Labour markets Flashcards
1
Q
What is the difference between a labour market and product market
A
- Firms demand labour and individuals supply labour
- Where demand for labour = supply of labour is the equilibrium WAGE rate and equilibrium quantity OF WORKERS
2
Q
What does the demand curve for labour for an individual firm show
A
How many workers will be hired at any given wage rate over a given period of time
3
Q
What is the marginal revenue product
A
- MRP = MPP x MR
Where MPP is marginal physical product which is the same as MP i.e. extra output produced by adding one extra worker
And MR is the extra revenue generated by one extra unit of output
So MRP is the extra revenue generated by hiring one extra worker
4
Q
What does the MRP curve look like
A
- Graph of wage against quantity of workers
- Increases at first and then decreases due to law of diminishing marginal returns
- MRP curve is the demand curve for labour as it shows the number of workers the firm would employ at any given wage rate
5
Q
Why is wage rate constant in a perfectly competitive market
A
- Firms are wage takers so they take the wage rate set by the market
6
Q
What level of workers will firms hire up to in a perfectly competitive market
A
Up to when MRP = wage rate
- Because wage is additional cost of each worker i.e. MC and it is constant in perfect competition
- Hiring quantities of workers after MRP = W means MC >MRP so the worker costs more than the revenue they bring in
- Hiring quantities of workers before the MRP = W means MRP>MC so extra workers bring in more revenue than they cost
7
Q
What is the demand curve for labour for the whole industry
A
- Sum of the MRP’s of all workers in that industry at each wage rate
- So exact same as demand curve (MRP) for an individual firm
- However, to keep things simple, we only draw the downward sloping part of the demand curve
8
Q
Why is there an inverse relationship between wage and quantity of workers
A
- In the short run, it is because of the law of diminishing marginal returns as hiring more workers when there are fixed factors starts to reduce MRP. Therefore, at higher wages, workers require more MRP to be employed, which reduces quantity
- In the long run, all factors are variable so firm can employ capital, which is a substitute for labour. Therefore, at higher wages, it may be more cost effective to employ capital instead
9
Q
What are criticisms of using MRP to decide how many workers to employ
A
- Difficult to measure MRP for professions which don’t produce quantifiable outputs and don’t charge a price e.g. teachers
- Difficult to measure MRP of individuals in team based work
- Self employed people don’t pay themselves based on their MRP like firms do (i.e. firms hire if MRP > or = to wage but self employed don’t)
- Trade unions may try drive up wages and they don’t take into account MRP
10
Q
What factors cause a shift in the demand for labour
A
Remember PDPC
- change in the PRICE of the final product causing MR to change, causing MRP to change
- change in DEMAND of the final product as labour is a derived demand from the product
- change in labour PRODUCTIVITY causing MPP to change, causing MRP to change
- change in the price of CAPITAL as labour and capital are substitutes in the long run (same effect as with a substitute good)
11
Q
Define the elasticity of labour demand
A
The responsiveness of labour demanded given a change in the wage rate
12
Q
How can you draw an elastic or inelastic labour demand curve
A
- Elastic is flatter as small change in wage causes big change in labour demanded
- Inelastic is steeper as big change in wage causes small change in labour demanded
13
Q
What factors determine elasticity of demand for labour
A
Remember SECT
- Substitutability of capital for labour e.g. if substitutability is higher, elasticity is higher
- Elasticity of demand for final product i.e. if inelastic final product, when wages go up, firms can charge a higher prices and not lose demand instead of decreasing quantity of workers
- Cost of labour as a % of total cost i.e. if this % is high, if wages go up, total costs go up a lot so firms cut workforce
- Time period i.e. all factors are variable in long run so firm can substitute labour for capital more easily so more elastic
14
Q
Describe the shape of the labour supply curve for an individual
