Labour markets Flashcards
What is demand and supply in a labour market?
Demand represents the number of workers that firms are willing and able to hire at different wage levels. It is downwards sloping because the higher wages, the less firms demand labour. Demand for labour is a derived demand, and based on a firms MRP. If hiring an additional worker increases their revenue from each worker, this increases the firms incentive to demand more labour to increase productivity
Supply represents the number of workers willing and able to work at different wage levels. It is upwards sloping because at higher wage levels, more workers are willing to work.
What is the axis for a labour markets diagram?
Y axis: Wage rate
X axis: Quantity of labour
What is the effect of a non-equilibrium?
Above the equilibrium wage, the quantity supplied of labour will be more than quantity demanded by firms because workers are so expensive to hire. So we’ll see an excess supply of labour - also called a surplus or unemployment. Eventually, equilibrium will be reached again, this is because workers will be unemployed so they will have no choice but to accept lower wages, reducing supply of labour and increasing demand of labour.
Below the equilibrium level, there will be excess demand of labour, and firms will have a shortage in workers, and therefore they will hav to increase wages to attract labour, and eventually we would reach equilibrium again.
What is elasticity of labour demand?
This is how responsive firms are in demanding labour when there is a change in wages.
What does it mean when labour demand is elastic?
This means that firms are very responsive to changes in wage rates. The demand curve will be flatter.
If wages increase, firms will cut workers off by a significant amount.
If wages decrease, firms will employ a significant amount of labour.
What does it means when labour demand is inelastic?
When labour demand is inelastic, it means that firms are not very responsive to wage changes.
If wages increase, firms cannot cut a lot of workers.
If wages decrease, firms cannot hire more workers.
How does the availability of substitutes impact the demand for labour?
More Substitutes → More Elastic Labour Demand
If firms can easily replace workers with machines, automation, or cheaper labour elsewhere, then labour demand is more elastic (i.e., sensitive to wage changes).
Example:
Fast food industry → If wages increase, businesses can replace workers with self-service kiosks.
Manufacturing → If wages rise, firms may outsource jobs to countries with cheaper labour.
Fewer Substitutes → More Inelastic Labour Demand
If workers cannot be easily replaced, demand for their labour is inelastic (i.e., firms still need them even if wages rise). This tends to be if the job is highly skilled.
Example:
Doctors and surgeons → Their skills take years to develop, and automation cannot fully replace them.
Footballers - They are highly skilled and clubs need them to win trophys, and so when they demand an increase in pay, they recieve it.
What is the effect of time on the elasticity of demand for labour?
Short Run → Labour Demand is More Inelastic
Long Run → Labour Demand Becomes More Elastic
- Short-Run Effect (Inelastic Demand) 📉
In the short term, firms cannot easily adjust their workforce when wages change.
Why?
Contracts & agreements prevent immediate layoffs.
It takes time to find substitutes (machines, outsourcing).
Some jobs require training, so firms can’t replace workers quickly.
Example:
A hospital cannot suddenly fire nurses if wages rise because healthcare services must continue.
A restaurant can’t instantly automate all cashiers when wages increase. - Long-Run Effect (Elastic Demand) 📈
Over time, firms find ways to adjust to higher wages, making labour demand more elastic.
Why?
Companies invest in automation to reduce labour costs.
They outsource jobs to lower-wage countries.
They redesign work processes to use fewer workers.
Example:
A factory might invest in robotic machinery instead of hiring workers.
A company may relocate to a region with cheaper labour.
How does percentage of total costs affect the elasticity of demand for labour?
Labour is a Large Percentage of Total Costs → Elastic Demand
If wages make up a big portion of a firm’s total costs, then an increase in wages will have a huge impact on overall expenses.
This makes firms more sensitive to wage changes, so labour demand is elastic (a wage increase leads to a large decrease in hiring).
Example:
Retail & Hospitality → Wages are a major cost, so if wages rise, firms may reduce staff or replace workers with self-checkouts.
