Labour Markets

Question 1

Define the marginal revenue product of labour? (MRPL) How is it calculated?

Answer 1

The extra revenue derived from one unit of labour, and is calulcated as MR * MPL

(MPL = marginal product of labour)

Question 2

Labour is a derived demand - define derived demand?

Answer 2

Demand for the factor of production is derived from the demand for the output produced by that factor

Question 3

How do firms decide how much labour to employ in a perfectly competitive market?

Answer 3

Firms will employ labour until the MRPL equals the wage rate

Question 4

Define diminishing marginal returns to labour?

Answer 4

The decrease in the marginal output as the amount of labour is increased by one unit, while the amounts of all other factors of production stay constant

Question 5

What does the MRPL curve look like? What is it showing?

Answer 5

Downward sloping (because of diminishing marginal returns to labour) - shows labour demand

Question 6

Explain the increase in the wage rate on the number of hours worked, split into income and substitution effect?

Answer 6

Income effect - increase in real wage, increases incentive for workers to offer more hours to work as can increase consumption with higher wage BUT can work opposite direction where individuals can reach their desired income with fewer hours worked
Substitution effect - opportunity cost of leisure increases, so higher wages incentive people to work more hours

Question 7

Why is the labour supply curve backwards bending?

Answer 7

The substitution effect suggests that higher real wages increase the hours worked as the opportunity cost of leisure is higher, the labour supply curve bends backwards when the income effect dominates as the income effect is where real wages mean that individuals can reach their desired level of income with fewer hours worked.

Question 8

Give 2 reasons why the labour supply curve is upward sloping?

Answer 8

1. A higher real wage rate encourages a higher participation rate (more workers)
2. A higher real wage rate can attract workers from other industries

Question 9

What happens to labour when there is a fall in demand for a product?

Answer 9

The demand for labour also falls

Question 10

What happens to labour when the where is an increase in wages in another industry?

Answer 10

Labour supply will fall

Question 11

What is a monopsony?

Answer 11

Where a firm has market power in employing factors of production e.g. labour

Question 12

What does the Lorenz Curve show?

Answer 12

Inequality

Question 13

Describe the Lorenz curve diagram and show how you find perfect equality and perfect inequality

Answer 13

x-axis = proportion of people
y-axis = proportion of income
perf equality = diagonal line going where y = 10%, x = 10% etc
perf inequality = vertical line at 100% on x-aixs

Question 14

What does an age-earning profile show?

Answer 14

Show how typical earnings vary with age and educational qualifications. Education induces a differential (high or lower curves) that tend to increase with age

Question 15

What is the labour supply and demand like in the short run?

Answer 15

In SR hard for people to switch between markets, so supply curve is inelastic. Wages will be high for skills that have a short supply relative to demand.

Question 16

What is labour supply like in the long run?

Answer 16

People can switch bewtween labour markets so more elastic than in SR but can be limited by innate ability. Education and training can help move people into higher wage markets

Question 17

What is human capital theory?

Answer 17

Views the pursuit of education and training as an investment. If the rate of return on human capital is greater than the rate of return on alternative people will pursue educational opportunities

Question 18

What causes demand differences for labour? (3)

Answer 18

Educational or other disadvantages before young workers reach labour market
Low perceived rate of return for firms on money spent on training
Racism/sexism

Question 19

What are employment rents?

Answer 19

The difference between the wage paid and the disutility of work

Question 20

Why do firms need to set wages high enough to receive employment rents?

Answer 20

To motivate employees as it means there is a cost of losing a job - the employee is better off being employed than fired.

Question 21

What does the wage-setting curve show?

Answer 21

Gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well

Question 22

What does the price-setting curve show?

Answer 22

Gives the real wage paid when firms choose their profit-maximizing price

Question 23

Where does the wage-setting curve sit in relation to the labour supply curve and why?

Answer 23

To the left - as some level of unemployment is needed to motivated workers

Question 24

What is the impact of collective bargaining/national minimum wage on the labour market?

Answer 24

Min wage set above equilibirum real wage -> excess labour supply -> involunatry unemployment as there are ppl that would work below MW