A
- Graph of real wage against hours worked
- Backward bending supply curve so looks a bit like a sideways quadratic
15
Q
Explain the shape of the labour supply curve for an individual
A
- At low wages, as wages rise, opportunity cost of leisure increases so substitution effect is positive, and individuals work more as they can get a higher income so income effect is positive. Overall wage effect is positive so wage is proportional to hours worked
- At medium wages, as wages rise, opportunity cost of leisure increases so substitution effect is positive, and workers are reaching their target income and don’t need to work many hours to get the wage they want so income effect is negative. Overall wage effect is slightly positive as substitution effect is outweighing income effect so wages are proportional to hours worked but steeper gradient
- At high wages, as wages rise, opportunity cost of leisure rises so substitiution effect is positive, but individuals have reached their target income and now they don’t need to work as much to maintain that income so income effect is negative. Overall wage effect is negative as income effect outweighs substitution effect so as wages rise hours worked falls
16
Q
Why is there a difference between the supply curve for the industry and the supply curve for an individual
A
- For industry, the supply curve is linear and upwards sloping
- This is because as wages rise, people who were trained in that profession but now working in another industry or not working at all come back to the industry due to higher wages, and this counteracts the negative income effect for individuals
17
Q
What is the labour supply curve for an individual firm in perfect competition
A
- For perfect competition, firms are wage takers so AC = MC = S and this is constant
18
Q
What is the labour supply curve for an individual firm, which is a monopsony
A
- They are a dominant employer in the market so can control wages
- AC = S and is upwards sloping and MC is upward sloping but twice as steep
19
Q
What factors cause a shift in the supply for labour in an industry
A
- Wage in substitute occupations as supply will shift in if workers can get a higher wage elsewhere
- Barriers to entry in that industry e.g. higher qualifications/skills means supply curve shifts in
- Non monetary characteristics of the job e.g. good healthcare funding, pension plans, working overseas, working hours and time of day working, promotion opportunities
- Improvements in occupational mobility of labour shifts supply out e.g. workers are more skilled so can enter lots of professions
- If workers can choose when they want to work overtime
- Size of working population e.g. migration
- If value of leisure time increases, supply labour shifts in and vice versa
20
Q
Define the elasticity of the labour supply curve
A
The responsiveness of labour supplied, given a change in the wage rate
21
Q
What does an elastic and inelastic labour supply curve look like on a diagram
A
- Elastic is flatter as small change in wage rate causes big change in labour supplied
- Inelastic is steeper as big change in wage rate causes small change in labour supplied
22
Q
What factors determine elasticity of supply for labour
A
- The skills required in the job as if the skillset is very specific, it is difficult for people who don’t work in that industry to take jobs, i.e. inelastic
- If training period is very long, people outside the profession won’t try take a job, even if wage rate goes up i.e. inelastic
- Vocational elements e.g. teachers don’t really teach for monetary benefit so fall in wages unlikely to make people leave the industry
- Time i.e. in the short run it is inelastic as people need time to adapt to the change in wages as they might need to give notice first or they think it’s temporary
23
Q
What are the characteristics of a perfectly competitive labour market
A
- Large number of potential workers and employers
- Labour is homogenous so all workers have the same skills and qualifications and could take any job
- Perfect information of all market conditions so workers know what the wage rate is and firms know the skills, qualifications, productivity of all workers
- Firms are wage takers and they take it from the equilibrium wage rate of the market.