Manufacturing → If labour is expensive, firms may outsource jobs to lower-cost countries.
- Labour is a Small Percentage of Total Costs → Inelastic Demand
If wages are a small part of total costs, then a wage increase doesn’t affect the firm’s overall expenses much.
Firms can afford to keep hiring workers even if wages rise, so labour demand is inelastic (a wage increase leads to little change in hiring).
Example:
High-tech industries (AI, software development) → Most costs come from research & development, not wages.
Luxury brands → The cost of raw materials and branding matters more than wages.
What is elasticity of labour supply?
The elasticity of labour supply measures how responsive the quantity of labour supplied is to changes in the wage rate. It answers how willing workers are to enter or leave the labour force based on changes in wages.
What is elastic labour supply, and what is inelastic labour supply?
Elastic Labour Supply → A small increase in wages leads to a large increase in the number of workers willing to work.
Example: If wages for fast-food workers increase, many people who were not working may decide to apply for jobs in the industry.
Inelastic Labour Supply → A change in wages leads to a small change in the quantity of labour supplied.
Example: If wages for highly specialized jobs (like surgeons) increase, it won’t attract many more people because there are not many qualified individuals.
What is the effect of skills and qualifications on the elasticity of labour supply?
Highly skilled jobs tend to have inelastic labour supply.
Low-skilled or less specialized jobs tend to have more elastic labour supply.
Highly Skilled Jobs (Inelastic Labour Supply) 🏥🔬
Reason: There are fewer qualified workers for these jobs, so wages don’t significantly affect the number of people entering these fields.
It takes years of education, training, or experience to develop the skills for high-skilled professions (e.g., doctors, engineers, lawyers).
A wage increase may not immediately attract many more workers because there are simply not enough people with the necessary qualifications.
For example, even if wages for surgeons or scientists increase, it won’t immediately result in a flood of new workers because becoming qualified takes years of study and practical experience.
Example:
Low-Skilled Jobs (Elastic Labour Supply)
Reason: These jobs typically require fewer qualifications or are easy to enter, so wages can have a big effect on the number of workers willing to take up these roles.
Many individuals can quickly enter the labour force with minimal training. For example, roles like retail workers, waitstaff, or warehouse staff don’t usually require high levels of education or specialized training.
Wage increases in these sectors can lead to a larger number of workers entering the market because the barrier to entry is lower and more people are willing to work at the higher wage.
Example:
A rise in wages for fast food workers may result in many unemployed or underemployed people entering the labour market because the qualifications and training required are minimal, and they can quickly start working.
What is the effects of unemployment on the elasticity of supply of labour
High Unemployment → More Elastic Labour Supply
Reason: When unemployment is high, there are more people actively looking for work. As a result, a wage increase in certain industries will attract more workers because people are eager to find jobs.
Why Elastic?
With many unemployed people, firms can easily recruit workers by offering higher wages.
This creates an elastic labour supply, meaning the quantity of labour supplied is highly responsive to changes in wage rates.
Example:
If unemployment is high in a region, a small wage increase in the retail sector might attract many jobseekers, as there are plenty of people looking for work.
- Low Unemployment → More Inelastic Labour Supply
Reason: When unemployment is low, there are fewer jobseekers, and most people are already employed. A wage increase might not significantly increase the number of workers available to work because many people are already employed or not seeking work.
Why Inelastic?
In a low-unemployment environment, the pool of available workers is smaller, so wage changes may not result in significant increases in labour supply.
Example:
If unemployment is very low (i.e., the economy is near full employment), even a substantial wage increase may not attract many additional workers, as most people are already employed and may not want to change jobs.
What is the effect of time on the elasticity of supply of labour?
Short Run → Inelastic Labour Supply
Reason: In the short term, it’s more difficult for workers to respond to wage changes because it takes time to enter the labour force, gain skills, or relocate.
Why Inelastic?
Training and Education: Workers cannot quickly acquire the skills needed for certain jobs.
