Labour Markets Flashcards
Define Marginal Revenue Product
The money value of the addition to a firm’s total output brought about by employing one more worker
Define Marginal Physical Product
The addition to a firm’s total output brought about by employing one more worker
What are the 5 main assumptions of the marginal revenue productivity theory of the demand for labour
- Homogenous workers - in terms of ability and productivity
- Firms have no monopsony power
- Trade Unions have no impact on the available labour supply
- Physical productivity of each worker can be accurately / objectively measured and the market value of the output produced by the labour force can be calculated
- Industry supply of labour is assumed to be perfectly elastic
How to calculate Marginal Revenue Product
Marginal Physical Product x Marginal Revenue
How to calculate the elasticity of supply of labour
%change in labour supply / % change in wage rate
3 Factors that shift the market supply curve for labour
- Change in income - Due to backward bending supply curve
- Change in Population - Change in supply of labour
- Change in Expectations - People staying in education longer, older people less optimistic of pension
4 Factors that determine the elasticity of supply for labour
- Time spent training
- Occupational / Geographical Immobility of Labour
- Time
- Employment / Unemployment - Availability of a pool of labour
How to calculate the Elasticity of demand for labour
%Change in QD / % Change in Wage rate
2 Factors that shift demand for labour
- A change in Labour Productivity
- A change in Technology
4 Factors that determine the elasticity of demand for labour
- Availability of substitutes
- Time period
- Elasticity of demand for the product
- Proportion of labour cost to total cost
How is demand for labour an example of derived demand
As it is a consequence of demand for another product
What is the demand curve for labour
Explain the relationship
Inverse
Due to the costs of production, the more workers that want to work, the less a firm can afford to pay each one
What does the supply curve for labour show
How much labour a particular worker plans to supply at different wage rates
What is the supply curve for labour from an individual worker in terms of hours of labour time supplied per week
Define the substitution affect
A higher hourly wage rate makes work more attractive than leisure, so workers substitute labour for leisure
Define the Income Effect
An increase in the hourly wage rate means a higher real income, and if leisure is a normal good, the quantity of leisure demanded goes up which means a reduction in the quantity of labour supplied.
Define Net advantage
The sum of the monetary and non-monetary benefits of working
What is a monetary benefit of working
The utility/welfare derived from the wage
What are non-monetary benefits of working
The utility derived from other aspects of working
Job satisfaction
What is the supply curve for the total number of workers willing to supply labour
Explain the relationship
Due to the incentive for workers to work with a higher wage
What is a tight labour market
A labour market where unemployment is low
Workers have the power
What is a loose labour market
A labour market where unemployment is high
Firms have the power
Diagram for a perfectly competitive labour market
Name 4 assumptions of an Perfectly Competitive Labour Market
Firm is a wage taker
Many buyers and sellers
Perfect Information exists
No barriers to entry
In the PCLM market, why the S=AC=MC line flat
As supply is perfectly elastic
The firm is a wage taker, so doesn’t determine the wage rate. So AC and MC are constant
Where is the point of profit maximisation when selling the output produced by labour
When MRPL = MCL
What is a competitive firm’s level of employment/demand for labour at each wage rate
MRPL=W
Define Monopsony
When there is only one buyer in a market
What is monopsony power
Give an example
The market power exercised in a market by the buyer of a good or the services of a factor of production eg. labour, even though the firm isn’t a pure monopsonist
eg. the market for firefighters
Explain the relationship between the supply curve and average cost curve in a monopsony labour market
The supply curve is the average cost curve
As more workers will be willing to supply labour if the wage rate (Average cost) is increased
Diagram showing how monopsony power can lead to the exploitation of workers
Explain it
W1 is the equilibrium wage rate, where Labour demand=Labour Supply
W2 is the profit maximising wage rate, where MRPL=MCL
However, using the ACL (Labour Supply curve) one can see that the wage rate a monopsony firm only needs to supply to achieve an employment level E2 is just W3
What is an imperfectly competitive labour market
A labour market where firms have monopsony power
What is a trade union
An organisation of workers who join together to maintain and improve their conditions of employment , including pay
Define Collective Bargaining
A process by which wage rates and other conditions of work are negotiated upon by a union or unions with an employer or employers
Diagram for a trade union in a perfectly competitive labour market
Explain it
E1, W0 is the equilibrium wage rate (DL=SL)
The trade union bargains to increase the wage rate to W1. E3 is the limit - the no. of workers who will be very happy with that wage rate.
So the blue line becomes the effective trade union supply curve : STU
It’s horizontal before E3 as the firm is forced by the trade union to pay a wage rate of W1, no matter the level of employment
However, now demand for labour has decreased to E2 so there is unemployment due to an excess supply of labour. Unemployment is the difference between E3 and E2
What are 4 points that can be used to evaluate trade unions
Is the trade union in a monopsony labour market
Strength of the trade union power, closed shop trade unions are illegal - power is based on union density. Less power means less distortion
Success of TU - Can be measured by union Mark up
Real world evidence proves the limited power of trade unions
Define Union Density
Proportion of the workforce in a given profession who are part of a certain trade union
The higher the proportion, the more powerful, the more distortion in the market
Define Union Mark up
The difference in wage between what workers are getting who are part of a Trade union in a given profession and those who are not in a Trade union
How has the power of Trade Unions become limited since the 70’s
- Legislation
- Closed shop trade unions illegal, must be mulitple TU’s
- Strikes can only happen if 75% of workforce agree
- Restructuring of UK economy
- Growth of service sector where there wouldn’t, just be 1 big employer, instead many smaller employers. Harder fight against many different firms
- Competitive pressures due to globalisation, firms now can’t increase wages as easily.