- There are no barriers to entry (extra skills/qualifications needed to take jobs) or B to exit (there is no notice period or cost)
24
Q
Why are firms and workers wage takers in perfectly competitive labour market
A
- Firms wouldn’t offer higher wages as every worker has the same skills so they wouldn’t be attracting better workers and the current level is where MRP = W so increasing wages means it costs more than MRP
- Individuals can’t ask for higher wages as every worker has the same skills so the firm will hire someone else
- Firms wouldn’t offer lower wages as workers would go to a different firm who offers the higher equilibrium wage rate
- Individuals wouldn’t want lower wages as they want to maximise income
25
How can you show wage determination in a perfectly competitive labour market diagram
1. Draw industry labour demand and supply and equilibrium wage rate and draw line across to firm diagram at this wage as firm is wage taker
2. Firm diagram has AC of L = MC of L = S of L and this is constant and = W. It also has the MRP curve = D and goes up then down due to LofDR. (Draw the down part for mainly)
3. Firms will hire where MC = MRP as for quantities higher than this, MC>MRP and for less than this, they could make more revenue from workers by hiring extra
26
Why would there be no wage differentials in a perfectly competitive market
- If there was a wage differential e.g. lawyers earn more than train drivers, train drivers would become lawyers to get the higher wage causing supply to shift out and wage rate falls. Therefore, supply of train drivers would fall causing wage rate to go up and eventually there would be no wage differential
- The fact wage differentials do exist shows that labour markets have imperfections
27
What are the market imperfections that cause wage differentials
1. Labour is not homogenous
2. If non- monetary considerations are good, this will mean high supply even with low wages
3. Labour is not perfectly mobile
4. Trade unions can negotiate higher wages in some industries more than others
5. Monopsony has the wage setting power to drive down wages in some industries
28
How does non-homogenous labour lead to wage differentials
- People have different MRPs in the real world so firms can offer higher wages to get a better worker
- Worker's can't enter any job they want so supply is different for different jobs
- There is discrimination (e.g. age, race) causing different workers to be paid different amounts
29
How does labour being not perfectly mobile lead to wage differentials
1. If some jobs require a lot of skill, qualifications and long training periods, wages are pushed up i.e. occupational immobility
2. Regional variances in wages due to geographical immobility e.g. workers don't want to move across the country to take a job causing regional variances to persist
3. Workers don't have perfect knowledge so they don't know the wages in different professions
30
What is a monopsony
The sole employer of labour in a given profession e.g. teachers and nurses in the UK
31
What are the characteristics of a monopsony
- Wage maker
- Maximise revenue from workers by hiring up to where MRP = MC of labour
- Reduces employment compared to competitive labour market outcomes
- Reduce wages compared to competitive labour market outcomes
32
How can you show a monopsony distorting efficient outcomes on a diagram
- Draw D = MRP
- Draw S = AC of labour which is upward sloping and MC of labour which is 2x steep as the firm has to increase wages for all workers
- Monopsony produces where MRP = MC and read wage off the AC curve
- Lower quantity and wage compared to the efficient labour market outcome of D = S or MRP = AC
- Workers are being exploited as the wage is much lower than their MRP
33
What is a trade union
- Organisation of lots of different workers that bargain for higher wages and better working conditions (it is known as collective bargaining)
- Assume 'closed shop' trade union who are a monopoly supplier of labour so control labour supply at a given wage rate
34
How can you show the impact of a trade union on wages and employment on a diagram
- Draw demand = MRP and S of labour and where D=S is the equilibrium wage and quantity
- Closed shop trade union negotiates higher wage of Wtu, meaning workers who were willing to work for any wage up to Wtu will join the trade union and accept the higher wage so the supply curve becomes horizontal for these workers. However, for workers who had a wage above Wtu, they would not join the trade union, so supply curve is normal
- Therefore wages are rising but this causes excess supply i.e. unemployment, and can be shown as quantity demanded decreases
35
Why is a trade union inefficient
- Many people are losing out, especially the workers who lose their jobs
- Firms have higher costs and may go bankrupt, which could worsen situation for workers in the long run
36
Evaluate the impact of a trade union
1. It would increase both wages and employment in a monopsony labour market
2. Increase in wages depends on strength of trade union power (union density which is proportion of work force in the union) as closed shop TUs are illegal
3. Success determined by union mark up (difference in wage between workers in TU compared to workers in a similar profession without TU)
4. Real world evidence proves limited power of TUs
37
What real world evidence shows limited trade union power
- Legislation since 1970s (e.g. closed shop is illegal, strikes can only happen if at least 75% of TU agree and if against their own employer)
- UK economy moved away from manufacturing to service sector since 1970s where there are a lot more employers who offer different wages, so organising the TU is difficult. Also difficult to organise TU's when UK economy has shifted to more part time jobs