Job Search: It takes time for job seekers to find new employment or switch industries, especially in specialized fields.
Geographic Mobility: Workers may need time to relocate if jobs are concentrated in certain areas (e.g., if wages are higher in a different region).
Example:
A wage increase in the IT sector may not immediately attract new workers because it takes time for people to gain the necessary technical skills and experience.
In low-skilled jobs, even though the wage increase may attract some workers, many may still need time to search for or consider switching to these jobs.
- Long Run → More Elastic Labour Supply
Reason: Over the long term, workers and firms have more time to adjust to changes in wages. People can acquire new skills, relocate for better opportunities, and switch industries more easily.
Why Elastic?
Skills and Education: Workers have more time to train for different jobs or fields, making it easier for them to enter the labour market in response to higher wages.
Geographic Mobility: People are more willing to relocate or change occupations if the wage increase persists over time.
Adjustment in Workforce Participation: Over time, more workers may enter or re-enter the workforce, such as individuals who were previously discouraged from working due to lower wages or economic conditions.
Example:
If wages for teachers rise significantly, more people might decide to pursue education degrees or relocate to take advantage of the higher pay over time.
What is a diagrammatic analysis of inelastic supply of labour and elastic supply of labour?
When the supply of labour is more elastic, this means the supply curve is more flat, therefore the equilibrium wafe will be lower.
This makes sense, for example in jobs where there are low qualifications needed, supply is more elastic, and in these jobs, wages tend to be lower. Eg mcdonalds workers
When the supply of labour is more inelastic, the supply curve will be more steep and the equilibrium wage will be higher.
This makes sense because for example, if a job requires high skills, the supply will be inealstic, and when drawn, the equilibrium wage will be higher.This is why heart surgeons get paid a lot.
What is the diagrammatic analysis of elastic and inelastic demand of labour?
When labour is demand elastic, this means the demand line is drawn flatter. This makes sense because when there are a greater amount of substitutes available, demand is more elastic, so it is drawn flatter and the equilibrium wage is lower. Eg Mcdonalds workers can easily be replaced by capital and this is why mcdonalds workers get paid low.
When labour is demand inelastic, the demand curve is drawn steeper, so the equilibrium wage is higher.
Eg when there is a small amount of substitutes, demand is more inelastic, like footballers who are highly skilled and cannot easily be replaced. This explains why footballers get paid so much.
So, inelastic demand and supply curves mean higher wages, while elastic demand and supply curved meand lower wages.
Labour as a derived demand:
Derived Demand means that demand for labour is not direct; it comes from the demand for the goods and services that workers help produce.
Essentially, firms hire workers because they need labour to produce products or services that consumers want to buy. If the demand for a product rises, the demand for the workers needed to produce that product also rises.
Eg
If the demand for construction increases (due to a building boom), more construction workers (e.g., builders, carpenters, electricians) are needed. The demand for these workers is derived from the increased demand for buildings.
Remember, if the demand for a good/service increases, companies producing those goods and services would need more workers, so their DEMAND for labour increased. Not our supply.
How does productivity impact the demand for labour?
Higher Productivity → Potentially Lower Labour Demand
Increased productivity means that firms can produce more output with fewer workers, which can lead to a reduction in the demand for labour.
Example: If a company invests in automation technology (robots, AI, etc.), it may need fewer workers to produce the same amount of goods, leading to a decrease in the demand for low-skill workers.
However it can also Increase demand for labour.
Higher Productivity → Potentially Higher Labour Demand
However, higher productivity can increase the demand for labour in other situations because it often leads to lower production costs, making goods and services cheaper and increasing their demand.
Increased productivity can lower costs and lead to higher output, which in turn can lead to higher sales, and consequently, firms may hire more workers to meet this demand.
Example: If a factory becomes more productive and can lower prices, it may see an increase in sales, which could lead to the firm hiring more workers to keep up with the demand.
What is the effect of capital in labour markets?
As capital gets cheaper, the demand for labour falls, because capital and labour are substitutes.
