Labour Markets!

Question 1

What are the two types of labour markets?

Answer 1

Perfectly Competitive
Imperfect

Question 2

How do you answer short and long questions?

Answer 2

Short answer (8,10,12 marks) - Unless it states otherwise, answer from a perfectly competitive labour market perspective.

Long answer - Compare perfectly competitive labour market to imperfect labour market.

Question 3

What are the characteristics of a perfectly competitive labour market?

Answer 3

There are many small firms and no firm has any influence over the market ruling wage. The workers are homogenous. There’s a perfectly elastic supply curve of labour. A worker’s output can be accurately and effectively measured. There are no monopsony buyers of labour. Labour is a derived demand - if there’s more demand for a firm’s output, there’s more demand for labour.

Question 4

What type of demand is labour?

Answer 4

Derived demand that’s determined by the marginal revenue productivity of labour theory.

Question 5

What’s the marginal revenue productivity of labour theory?

Answer 5

It measures the change in total output revenue for a firm as a result of selling the extra output produced by additional workers employed.

Question 6

What’s the formula for the marginal revenue productivity of labour?

Answer 6

MRPL = Marginal Physical product * Price of output per unit

Question 7

How do wages and MRPL effect employment?

Answer 7

MRPL > Wage -> Workers Increase
MRPL < Wage -> Workers decrease
MRPL = Wage -> Workers stay the same

Question 8

What are the factors that cause a shift in labour demand?

Answer 8

Labour productivity
Higher demand for the final product
The price of a substitute input rises.

Question 9

What are the factors that affect the wage elasticity of demand for labour?

Answer 9

• % of labour costs in total costs - demand is more elastic in labour intensive industries.
• Ease of factor substitution - demand is elastic when labour and capital are interchangeable.
• PED for the final product - can firms pass on higher costs?
• Time period - The demand for labour is inelastic in the short run.

Question 10

What’s the labour supply?

Answer 10

The total number of hours that labour is willing and able to supply at a given wage rate. Also, the number of workers willing and able to work in a given occupation or industry for a given wage.

Question 11

What’s the labour force?

Answer 11

The number of people either in work, or actively seeking paid employment and available to start work.

Question 12

What are the determinants of the supply of labour?

Answer 12

The wage rate (Main determinant)
Benefits
Tax system
Childcare allowance
Migration levels (730,000 net migration in UK in 2023).
Job security
Fringe benefits
Status

Question 13

What’s the national minimum wage?

Answer 13

A statutory wage floor that firms have to pay, otherwise they’ll be prosecuted. It was introduced in 1999 by the labour government. It’s implemented to try and reduce relative poverty.

Question 14

What are the pros of the national minimum wage?

Answer 14

Improved living standards (Better LC + Gini Coefficient)
Reduced inequality and relative poverty
Increased supply of labour
More training
Less spending on benefits (improved fiscal position)

Question 15

What are the cons of the national minimum wage?

Answer 15

Less employment (damaged fiscal position)
PAP
Firms with higher labour costs have damaged profitability
Can be inflationary

Question 16

What’s a trade union?

Answer 16

An organisation that protects its members from exploitation, unfair dismissal, discrimination, protects pensions, working conditions, health and safety and helps to promote education and training. They were formed in the 1920’s; in traditional industries which were very labour intensive, they had very high trade union density.In the 1950s-70s, trade union membership was very high (13.2 million in 1974). E.g, RMT, UNISON, TGWU. All trade unions belong to the trade unions congress (TUC). Trade union membership has fallen dramatically to less than 6 million since the UK economy moved from the secondary to the tertiary sector.

Question 17

What’s collective bargaining?

Answer 17

Where unions come together as one and negotiate with an employer. E.g, in education there’s the NEU and the NASUT, who’ll come together and negotiate with an employer at a school.

Question 18

What are the pros of trade unions?

Answer 18

Increased wages
Improved living standards
Reduced inequality
Increased productivity from motivation
More tax revenue + less benefits

Question 19

What are the cons of trade unions?

Answer 19

Higher costs
PAP
Inflationary
Improved technology -> Automation
Trade unions become militant

Question 20

What legislation did Thatcher pass to reform the trade unions?

Answer 20

No illegal picketing
No more closed shops
Only have secret ballots
TU’s now have to negotiate before striking
TU’s can be heavily fined if strikes are illegal
Must be a threshold of over 20% of workers going on strike

Question 21

What are the reasons why trade union membership has fallen?

Answer 21

Collapse of traditional industries
More competitive product markets
More short-term, flexible and zero-hour contracts
Improved employee/employer relations

Question 22

What’s a monopsonist?

Answer 22

A monopsonist has buying power in their market. This means that they can exploit their bargaining power with a supplier to negotiate lower prices/wages. Reduced costs of purchasing increases their potential profit margins. Monopsony exists in both product and labour markets.

Question 23

What are the cons of a monopsony buyer in a product market?

Answer 23

Lower wages - exploit supplier
Merchandising
Late payment - hurts cash flow

Question 24

What are the pros of a monopsony buyer in a product market?

Answer 24

Higher output -> economies of scale
Only one customer
Reduced costs on marketing
Plan investment

Question 25

What’s the profit maximising level of employment?

Answer 25

Where the marginal cost of labour equates with the marginal revenue product of employing extra workers.