Diagram for a Monopsony Labour Market with Trade Union Intervention
Explain it
Monopsony firms want to charge W1
Trade union bargains to get wage rate increased to WTU which closer to the equilibrium (Not what is shown in diagram but that’s how it should be)
Up to this employment level, wage rate is constant, so MCL and ACL are flat.
But then after ETU, wage rate increases, so ACL starts to increase from WTU and MCL starts to increase from the point it would be at if there had been no TU. So it jumps up to that point.
What affect does a Trade Union have on a monopsony labour market
Increases wages and employment closer to the PCM outcome
What affect does a trade union have on a perfectly competitive labour market
Wages increase but employment falls
Explain a point for evaluation of trade unions in a monopsony labour market
How valuable they are - how powerful the monopsony firm is.
The bigger the difference between the WMonopsony and WE the more powerful the monopsony is
So the larger the difference the trade union can make as it can increase wages by a larger extent
Define National Minimum wage
A minimum wage rate that must by law be paid to employees
What is a national minimum wage similar to in terms of its affect on any type of labour market.
Why
Therefore, what affect does a national minimum wage have on a PCLM and Monopsonistic labour market
Similar to Trade union intervention
Both increase the wage rate above what firms wish to pay
PCLM: Increases wage but causes unemployment
Monopsony: Increases wage and increases employment
Explain 5 benefits of a National Minimum Wage
- Reduces wage differentials
- Incentive to work
- May increase productivity
- Boosts morale
- Incentive for firms to increase human capital
- Make the most of workers as average costs are higher
- Counter Monopsonist employer
- Reduces monopsonist power as they must increase wage
Name 5 disadvantages of a national minimum wage
- Real wage unemployment
- Diagram
- Especially youth who have a lower MRP - less skills, productivity - harder to justify employing them
- Those not on NMW may ask for higher wage to keep differential
- Higher cost to firms
- Lack of competitiveness for firms and businesses/go out of business
- Doesn’t account for regional differences in costs - living costs higher in London than in Newccastle
- Can affect gov. finances due to state employment
- UK gov. employs a disproportionately large amount of NMW workers
Explain a point of evaluation against real wage unemployment due to a NMW
Depends on elasticity of Labour Demand/supply
More inelastic = Less unemployment
Diagram for real wage unemployment
Explain 5 causes of labour market imperfections
- Labour is not homogenous
- Discrimination, different MRPs
- Non Monetary considerations
- Low non-monetary benefits will decrease labour, may need compensating wage differentials
- Labour immobility
- Geographical/skills/lack of perfect knowledge
- Trade unions/supply restrictions
- Power of trade unions-union density - more power over wages
- Monopsonies - wage setting ability
What are compensating wage differentials
When low monetary benefits cause a lower supply of labour, so wages are increased to compensate
What are labour market impefections
Factors that may stop a labour market from operating as a PCLM
Define Wage discrimination
Paying different workers different wage rates for doing the same job
Explain 5 benefits of wage differentials
- Incentives
- To gain qualitifactions to boost MRP and access those higher wage professions - More productivity, LR growth
- Trickle down effect
- Benefits will be felt by lower income earners through more jobs, better gov. spending..economic growth
- Encourage enterprises
- People know if they take the risk and it’s successful, their income will grow
- Will create jobs, drive down costs, benefits of innovation
- Encourages work, not welfare benefits
- Can be earning a much higher wage, less costs for gov. to pay
- Efficient allocation of resources
- Where wages are higher, the most productive workers will move there
Explain 5 disadvantages of wage differentials
- Income inequality
- More welfare spending
- Can reduce growth - the poor have highest MPC and the rich have highest MPS
- Social costs - crime, divorce, worse health
- Trickle down effect
- May not happen
- Multiplier effects may not occur as rich don’t spend, may send money abroad or save
- Tax evasion
- Gov. solutions are limited if they are the cause
- If they are a monopsonist employer, it’s harder for them to raise wages to solve problem
Explain 3 points for evaluation of the wage differentials argument
- How much inequality
- Are the costs of it greater than the benefits
- If its small inequality, benefits may outweigh costs
- Risk of government failure
- SR vs LR
- Greater benefits in LR
- Trickle down effect, incentives, innovation..
- But SR issues may cause more issues in the LR as inequality gets out of control
What is a condition necessary for wage differentials
Employers being able to identify/seperate groups of workers
What is wrong with the Government mandated gender pay gap data published by firms
Doesn’t break down earnings by characteristics that can affect an individual’s pay
So makes no allowances for the different roles available in the firm
Give an example of how Firm’s gender pay gap information is misleading
Easy reported a 54.1% hourly pay gap - 2018
But 71% of the cabin crew who would earn under £24k are female
While 5% of pilots (making up 25% of their workforce) who earn over £98k are female
EasyJet’s gender pay gap is due to men and women taking up different roles in the firm
Give a reason for the existence of a gender pay gap i the UK
The individual decisions men and women take
Taking time off to raise children eg will affect the salary one gets