Firms can invest in capital and lay off employees showing a fall in the demand for labour.
However, we could argue that investing capital reduces cost of production for firms, so firms pass on these costs to consumers via lower prices, and therefore the demand for the goods and services increases, and since labour is a derived demand, the demand for labour increases.
What is the effect of migration on the labour market?
Migration affects supply.
High skilled workers tend to move to countries that offer better pay for their skills, increasing the supply of labour for the country they are migrating to, and decreasing the supply for the domestic country.
In some countries, migrants may have a higher participation rate in the workforce than the native population, especially if they are coming to take on low-skilled jobs or seasonal work.
Example: Many migrants may work in agriculture, construction, or hospitality industries, filling essential roles that might not be attractive to native workers.
What is the effect of income tax and benefits on the labour market?
Higher income taxes reduce the take-home pay of workers, which can discourage people from working or working additional hours. When workers receive a lower wage after tax, the incentive to supply labour decreases, especially if the tax burden is significant. (Negative income effect)
Evaluation: However, when income tax increases, this can cause some poeple to have to work EVEN harder to earn the same amount as they did before the increase in income tax, and therefore this would actually increase the supply of labour.
Lower income tax increase the incentive to work because workers can earn more so they are incentivised to work, and thereore supply increases. Evaluation: However, a alower income tax means workers can work less hours for the same amount of pay, and therefore the incentive to work falls, and supply falls.
Generous unemployment benefits can provide a disincentive to work, especially if these benefits are paid for long periods. If people can receive a substantial income from benefits without working, they may choose to remain unemployed rather than seeking work. This would decrease supply of labour.
VICE VERSA
What are non-pecuniary benefits?
Non-pecuniary benefits refer to the non-monetary advantages or rewards that employees receive as part of their employment package, which are not in the form of direct wages or salary. These benefits can improve the quality of life for workers and contribute to job satisfaction, but they don’t involve direct financial compensation.
Eg; Good working environment
Gym membership
Recognition
Job security
What is the effect of non-pecuniary benefits on the labour market?
When these benefits increase, supply of labour increases because working is more appealing to workers.
This would shift supply to the right, and therefore wages will fall, and this is why jobs with high non-pecuniary benefits liek teaching, have lower wages.
What is a monopsony?
A monopsony is when there is a single buyer in the market.
Describe a monopsony in the labour market.
In labor markets, a monopsony occurs when there is a single dominant employer or a small number of employers, giving them significant control over the labor force.
The monopsony power has the ability to exploit the worker, by setting wages low, knowing that the worker has no other option, otherwise they would go unemployed.
Eg the NHS controlling the wage they pay to workers.
Describe a monopsony in the goods market.
This is when all goods/service are dominated by one buyer.
The monopsonistic buyer can drive down the price of goods or services by using its position to pressure suppliers. Since suppliers depend on this single buyer for a significant portion of their revenue, they may have little choice but to accept lower prices.
Monopsonistic buyers often buy in large quantities, which they can leverage to negotiate discounts or better terms. While this can benefit the buyer in terms of cost savings, it may hurt suppliers’ ability to charge a fair price for their goods or services.
If the single buyer dominates the market, suppliers may have nowhere else to sell their goods or services. This makes them price takers who must accept the buyer’s terms, even if it means significantly reduced profit margins.
To survive under the pressure of low prices, suppliers may cut corners on quality, reducing their input costs by using cheaper materials, labor, or production methods
What is a national minimum wage ? (Price ceilings)
A national minimum wage is a legally mandated minimum amount that employers must pay their workers.
On a diagram, it is a horizontal line above the equilibrium wage, and this creates a situation of excess supply. Because there is excess supply, workers supply their labour more than, employers demand it, creating unemployment.
What are the advantages of a NMW?
Reduction in poverty: By ensuring that workers receive a minimum income, the wage floor can help lift people out of poverty, especially those working full-time in lower-paying jobs.
Income redistribution: The policy can also reduce income inequality by increasing the earnings of those at the bottom of the wage distribution.
