Labour Markets Flashcards
Why does labour demand slope downwards
MRP theory - as we add additional units of labour, MPP has diminishing returns, so as workers become less producible, firms are willing to pay less for more labour
Capital substitution - as price of labour rises, capital becomes relatively cheaper and firms substitute labour for capital
What factors shift labour demand curve
Changes in derived demand for labour - demand for good up, labour demand up
Changes in productivity of labour - more productive worker means higher MPP, so more demand
Changes in labour substitutes - change in price or availability of substitutes
What is the MRP formula
MPP X MR
What factors influence wage elasticity of demand (WED)
PED of the final good EX: wage up 10% so price of good up 10%. PED of good =-2. Demand for good falls sharply, so derived demand for labour also does.
Labour substitutes. The closer the substitutability of labour for capital, the more elastic
Labour share in total costs (low share, more inelastic)
Time period
Availability of labour
What factors influence supply of labour
Changes in wages in other professions
Length of training time and skills needed (barriers to entry)
Migration policies
Geographical factors eg transport links
What factors determine WES (%change quantity Supplied / % change wage
Qualification/ skills requirement - higher means more inelastic. Same with training time
Sectoral unemployment - higher unemployment increase elasticity as workers will more quickly respond to a wage increase by supplying labour. However for wage cuts, WES may be inelastic as workers may have to take wage cuts because less bargaining power.
Time period
Degree of dependence on job (low income workers more inelastic)
What factors influence labour market flexibility
Trade unions
Minimum wage
Welfare payments
Income tax
What causes wage differentials
Varying skill sets
Mismatch in supply and demand for those skill sets
Implications of wage differentials
Good:
Incentivises people to improve skills to earn more
Encourages enterprise
Promotes efficient resource allocation
Bad:
Income inequality
Government solutions are limited if they are the monopsonist employer
What does the fact that there are wage differentials mean
Labour market imperfections exist because:
Labour is not homogenous
Labour is not perfectly mobile
Trade unions and supply restrictions
Monopsonies and wage setting ability
Inactivity rate
The percentage of people within working age who aren’t looking for work and aren’t working
What are the main reasons for economic inactivity
- Long term illness
- Studying
- Looking after other people ie kids
