawbacks of the common market wage model?

Answer 12

very basic view

assumes that wages are flexible but in reality we have things like minimum wages

also assumes full employment but in a country with lots of labour there will be unemployment.

skills play a role in real life so there are bound to be wage differentials

Question 13

why else might wage rates converge? [2]

Answer 13

1. free movement of capital
   wage rates are different due to different MVPs. MVPs are different due to capital:labour ratio. If there is free movement of capital, then firms can relocate from areas with high wages to areas with low wages to lower COP.
2. free trade
   one country will specialise more in exporting goods which requires more labour in their production, increases demand for labour in country A so wages increase as incentive.

Question 14

What was the treaty of rome 1958?

Answer 14

Commits member states to form a common market. European economic committee formed

Question 15

What is a commons market?

Answer 15

free trade, CET, free movement of capital and labour

Question 16

what does free movement mean?

Answer 16

• **no restrictions **on capital and labour crossing borders
• no discrimination based on nationality
• posted workers (Remittances)

Question 17

What was labour mobility like among EU countries ?

Answer 17

1. 1960’s post-treaty of rome.
   Lots of migration from south to north coutnries, but after second period, labour mobility was low and less migration because northern countries had lots of unemployment and wasn’t growing fast.
   Also had cultural and linguistic barriers.
2. In 2004, enlargement of european union to eastern european countries meant considerable ast -> west migration (3 million) due to large wage disparities and specific skill shortages in the west.