labour markets Flashcards
What is the labour market?
- a factor market since labour is a factor of production in the making of goods and services
-the suppliers of labour are individuals from households/ workers
-those that demand labour are firms
THE LABOUR DEMAND CURVE
- the demand curve represents the number of workers firms wish to hire at any given wage.
-represents maximum wage a firm would be willing to pay for a unit of labour
-downward sloping
Why is the labour demand curve downwards sloping?
MARGINAL REVENUE PRODUCT
- the extra revenue generated by an individual worker
- The higher the MRP the higher the demand for workers
-The law of diminishing marginal productivity - in the short run atleast one factor of production is fixed
- Increasing the number of workers, whilst all other factors are fixed, is likely to increase MRP at first
-however will then start to decline (could be due to overcrowding)
-the wage rate must then fall if firms want to hire more workers as they generate a lower return
CAPITAL SUBSITUTABILITY
- as wages rise firms will substitute labour for machinery as it is relatively more efficient now
-However- certain jobs cannot be replaced
FACTORS SHIFTING THE LABOUR CURVE: derived demand
-The demand for labour is dependent on the demand for the final goods and services that labour helps to produce
-High demand for goods = high demand for labour (during booms)
-eg increasing technological change increases demand for software engineers
FACTORS SHIFTING THE LABOUR CURVE: productivity
- when workers become more productive the demand for them increases because they have better skills
FACTORS SHIFTING THE LABOUR CURVE: changes in price of technology or capital
wages in other countries
- If capital becomes cheaper, firms will demand less labour
-might be cheaper to hire workers elsewhere so demand in the UK decreases
FACTORS SHIFTING THE LABOUR CURVE: increases in price of final product
- the revenue each worker generates increases, so the firm is willing to pay them more
FACTORS SHIFTING THE LABOUR CURVE: sypnotic point
- the demand for labour is also influenced by the state of the economy
-poor state = low demand
-state of economy also affects expectations for the future and business confidence
-if confidence is low, businesses may start laying off workers
PRICE ELASTICITY OF DEMAND FOR LABOUR: length of time
-In the short term firms must employ workers - more inelastic
- In the long run, firms can buy labour-saving machinery or reorganise their production methods - more elasctic
PRICE ELASTICITY OF DEMAND FOR LABOUR: availability of subsitiutes
- the easier it is to substitute labour with capital, the demand for labour is more elastic
-High skilled jobs (doctors) more inelastic
PRICE ELASTICITY OF DEMAND FOR LABOUR: directly correlated to the price elasticity of demand for the product
- labour is a derived demand
- if a good is price inelastic (gas), then a sudden rise in wages which pushes up price will have a proportionally smaller effect on the demand for the good, therefore the labour is also inelastic as it is still needed
PRICE ELASTICITY OF DEMAND FOR LABOUR: proportion of labour to total costs
- if wages are a huge proportion of costs, then an increase in wages will increase costs
massively and so there will be a large fall in demand for labour hence it will be
elastic.
Labour supply
-Quantity of workers willing and able to work/ be supplied at a given age
UPWARD SLOPE
- As wages rise, quantity of labour supplied will increase due to increased incentive to work at a higher wage
-As wages in one industry rise, it will incentivise more workers to switch to that industry therefore other industries will also raise their wages (however this is based on skill level)
FACTORS CAUSING LABOUR SUPPLY TO SHIFT: barriers to entry
- high barrier to entry causes less supply and higher wage as firms can afford to pay higher
-e.g decreased immigration/ increased laws on immigration
FACTORS CAUSING LABOUR SUPPLY TO SHIFT: occupational mobility of labour
-Improvements in this increases supply
-e.g. can be result of expansion of apprenticeships and other work experience
FACTORS CAUSING LABOUR SUPPLY TO SHIFT: non-monetary characteristics
-High risk-low supply (unwilling)
-Antisocial hours
-Working conditions
-Quality of in-work training
FACTORS CAUSING LABOUR SUPPLY TO SHIFT: net migration of labour
Net inward migration boosts labour availability
e.g NHS/ construction
ELASTICITY OF SUPPLY OF LABOUR - nature of skills
-specific skills and qualifications make labour supply inelastic
-lengthy and costly training - inelastic
-links to specialisation
ELASTICITY OF SUPPLY OF LABOUR - Time period
- short-run inelastic
-takes time to respond to changes in wage and earnings available, especially if people need to be retrained to successfully enter a new occupation
-when labour is geographically and occupationally mobile, the labour supply will be relatively elastic in the short term
Wage determination in perfectly competitive labour market
PERFECTLY COMPETITIVE LABOUR MARKET
- many employers
-many identical workers
-both workers and employers are ‘price takers’ - must pay/accept the equilibrium market wage rate
-If a firm paid lower - worker would move elsewhere
-If worker demanded higher wage - firm would fire them
WAGE DIFFERENTIALS - compensating wage differentials
Compensating wage differentials - higher pay can be reward for risk taking in certain jobs, poor conditions
WAGE DIFFERENTIALS - reward for human capital
-compensation for human capital acquisition
-opportunity cost is aquiring qualifications - university per year 9250
-measured by current earnings foregon by staying in education
WAGE DIFFERENTIALS-Different skill level
-high skilled workers in higher demand but inelastic supply
-pushes up pay
WAGE DIFFERENTIALS - differences in labour productivity and revenue creation
-Highest efficiency and ability to generate revenue - rewarded with higher pay
- City economists gain bonuses based off of performance
WAGE DIFFERENTIALS - trade unions
-discrimination
-might exercise bargaining power to offset power of an employer
-Achieve mark up compared to non-union members
-lower pay due to discrimination - race, gender, age
WAGE DETERMINATION IN IMPERFECTLY COMPETITIVE LABOUR MARKETS - minimum and maximum wage
-Minimum wage - employers not legally allowed to pay below the minimum wage- artificially raises wage
-Over 25s paid £11.44
EVAL: only affect lowest paid industries
-In industry where wage is above minimum -determined by free market s+d
-MAximum wage - keeps wage artificially below market wage rate
e.g Corbyn - bonuses cannot be more than 100% of salary
-regulate pay - highest earner in company cannot earn for than ‘N’ times the lowest paid worker