Higher motivation: Workers earning a higher wage may feel more valued and motivated, leading to greater job satisfaction and, potentially, increased productivity.
Skill development: As workers earn higher wages, they may be able to invest more in education and training, potentially leading to greater skill development and higher productivity.
What are the evaluation points for a NMW?
Labor demand: Employers may respond to higher wages by reducing the number of workers they hire, especially if the minimum wage is set above the equilibrium wage. In industries with thin profit margins or low-skilled work, employers might be forced to cut jobs or reduce hiring.
Inflation: If businesses are required to pay higher wages, they may face increased costs of production. In order to maintain profit margins, businesses might pass on these higher costs to consumers in the form of higher prices. This can lead to inflation.
Wage-price spirals: When wages increase, firms tend to push their prices up to cover costs, so employees demand higher wages, because of rising costs for necessities like food, and so firms have even higher costs, they increase prices even more, the process repeats leading to a spiral.
Impact on small businesses: Small business may not be able to keep up with these costs of paying their employees higher wages, so they may have to close down if AVC>AR
What is a trade union?
A trade union is an organised group of workers who come together and bargain to improve employee welfare.
The effects of trade union on labour markets are:
- Higher wage
- Job security (negotiating long-term contracts)
- Working hours and work-life balance
If the unions are not guaranteed what they bargain for, there is a risk of strikes, which would disrupt production.
What is a national maximum wage? ( price floor )
This is a cap on the amount of money that individuals can earn.
On a diagram, it is set below the equilibrium price, and this creates a situation of excess demand, as workers are now more cheaper to hire, however this decreases the quantity supplied, because big shot workers are not willing to work for these lower wages.
What are the advantages of a national maximum wage?
Reducing Income Inequality: The main argument in favor of a national maximum wage is that it could help reduce the large gaps between the rich and the poor. Supporters argue that when some people earn vast amounts of money (e.g., top executives or celebrities) while others live in poverty, it exacerbates social divides and creates an unfair society.
What are the evaluation points for a national maximum wage?
Disincentive to Work Hard or Innovate: Opponents argue that setting a maximum wage could reduce the incentive for individuals to work hard, take risks, or innovate. High earners, particularly in industries like technology or finance, may be motivated by the potential for higher compensation, and a wage cap might limit these incentives.
Economic Inefficiency: A national maximum wage could lead to inefficiencies in the labor market. Employers might have difficulty attracting or retaining top talent if compensation is capped, particularly in industries where skilled workers or executives are in high demand and competition for talent is fierce.
Talent Drain: If a national maximum wage is set too low, highly skilled professionals or executives might leave the country to find better-paying opportunities elsewhere. This could lead to a “brain drain” where the most talented individuals migrate to countries with fewer restrictions on wages, potentially harming the country’s economy in the long run.
What is occupational immobility?
Occupational immobility refers to the inability or difficulty of workers to move from one occupation or industry to another.
The causes of occupational immobility include: skills mismatch which are not easily transferable, lack of qualifications, lack of experience, age.
This leads to unemployment of work, which is a labour market failure, as resources (labour) are not being used efficiently. This leads to structural unemployed, especially when the economy is shifting.
How can occupational immobility be reduced?
- providing training and education schemes
- providing career guidance
What is geographical immobility?
Geographical immobility refers to the difficulty or unwillingness of workers to move from one location to another in order to take up job opportunities.
This can be because of family or social ties, cost of living in the new area, cultural or language barriers, transport, time in transport.
This leads to labour market failure because when workers are geographical immobile they cannot move for a job, so they are left unemployed, meaning resources (workers skills) are being used inefficiently, leading to market failure.
How can geographical immobility be reduced?
- improving transport making it easier and less time consuming for workers to relocate
- provide relocation subsidies
What is the positive substitution effect?
As wages increase, workers tend to substitute work for leisure.
What is the negative income effect?
As wages increase, workers supply less work, because they can work fewer hours for these same income
