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9708 Economics A2 > Labour Markets > Flashcards

Labour Markets Flashcards

1
Q

Features of PC labour markets

A
  1. many potential workers and employers
  2. labour is homogenous (no difference in skills and qualifications and workers have all skills and qualifications to enter any industry, so perfectly mobile)
  3. firms are profit maximisers
  4. no wage differentials
  5. perfect information for workers about the going wage rate and for employers about skills, qual and productivity of all workers
  6. firms are wage takers (no incentive to pay more since labour is homogenous, and less means cannot employ anyone)
  7. no barriers to entry (skill requirements or training lags) or exit (notice periods for workers or redundancy payments for firms)
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2
Q

why is the MRP curve the demand curve for labour?

A

at any given wage rate, it shows us how many workers a firm is willing to employ

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3
Q

reasons for wage differentials

A
  1. trade unions - large mark up
  2. monopsony power - below MRP to profit maximise
  3. labour not homogenous - different MRP (skills and quals); discrimination (seen as diff even if may not be); different supplies of labour b/w industries
  4. immobility of labour - geo and occu, imperfect info
  5. non-monetary considerations when choosing to work - may be compensating wage differentials when non-financial benefits are low, e.g. poor working conditions
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4
Q

why is labour a derived demand

A

labour is a FOP used to produce others goods and services

only if the good and services are in demand will firms demand the labour that produces those G&S

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5
Q

define MRP

remember that formula should be part of explanation

A

the addition to total revenue as a result of employing one more worker, found by multiplying marginal product from additional worker by the price (MR) of the product

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6
Q

profit maximising level of employment

remember to explain why less than and more than this level is not ideal. Remember to explain any abbreviations, even MC, the first you use them

A

where MC of labour equals MRP of labour.

less than this, the firm has scope to make more profits as each additional worker is adding more to revenue than costs so worth hiring more

more than this, by hiring additional workers, firm is adding more to revenue than costs which is irrational

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7
Q

4 non-wage factors affecting demand for labour

A
  1. demand for final product - derived demand - shifts MRP curve
  2. marginal productivity - higher productivity means more output per worker, making labour a more attractive resource for profit maximising firms. Higher MP shifts MRP curve
  3. price of final product - if increases due to ICIPASTE, will incease MR and MRP
  4. relative cost of capital - substitute

remember: either affect MR (price) or MP (productivity). make sure to mention CETERIS PARIBUS

Use term ‘WILLINGNESS AND ABILITY TO HIRE AT ANY GIVEN WAGE RATE WILL CHANGE, SHIFTING MRP CURVE LEFT/RIGHT’

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8
Q

limitations of MRP theory

A
  1. hard to quantify marginal productivity in service sectors
  2. work becoming collaborative so harder to measure individual MRP
  3. different objectives than profit maximisation, e.g. self-employed, so may pay more than MRP
  4. assumes perfectly competitive market but imperfections like TU mean firms pay a wage higher than MRP due to collective bargaining
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9
Q

supply to firm or industry

A

it is the sum of the individual supply curve of all workers employed in that firm/industry

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10
Q

labour participation rate

A

proportion of population of working age actually in employment

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11
Q

trade union

A

organisation of workers aiming to protect and improve the wellbeing of its members through collectively bargaining with employers and the govt for higher wages and better working conditions

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12
Q

causes of wage differentials

A
  1. due to demand for and supply of labour in an occupation - demand for labour with inelastic supply due to high skills rises more quickly; artifical barriers to supply (exams)
  2. TU collective bargaining
  3. reward for education and training (HC); skill level –> MRP and revenue generation (film, sports)
  4. gender and ethnicity
  5. discrimination despite laws
  6. compensating WD - risk, antisocial hours, risk
  7. hours of work - part time vs full time

Mother Told Me Get Dog Collar

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13
Q

why is the MRP curve/ demand curve for labour downward sloping in SR?

