LS9 - Demand And Supply For Labour

Question 1

What kind of demand is demand for labour.

Answer 1

A derived demand. Firms demand labour for the sake of revenue obtained from selling the output labour produces.

Demand for labour derived from demand for the goods and services labour produces

Question 2

Describe the structure of ‘the labour market’

Answer 2

There is a multitude of sub-markets because individual workers differ from each other in terms of their characteristics and skills. There are different markets for different types of labour, such as lawyers, accountants, cleaners and bricklayers.

There may also be geographic sub-markets, given that labour may be relatively immobile. There may be a labour market for an industry, or for particular skills within an industry.

Question 3

What factors can shift the demand curve for labour

Answer 3

Changes in the productivity of labour: demand for labour is a derived demand, so firms demand labour for the sake of the output that labour produces. If labour becomes more productive, this will lead to an increase in the demand for labour. For example, if a new technological advance raises the productivity of labour, it could shift the labour demand curve right

Changes in the price of the good labour produces: If the price of the g/s labour produces increases, economic theory predicts that firms will increase production. Therefore, demand for labour in that industry will also rise. (As labour is a factor of production)

Changes in the demand of the good labour produces: If the demand of the good labour produces increases, demand for labour would increase. This can occur when the economy is in a boom or if consumer preferences shift.

Changes in the price of capital: Firms can substitute labour for capital, so if capital becomes more expensive, firms will employ more labour, but also if labour were to become more expensive, the demand for capital would increase. Sometimes firms will specialise in capital-intensive processes because labour is highly skilled and expensive. This tends to be the case in the developed world, whereas in the developing world, where labour is abundant and lacking in skills, it is cheaper to employ workers than it is to automate a process.

Question 4

State and explain two important effects when discussing the supply of labour

Answer 4

The substitution effect: the wage rate can be seen as the opportunity cost of leisure, an increase in the wage rate increases the size of the opportunity cost. This motivates workers to work longer hours.

The real income effect: a higher wage means workers receive a higher real income, this encourages the consumption of more goods and services. Assuming leisure is a normal good, this could increase the workers leisure time. OR workers can earn the equivalent amount while working less.

Question 5

What factors influence labour supply?

Answer 5

Size of the Working Age Population: The larger the size of the working age population, and the higher the participation rate, the greater any industry labour supply curve will be. Immigration is an important factor here.

Wages on Offer in Substitute Occupations: Some occupations can be considered as substitutes for one another e.g. retail and hospitality. Therefore, changes in relative wage rates between these occupations would likely cause some workers to switch occupation. If wages on offer in substitute occupations are rising at a relatively higher rate, the industry supply curve is likely to shift to the left i.e. decrease.

Barriers to Entry: Many jobs require a minimum level of experience and qualification(s). The higher the required level of experience and qualifications, the fewer people will be able to work in the occupation. Doctors and engineers are examples of occupations with high barriers to entry. If barriers to entry for an occupation increase, the labour supply curve will decrease. Barriers to entry for an occupation could fall through deregulation e.g. the government could allow hospitals to hire nurses without qualifications.

Non-pecuniary Benefits: The greater these benefits are the more willing people to work in a particular occupation will be i.e. the labour supply curve will shift to the right. Similarly, the nature of the job can be a factor e.g. waste disposal

Overtime: this allows an individual to increase her or his income. For some people, this financial boost is highly valuable. Therefore, if overtime is available in an occupation more people will be willing to work in it.

Factor mobility

Question 6

When might the size of the working age population increase?

Answer 6

The size of the working age population increases when the birth rate rises, death rate falls, and net immigration is positive.

Question 7

What is the participation rate and how is it measured

Answer 7

The participation rate (important factor) measures the proportion of a country’s working age population that is actively engaged in the labor market. This includes people who are either employed or actively seeking employment. It is an important indicator of how effectively a country is using its available labor resources.

This excludes ppl who are not eligible to work e.g. disabled, students

Question 8

What are non-pecuniary benefits?

Answer 8

Non-pecuniary or non-monetary benefits are the perks involved with a job e.g. on-site gyms, company cars, staff discount cards etc.

Question 9

Explain the lump of labour fallacy

Answer 9

The idea that the amount of work available in an economy is fixed. But, most economists argue this belief there is a fixed number of jobs (or a fixed number of hours) is usually incorrect.

