Labour markets Flashcards
Supply of Labour (maybe perfect competition)
- Higher wages usually will encourage a worker to supply more labour because work is more attractive compared to leisure.
- Substitution effect of a rise in wages: Workers will tend to substitute income for leisure as leisure now has a higher opportunity cost. This effect leads to more hours being worked as wages rise.
- Income effect of a rise in wages: This effect involves workers working fewer hours when wages increase. This is because workers can get a higher income by working fewer hours.
The market supply of labour will depend upon:
- The number of qualified people willing to do the job.
2. The non-wage benefits of a job.
Demand For Labour (maybe perfect competition)
- Marginal Revenue Product (MRP) - This is the extra revenue a firm gains from employing an extra worker
- Marginal Physical Product (MPP) - This is the extra output that an extra worker produces.
- Marginal Revenue (MR) - This is the revenue that a firm gains from selling the last unit of output.
- MRP = MPP x MR. - This will be the effective demand for labour
Wage Determination in Perfect Competition
- The equilibrium wage rate in the industry is set by the meeting point of the industry supply and industry demand curves.
- In a competitive market firms are wage takers because if they set lower wages workers would not accept the wage.
- Therefore they have to set the equilibrium wage We.
- Because firms are wages takers the supply curve is perfectly elastic, therefore AC = MC
- The firm will maximise profits by employing at Q1 where MRP of Labour = MC of Labour.
Imperfections in the Labour Market - monopsony
This occurs when there is just one buyer of labour in a market or if the firm has market power in employing workers and setting wages. Can reduce real wage unemployment and employment levels below that in perfect competition.
• The marginal cost of employing one more worker will be higher than the average cost because to employ one extra worker the firm has to increase the wages of all workers.
• To maximise the level of profit the firm employs Qm of workers where MC = MRP. Therefore the firm only has to pay a wage of Wm. This is less than the competitive wage.
Imperfections in the Labour Market - trade unions
Under certain conditions, trade unions can bargain for wages above the competitive equilibrium.
• This increase in wages will cause a fall in employment. Thus in competitive labour markets, trades unions can cause unemployment.
• Trades Unions could increase wages to W2. This would reduce demand to Q2. The level of unemployment would be Q3-Q2.
However Trade Unions can be beneficial if:
- They operate in an industry with a Monopsonistic employer. In this case, Trade unions can increase wages without causing unemployment
- They help to increased productivity. Unions could bargain for higher wages in return for increasing labour productivity. Therefore firm can afford higher wages.
Imperfections in the Labour Market - others 1
- Wages will vary due to geographical differences:
Workers and firms will find it difficult to move because of geographical immobilities. For example, workers may be aware of jobs in other cities, but would find it difficult to move because their children are in school or the difficulty of buying house in other area. - Firms may be Non Profit Maximisers. If demand for a product falls, MRP theory suggest wages are likely to fall; however firms may be reluctant to cut wages or make people redundant, therefore they may keep paying high wages despite this.
Imperfections in the Labour Market - others 2
- Discrimination. Firms may not be rational, but pay some workers different wages on the grounds of age, race, or gender. For example, women may be paid less than men for doing the same job. This reduces the supply of labour into a given profession, and drive up the pay of the elite workers.
- Difficult to measure productivity. The theory of MRP assumes firms can measure the MPP of a worker; however, in practice, this is difficult because in many jobs, e.g. the service sector, productivity cannot be measured precisely.
- Poor information - Workers or firms may suffer from poor information, e.g. workers may be unaware of better paid jobs elsewhere.
Gender and wage inequality explanations
Possible differences in the level of human capital development, especially formal education because women may invest less in their own human capital development than men.
There may be productivity differences (in manual work), although this is clearly a minor factor in a service sector economy.
The number of hours worked, and career breaks will affect labour productivity. On average, women work fewer hours than men (35 hours per week, for women and 40 hours for men. It is estimated that this alone contributes around 12.5% of the difference).
Gender wage gap reduction explanations
The human capital of females is catching up with that of males because female performance in formal education has improved. Girls achieve higher GCSE and ‘A’ level grades and are rapidly catching up in terms of degree performance.
More females are becoming employers, and this reduces the likelihood of discrimination.
The introduction of the national minimum wage in 1997 had a proportionately bigger effect on female wages, compared with male wages.
Wage differentials
Human capital differences - Some jobs require lengthy training and education, and this is reflected in higher wages. Human capital is the quantity and quality of labour and human capital development is the process of improving the quality of labour through education and training. It’s a cost to individuals and firms in time and resources. So they need to pay those that receive it more.
Lifetime earnings vary directly with education and an individual who just obtains ‘A’ Levels, will earn much less, on average, than an individual with a university degree.
The demand for skilled workers is greater than the demand for unskilled workers because the value of the output produced by skilled workers will be higher, and can command a higher price. The marginal cost of acquiring a skill and improving human capital is greater, so the skilled worker’s supply curve is to the left of the unskilled worker.
gini coefficient
a/a+b
