Labour Markets Flashcards
What is the demand of labour
The demand for labour refers to the amount of workers employers are willing to and able to hire at a given wage rate over a given time period
What is the relationship between demand of labour and wage rate
- inverse relationship
- higher wage rate means firms cannot afford to take on any more workers
- lower wage rates leads to substitution effect which increases demand of labour
What causes an extension and contraction in demand of labour
-Lower wage rate causes an extension In demand of labour
- higher wage rates causes a contraction in demand of labour
What are the causes of shifts of demand of labour
- consumer demand
- changes in the price labour produces
- changes in labour productivity
- employment subsidies and tax incentives
- changes in the price of capital goods
Hwo does consumer demand affect DOL
- increased consumer demand means that firms need to increase production and this requires increasing workers
- decreased consumer demand means less output needs to be created so there is less demand of labour
How does the price of goods labour produces affect DOL
- an increase In price gives firms the incentive to maximise profits by increasing supply of this good -> requires an increase in production and therefore more workers needed
How do changes in labour productivity affect DOL
- increase in labour productivity makes labour more cost effective compared to investing in new capital for firms -> due to this there is an increase in the demand of labour
How do changes in the price of capital goods affect DOL
- The direct substitute for workers is capital goods
- decrease in the price of capital goods means the demand for labour decreases
- increase in the price of capital goods means the demand of labour increases
What is derived demand
Derived demand refers to the demand of a factor of production which is used to produce and other good or service
Due to DOL being derived demand what happens in a boom and recession
- In a economic boom, the demand for goods and services increases so DOL increases
- in recession, demand for goods and services decrease therefore DOL decreases leading to cyclical unemployment
Give an example of cyclical unemployment in an industry
- Construction industry
- in an economic downturn, the demand for houses decreases leading to cyclical unemployment for construction workers
What is the elasticity of labour demand
Elasticity of labour demand refers to the responsiveness of labour demand given a change in wage rate
What factors affect elasticity of labour demand
- labour costs as % of total costs
- ease and costs of factor substitution
- ped of the produced product
- time
What is the individual labour supply
Individual labour supply refers to the amount of hours of labour a individual is willing to supply at at given wage rate
What is the opportunity cost of supplying labour
Leisure time
What two effects does an increase in wage rate lead to
- substitution effect
- real income effect
What is the substitution effect
The substitution effect occurs when an increase in wage rate leads to the opportunity cost of leisure time increasing which incentivises people to work more and have less leisure Time
What is the real income effect
The real income effect is that an increase in wage rate brings people closer to their target income and encourages them to have more leisure time
Draw the individual labour supply curve
Backwards bending
Wage rate
Hours of labour supplied
What effect is stronger at lower wage rates
Substitution effect is stronger at lower wage rates
What effect is stronger at higher wage rates
Income effect
What is the industry labour supply curve
The industry labour supply curve refers to the amount of workers which are willing to work in a given industry
What shape is the industry supply curve
Upward sloping
Show the impacts of a wage rise and wage decrease on industry supply curve
An increase in wages will lead to a extension in supply
Wage decrease will lead to a contraction in supply
What factors cause a shift in labour supply curve (non wage factors)
- wages in substitute occupations
- non wage benefits (pensions, canteen, company car)
- barriers to entry (qualifications, skills, experience, age)
- overtime
- size of working population
- increase in the occupational mobility of Labour