Immigration increases labour supply - so we may expect a fall in wages.
However, net migration increases demand in the economy, causing an equivalent rise in demand for labour. The net effect should be that wages stay constant. (This may not be the case in all labour markets, this also depends on the skill level of the migrants)

Question 10

Describe factor immobility

Answer 10

• a cause of market failure where immobile labour can cause unemployment and skills shortages
• there are two kinds: occupational and geographical immobility

Question 11

Describe occupational immobility

Answer 11

When there are barriers to the mobility of factors of production between different sectors of the economy leading to these factors remaining unemployed, or being used in ways that are not efficient.

Capital inputs can be occupationally mobile: computers are used in different industries, commercial buildings (shops or offices) can provide a base for many businesses. Some units of capital are specific to the industry they have been designed for - a printing press or a nuclear power station for example!

Labour can experience occupational immobility. For example, workers made redundant in the steel industry or in heavy engineering may find it difficult to find a new job. They may have specific skills that are not necessarily needed in growing industries which causes a mismatch between the skills on offer from the unemployed and those required by employers looking for workers. This problem is called structural unemployment. This leads to a waste of scarce resources and represents market failure.

Question 12

Describe geographical immobility

Answer 12

Geographical immobility refers to barriers people moving from one area to another to find work. There are good reasons why geographical immobility might exist:
Family and social ties
• The financial costs involved in moving home including the costs of selling a house and removal expenses.
• Huge regional variations in house prices leading to a shortage of affordable housing in many areas
• The high cost of renting property
• Differences in the general cost of living between regions and also between countries
• Migration controls e.g. a cap on inward migration
• Cultural and language barriers

Question 13

What policies could reduce occupational immobility

Answer 13

Invest in training schemes for the unemployed to boost their human capital to equip them with new skills and skills that can be transferred from one occupation to another.
• Subsidise the provision of vocational training by private sector firms to raise the skills level

Question 14

What policies could reduce geographical immobility

Answer 14

Reforms to the housing market designed to improve the supply and reduce the price of rented properties and to increase the supply of affordable properties. eg. help to buy scheme
• Specific subsidies for people moving into areas where there are shortages of labour - for example teachers and workers in the National Health Services

Question 15

What is elasticity of demand for labour?

Answer 15

• The elasticity of labour supply to an occupation measures the responsiveness of labour demand to a change in the wage rate.

If demand for labour is elastic, businesses cut back aggressively on employment if wage rates increase and will expand rapidly when labour becomes cheaper relative to other factor inputs.

When the elasticity of demand for labour is inelastic the response to changes in wages will be smaller.

Question 16

What does elasticity of the demand for labour depend on?

Answer 16

• the proportion of labour costs in the total costs of a business
• the ease and cost of factor substitution
• the price elasticity of demand for the final output produced by a business and the time period under consideration.
• In low-skilled occupations, labour supply is elastic because a pool of labour is available to take the job.
• Where jobs require specific skills, training or qualifications, the labour supply will be more inelastic because it is hard to expand the workforce in a short period of time when demand for workers has increased.

Question 17

What’s the role of a trade union in the labour market

Answer 17

Pay bargaining (real wages)
this!
• Protecting pension rights
• Employment rights
• Working conditions including health and safety at work
• Lobbying for improved minimum wages and workplace training funding
• Campaigns on discrimination

Question 18

Why have trade unions been declining in size and power

Answer 18

Structural change in employment from heavy manufacturing and large public sector employment to a more flexible labour market dominated by services where unionisation rates are much lower.

Globalisation and flexible hiring - many multinationals make it harder for trade unions to organise. The rise of the gig-economy has led to a rise in contingent, non-contracted, self-employed workers - most of whom are not TU members

Question 19

What factors can affect trade union bargaining power in the labour market

Answer 19

Union density and membership: Higher union density means can provide unions with more negotiating leverage. This links to the credible threat of strike power and the commercial effects of strikes.
Economic climate: In times of rapid GDP growth, falling unemployment, and skilled labour shortages, unions may have greater bargaining power due to the scarcity of skilled workers. Consider recent pay rises for thousands in logistics.

