Labour Markets Flashcards
What is the substitution effect (Demand)
When the price of workers increases, firms don’t want to hire as many workers and so they replace them with capital
What is MRP (marginal revenue product)
The additional revenue from employing an extra worker
Why is the labour demand curve downward sloping
Marginal Revenue Product
Substitution effect
More people hired as they cost less
Factors which determine a shift for the demand for labour
Productivity,
Price of capital substitutes, Derived demand,
Increases in the price of the final product
What is derived demand
When the demand for labour increases because of an increased demand for the final good/service
Determinants of Elasticity of Demand for Labour
Time – Takes time = inelastic
Availability of subs – can’t replace with anything = inelastic
Elasticity of D for Products - inelastic product = inelastic labour
Proportion of labour cost of total cost – low percent of the price = inelastic
Reason for upward slope of the supply of labour
Substitution effect
Income effect
What is the substitution effect (supply)
As wages go up, work becomes more rewarding and leisure time becomes more expensive (in terms of opportunity cost). People will therefore take less leisure time and work longer hours. They substitute leisure time for work.
What is the Income effect (supply)
As workers are paid more they can afford the luxury of leisure time, while still maintaining a good standard of living. So as wages go up, people will work less as fewer hours give them a sufficient income.
Factors that determine labour supply
Skills/qualifications, Population size, Perks/benefits,
Location/ transport,
Salaries in other industries
Determinants of the elasticity of supply for labour
Skills required
Vocational nature of work (skills specific to one type of job)
How is wage determined in a perfectly competitive market
By the Supply and Demand curve
How are wages determined in an imperfectly competitive markets
Trade unions
Monopsony employers
How do trade unions determine wages
The trade unions can refuse to accept the equilibrium price
How Monopsony employers determine wages
When one firms has the whole market so workers have to accept a lower wage
How does government intervention determine wages
Min/Max wages
Public sector wage settings and benefits
How do unemployment benefits effect wages
If firms offer wages which are less than the unemployment benefit then nobody will work for them
What are the market failures with the Labour markets (3)
- Labour immobility: occupational and geographical
- Inequality due to low wages
- Labour market rigidities/sticky wages caused by trade unions
What is Labour immobility: Geographical and Occupational
Geographical: when workers find it hard to move to another area
Occupational: the ability of workers to transfer from one occupation to another (skills)
What are Labour Market Rigidities
Caused when the price mechanism is prevented from working and wages are kept artificially high above the equilibrium (min wages, trade unions)
What are inequalities due to low Equilibrium Wages
If left to the free market, there can be rising wage inequality