A

due to law of DMR

adding the variable factor of labour to a fixed factor capacity initially increases productivity and efficiency due to specialisation gains, which increases MP and thus MRP. each worker contributes more to revenue than costs

past a certain point, fixed factor constraints set in that increase inefficiency. each worker contributes more to costs than revenue. MP falls as does MRP

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14
Q

WED

A

responsiveness of demand for labour to a change in the wage rate

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15
Q

WED determinants

A
  1. labour costs as proportion of total costs
  2. PED of final product - derived demand, EOIS
  3. substitutability of capital for labour - ease, speed, cost
  4. time frame - more elastic in LR due to capital being fixed and inflexible in SR, but variable in the LR

make sure to link to impact on costs, profit maximising employers

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16
Q

explain why the individual labour supply curve is backwards bending

A

the BB nature reflects the tradeoff individuals face b/w work and leisure

initially, as the wage rate increases, the number of hours of work supplied increases. This is because the income effect is positive, meaning as the wage rate rises, the incentive to work more and earn higher incomes rises. The substitution effect is also positive, as the OC of leisure time increases so there is an incentive to work instead. Wage effect is positive

Eventually, past a certain point, curve becomes backwards bending and relationship becomes inverse. At a certain wage rate and number of hours, workers have already reached their target income and so can work fewer hours to remain at this target. SE is very positive but IE is negative and outweights, so wage effect is negative

tradeoff b/w work and leisure; IE; SE; wage effect; incentives; opportunity costs; target income

17
Q

describe the industry/firm supply curve for labour

A

is generally upward sloping because the incentive to work more hours as the wage rate increases to earn higher incomes will outweigh the backward bending nature of individual supply curves

the slope of the curve will differ depending on the WES of labour - more inelastic supply due to more skills and quals needed will be more steep than jobs requiring fewer skills

upwards sloping; slope and WES

18
Q

long run supply of labour determinants to economy overall

A
  1. population
  2. net immigration
  3. labour participation rate - women; retirement culture in MEDCs; university students; value of leisure time
  4. tax and benefit levels - incentives are affected especially in high income countries

can differ b’w LEDCs and MEDCs

19
Q

non-wage LR supply of labour determinants to firms

A
  1. substitute wages
  2. non-financial incentives/factors
  3. mobility
  4. barriers to entry and exit
  5. overtime opportunities

SIMBAPOV - SHIFT SUPPLY CURVE

link to WILLINGNESS AND ABILITY to supply labour

20
Q

WES determinants

A
  1. skill requirements - higher wage may incentivise but most people will be prevented from entering industry
  2. mobility - occ and geo - GIVE EXAMPLES
  3. time
  4. vocational jobs
  5. pool of avaliable workers
21
Q

pros of min wage

A
  1. reduce poverty, reduce inequality and boost SOP
  2. increase incentive to work - work not welfare - which increases fiscal tax dividend and lowers strain on govt finances
  3. increase worker productivity - morale and training (which increases MRP and earning potential)
  4. fight monopsonist power
22
Q

cons of min wage

A
  1. creates involuntary unemployment - excess supply
  2. cost push inflation as COP rise - rising COP may also cause shutdowns and relocation of firms
  3. deterioration of government finances as public sector workers need to be paid more
23
Q

explain how higher MRP can lead to higher wages

A
  • define mrp
  • explain why MRP may increase - if workers get more skills, improve HC and productivity increases
  • draw MRP diagram - higher productivity will shift MRP right and increase the wage paid to every quantity of labour employed
  • this is because higher MRP will increase revenues and profits for firms, so can pay higher wages to attract and retain these workers
  • there is now a higher equilibrium wage at W1
24
Q

explain why WED is low if labour costs are a small proportion of total costs

A
  • a given rise in the wage rate shifts the marginal cost curve right by only a small extent
  • there will be little reduction in the profits made by firms (can compare pre and post wage rise)
  • this means the reduction in the Q of labour to remain at the profit max employment level is very little
  • reduces by proportionately less than the wage rise

9708 Economics A2 (25 decks)

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