Question 20

What is a monopsony employer?

Answer 20

One large employer in an industry e.g. NHS in the UK healthcare industry

Question 21

How are wages determined when a monopsony employer negotiates with a trade union?

Answer 21

Monopsony employer have buying power when hiring labour. They use can this power to pay a wage lower than the MRPL. Trade Unions might help to counter-balance monopsony exploitation.

Question 22

Factors that might explain the gender pay gap in the UK labour market

Answer 22

Age and the glass ceiling effect: A substantial gender pay gap emerges among full-time employees aged 40 and over. This links to many women taking a career break. Women may face systemic barriers, such as gender bias, stereotypes - both discriminatory practices - a good example of bounded rationality of employers.
Occupational clustering effects - In many jobs such as social care, accommodation and food services - pay is relatively low with limited trade union representation - but there is a high concentration of females working in these occupations.
have to pay for union membership.

Question 23

What is a maximum wage?

Answer 23

For specified industries, wages cannot exceed a certain level . They can help regulate labour markets where workers have excess monopoly power.

Question 24

Why might a maximum wage be created in an industry?

Answer 24

People earn too much and they ‘don’t deserve it’ - therefore keeps it low.
2. It helps to reduce costs for firms as lower rate set.
3. In some labour markets, labour may have the ability to bargain for wages which include substantial economic rent - this takes away labours bargaining power.

• Prevents skilled labour only entering professions with highest pay as wages have a MAX limit. E.g. if lawyers received very high wages, the best graduates may ALL train to become lawyers, but this means other job sectors, such as doctors, engineers would not attract the best workers.

Question 25

Describe a case study on max wages in football

Answer 25

There was a maximum wage for professional footballers in England up until 1960. The maximum wage for footballers was £14 per week (1951), £15 (1953), £17 (1957) and £20 (1958)

With many clubs on the face of bankruptcy, some argue, the Football League should consider a return to a maximum wage - to prevent clubs spending more than they can afford on wages.

Question 26

What are some reasons to not have a maximum wage?

Answer 26

Here’s a clearer version of the reasons:

1. No benefit to the government: A maximum wage would cap the earnings of high-income individuals, but the government wouldn’t directly gain from it. Instead, raising taxes on the highest earners could generate revenue for the government, which could then be redistributed to benefit society.
2. Work disincentives: A maximum wage might drive skilled workers and top executives to move abroad where they can earn more. This could result in a shortage of talent and harm the economy.
3. Economic value of high wages: If companies are paying high wages, it’s because these workers provide value equal to their pay (their Marginal Revenue Product). Limiting wages may disrupt this balance.
4. Limited overall benefit: Apart from a symbolic sense of fairness, a maximum wage offers little economic benefit in most industries, and doesn’t significantly address deeper issues of inequality.

Question 27

Why do countries implement minimum wage laws, and what is the impact on employment?

Answer 27

boosts the incomes of low-paid workers.

economic theory suggests that minimum wages could cause unemployment in a competitive labor market (supply exceeding demand) but real-world evidence shows that in monopsonistic markets, certain minimum wage levels don’t lead to unemployment.

Question 28

What is the current National Minimum Wage in the UK for workers aged 23 and over, and when was it introduced?

Answer 28

As of April 2023, the UK National Minimum Wage for workers aged 23 and over is £10.42. It was introduced in April 1999 at £3.60.

Question 29

What is the main goal of the National Minimum Wage in the UK?

Answer 29

The aim of the National Minimum Wage is to help increase the incomes of low-paid workers, especially in a labor market with declining trade unions and growth in low-paid service sector jobs

Question 30

What did Milton Friedman argue about the National Minimum Wage?

Answer 30

Milton Friedman argued that a National Minimum Wage could lead to unemployment because firms may not be able to afford to pay the workers.

Question 31

What are some benefits of the National Minimum Wage?

