Labour Markets Flashcards
What is the demand for labour?
The demand curve for labour shows the amount of workers a firm is able and willing to hire at a given wage rate. The demand for labour is derived demand, coming from the demand for goods and services.
Marginal Revenue Product is the extra revenue generated by employing an additional unit of labour. MRP = MPP * MR = D
MRP will fall as more units of labour are employed, due to the fixed nature of the other factors of production, with workers becoming less productive.
There is an inverse relationship between wage and workers employed due to:
-In the SR, the law of diminishing marginal returns
-In the LR, workers can be substituted by more efficient capital.
What are the criticisms of the MRP theory?
- Difficult to measure MRP, could be hard to distinguish between workers or to calculate MRP in some industries (such as teachers).
- Professions where teamwork is required makes it much harder to know the MRP of each individual.
- Trade Unions could affect wages, even if worker’s MRP doesn’t change
What could shift labour demand?
- Change in price of good being produced
- Change in demand of good being produced
- Change in productivity of labour
- Change in the price of capital
What affects the elasticity of labour demand?
- Substitutability of labour with capital
- Elasticity of the demand for the good being produced.
- Cost of labour as a percentage of total cost.
- Time period
What is the supply of labour?
The supply of labour is the amount of workers willing and able to to supply their labour services at a given wage rate.
Two effects will alter the supply of labour:
-Income Effect - As wages increase, so does one’s ability to enjoy leisure, thus workers may supply less labour at higher wage rates to enjoy leisure.
-Substitution effect - As wages increase, the opportunity cost of not working increases, meaning that the worker will opt to prioritise work over leisure.
What can shift the supply of labour?
- Wages on offer in substitute occupations - e.g. nurses coming back to work after wages rise.
- Barriers to entry - Skills and qualifications - Higher barriers to entry will limit supply, shifting it left.
- Non-monetary characteristics of the job - Greater non-monetary benefits will attract workers, increasing supply
- Improvements in occupational mobility of labour - The more easy it is for workers to travel to jobs further around the country, the more workers will supply their labour services for those jobs.
- Having the option to work overtime can attract workers, shifting supply
- Size of working population
- Value of leisure time - If workers value their leisure time over a job, at a given wage rate, they may not be willing to work.
What affects the elasticity of labour supply?
- Nature of skills required - The greater the skills required, the harder it is for workers, who don’t have the right skills to fulfil the work, to enter the market.
- Length of the training period - The longer the training period is, the less likely workers will supply their labour.
- Vocational professions - If the wage is not the driving factor of a worker in an industry (like teaching) then supply of labour may be less responsive to the change in wages (inelastic).
- Time - A lot of people will take time to change jobs or wait to see if wage changes are permanent.
What are the characteristics of a perfectly competitive labour market?
- Perfect information
- Labour is homogeneous
- Large number of buyers and sellers
- No barriers to entry/exit
- Firms are wage takers
Perfectly competitive labour market explanation
In a perfectly competitive labour market, the firm must pay the wage demanded by all workers. This is due to the fact that there are a large number of small buyers and sellers, meaning that workers will be able to find another firm that is willing to pay the wage demanded.
Why are there labour market imperfections?
The fact that wage differentials exist implies that there are labour market imperfections.
This could be due to:
-Labour is not homogenous - workers have different MRP and there could be discrimination within a labour market
-Non-monetary consideration - workers will not solely base their decision to take a job on the wage, taking into account pension scheme, holidays and overtime also.
-Labour is not perfectly mobile - occupational and geographical immobility
-Trade unions will collectively bargain for higher wages
Monopsonies and wage setting ability
Monopsony exaplanation
A monopsony is a sole or dominant employer of labour in an industry. For example, the government is a monopsony in the labour market of nurses and teachers.
Compared to a competitive labour market, a monopsony will give lower wages, whilst also reducing the quantity of workers employed. Furthermore, in a monopsony, the workers will be paid a wage lower than their MRP, shown by the difference between the D curve and W2 at Q2.
Trade union explanation
A TU is a group of workers that collectively bargain for higher wages and better working conditions. As the trade union bargains for higher wages, of W1, the firm will be forced to pay this wage. This shifts the supply curve, as seen in the diagram. Whilst this does lead to a rise in wages, there is a clear fall in the quantity of workers demanded. It could be said that this outcome is worse than before, due to the increase in unemployment.
Trade union in a monopsony explanation
A TU can control the supply of labour at given wage rates. In a monopsony, the TU will see the low wages (compared to MRP) and bargain for higher wages. A monopsony will then have to pay the wage that the TU demands, making the monopsony a wage taker. This new wage will kink the supply curve and a vertical discontinuity in the MC curve. As before, the monopsony will employ workers up to MRP=MC. The outcome of the TU in the monopsony labour market is that there has been a rise in wages and increase in employment. Both wages and employment will move closer to the competitive labour market level, increasing efficiencies. The monopsony power can be seen in the difference between wages and MRP. The greater the monopsony power, the greater the benefit of a TU, due to them being able to increase wages further.
Trade union eval
- Use/Effect of TU in a monopsony labour market
- Strength of the TU power - The union density measures the percentage of workers in an industry that are a member of the TU. This greater this percentage, the greater the power of the TU
- Real world evidence proves limited power of TUs:
- Legislation - The fact the closed shop TUs are illegal will limit union density and severely reduce its power. Also, legislation has come in to tackle striking, taking away the TUs power when bargaining for greater wages.
- Restructuring of the UK economy
- Competitive pressures
Why do men earn more than women?
- Women move in and out of the labour force more often, possibly to care for a child. This can limit their experience, skills and MRP
- Age of being economically active - A lot of women will leave the workforce during the period that they push on in their career.
- Differences between education/qualifications
- Women work in low-paid occupations
- Part time work
- Service sector work
- Public sector work
- Vocational work
- Lack of trade union presence
- Increase in the supply of female workers
- Discrimination