- Globalisation means firms have the power to rejected wage demands from TUs and they want to maintain competitiveness with other countries so don't accept the higher costs
38
How can we show the impact of trade unions on a monopsony labour market on a diagram
- Draw the monopsony diagram showing D=MRP, S=AC, MR is 2x steep and produce where MC = MRP and read wage Wm off AC curve
- Trade union causes wage to increase to somewhere between Wm and competitive wage where D=S (Wc)
- Any supply below Wtu is willing to join trade union and get a higher wage so AC curve is horizontal at Wtu i.e. S = AC = MC as each additional worker costs the same and firm is wage taker
- However, any supply above this will not join TU as they can get a higher wage so supply curve is normal past Wtu
- MC curve also becomes normal after Wtu so there becomes a vertical gap in the MC curve
- Monopsony produces where MC = MRP so higher wage and higher employment moving towards the competitive efficient outcome
39
Why is there a wage differential between men and women
- Women are in and out of the labour force more due to maternity leave, where their skills aren't developing at a key age and their MRP may fall compared to men and limit wage potential
- Differences in education/qualifications in developing countries
- More women work in lower paying jobs, like part time, service sector, public sector, vocational elements, less TU presence in service sector and public sector as hard to organise
- Discrimination
40
Why is there a wage differential between footballers and teachers
- MRP of footballers is extremely high due to revenue from winning trophies, TV revenue, merchandise revenue
- Very low supply of footballers and extremely inelastic supply due to very long training period, and high demand (can show shift out in demand with inelastic supply on diagram to show high wages)
- Monopsonist employer of teachers who have wage setting power and want to keep wages low for macroeconomic objectives
- Vocational element to teachers as they don't do it for the money driving wages down
- Teachers would not want to strike as it impacts student performance so reduced bargaining power of trade unions
- Footballers are not homogenous as they all have a unique skillset so some footballers are paid a lot more
41
Why is there a wage differential between regions in the UK
- Restructuring of the UK economy away from manufacturing in North and towards service in South so demand for workers in North is lower i.e. MRP is lower
- Negative multiplier as workers in North have less money so demand for products goes down so demand for labour falls as well. Unemployment causes bigger wage variance. Accelerator effecrt as more spending in South means more growth so firms invest and create new jobs, whereas less investment in North
- Occupational immobility as workers don't have the skills to take service sector jobs in the South. Geographical immobility as workers don't want to move to a different location
- Only the best workers migrate to the South i.e. brain drain from North so only lowest paid workers left
42
Why is there a wage differential between ethnic groups
- Minority groups may be less qualified on average so have lower MRPs
- Lack of language proficiency means less productivity and employability in high paid sectors
- Concentration of such workers in low pay sectors
- Living in poorer areas of the country where demand for labour and employment prospects is low
- Reluctance of minority groups to migrate to earn more as culture may be to stay closer to family
- Discrimination
43
What are the advantages of wage differentials
1. Incentivises workers to gain skills and qualification and train to boost MRP and access higher wage professions, leading to more productivity and international competitiveness for firms and long run growth
2. Trickle down effect
3. Encourages enterprise as entrepreneurs earn high wage from risk taking, which causes long run growth through innovation and tech, lower costs and also causes trickle down effect
4. Discourages unemployment trap as people can't earn the same wage as everyone else through benefits, good for government and tax payers
5. Promotes efficient allocation of resources as wages signal to workers what job they would be most productive in based on their skills
44
What is the trickle down effect
Where high wage earners cause increased incomes for low income people
- They spend on goods and services causing multiplier effects in the economy as demand for products increase so demand for labour increases boosting wages and incomes
- High wage earners may create jobs for people on lower wages by getting them to work for them
- They pay more income tax and government can use tax revenue to boost income for low wage earners
45
What are the disadvantages of wage differentials
1. Income inequality means government has to spend on benefits, less growth as poor people have a higher mpc, social costs like higher crime, depression, protest rates
2. Trickle down effect may not occur as rich have the highest mps, may spend on foreign products, tax evasion or avoidance could occur
3. Gov solution won't work if they are a monopsonist employer, they are the cause of the problem and won't raise wages for macroeconomic objectives
46
Evaluate the impacts of wage differentials
1. Whether the costs outweigh benefits depends on how much income inequality
2. Government failure could occur e.g. Laffer curve with tax, job loss with minimum wages
3. In the short run, income inequality could mean costs outweigh but trickle down effect and entrepreneurship, benefits could outweigh in long run. However, short run costs could cause long run issues as well.