Answer 31

Here’s a streamlined version of your points:

1. Reduces poverty: Minimum wage raises incomes for the lowest-paid workers, helping to reduce relative poverty.
2. Boosts productivity: Higher wages can motivate workers to work harder and push firms to improve labor productivity, making the economy more efficient.
3. Increases job acceptance: A higher minimum wage creates a larger gap between benefits and employment income, encouraging more people to enter the workforce.
4. Encourages investment: Higher labor costs push firms to invest in increasing productivity, fostering a high-value economy instead of relying on low wages.
5. Raises wages above the minimum: A higher minimum wage can indirectly boost wages for those earning just above the minimum, as firms seek to maintain pay differences for more experienced workers.
6. Limits monopsony power: A minimum wage prevents firms with monopsony power from suppressing wages, which can have a positive effect on employment.

Question 32

What problems may arise from imposing a minimum wage

Answer 32

Here’s a streamlined version of your points:

1. Risk of unemployment: In competitive labor markets, a minimum wage above the equilibrium could reduce demand for workers and create excess supply.
2. Impact on labor-intensive industries: Industries with high labor costs, such as elderly care, could be hit hard by a high minimum wage, especially as the demand for care increases.
3. Regional wage differences: A national minimum wage doesn’t account for regional wage variations. In high-cost areas like London, it may have little effect, but in lower-wage regions, it could lead to significant unemployment.
4. Higher consumer prices: Firms may raise prices to offset the higher wage costs, passing the burden onto consumers.
5. Workers stuck on minimum wage: Many workers, particularly women, ethnic minorities, and young people, are stuck on minimum wage, as firms may be incentivized to keep them in the lowest wage bracket.
6. Black market incentives: A high minimum wage could push some firms to pay workers cash-in-hand, avoiding taxes and increasing the risk of labor exploitation, especially in sectors with migrant workers.

Question 33

What factors should be considered when deciding the size of the minimum wage?

Answer 33

Here’s a summary of the points:

• State of the economy: Firms can pay higher wages more easily during periods of strong growth and low unemployment.
• Elasticity of demand for labor: If demand for labor is wage-inelastic, firms can absorb wage increases, but in some sectors (e.g., service jobs), even small increases could lead to unemployment.
• Regional wage differences: A national minimum wage may not suit all regions, suggesting the need for region-specific wages, such as a London-specific rate.
• Type of labor market: The impact of wage increases depends on whether labor markets are competitive or monopsonistic.
• Productivity potential: Firms may be able to afford higher wages if they can increase labor productivity.
• Relation to median wages: Studies show that setting minimum wages between 37% and 59% of the median wage has not led to significant job losses.

Question 34

What are some social barriers to geographic labour mobility?

Answer 34

Social barriers include reluctance to leave friends, family, familiar environments, and concerns about disrupting children’s education.

Question 35

What are some economic barriers to geographic labour mobility in the UK?

Answer 35

Economic barriers include the high costs of moving, challenges faced by homeowners, and council house tenants needing strong incentives or returning to the bottom of waiting lists.

Question 36

How do housing prices affect geographic labour mobility?

Answer 36

Differences in house prices across regions make it difficult for workers to relocate for jobs, creating further mismatches between workers and employment opportunities.

Question 37

How does information availability affect geographic mobility?

How does the internet impact geographic mobility?

Answer 37

Workers may have limited information about job availability in other regions, making it easier to find jobs locally where the reputation of firms is better known.

While the internet has reduced job search costs, it is still easier for workers to find jobs locally than in other areas.

Question 38

How does dual-income households affect geographic mobility?

Answer 38

Geographic mobility is often harder for couples where both partners are working, as both need to find jobs in a new location.

Question 39

How has the international mobility of labour changed in recent years?

Answer 39

International labour mobility has increased, especially after the EU expansion (10 new member countries joined) in 2004, which allowed free movement of workers, particularly from Poland to the UK due to wage differentials.

Question 40

What are the costs involved in occupational mobility?

Answer 40

Occupational mobility can involve retraining costs, as a worker may not easily switch occupations without gaining new skills.

Question 41

What is the free-rider problem in occupational mobility?

Answer 41

Firms may underprovide worker training because they fear other firms will benefit from their investment, leading to a need for government intervention to promote occupational mobility.

Question 42

How does a lack of information impede occupational mobility?

Answer 42

Workers may not have enough information about their aptitude for other jobs or may be unaware of the job satisfaction they could gain from new occupations.

Question 43

How does occupational immobility affect workers displaced by structural change?

Answer 43

Displaced workers may not find suitable jobs due to a lack of retraining or information, contributing to structural unemployment.