Micro I - Labour Markets

Question 1

Fill in the gaps:
Derived demand is the demand for a ___ of production used to produce another good or service. During a recession or prolonged economic slowdown, demand for labour tends to fall causing a rise in ___.

Answer 1

Derived demand is the demand for a FACTOR of production used to produce another good or service. During a recession or prolonged economic slowdown, demand for labour tends to fall causing a rise in CYCLICAL UNEMPLOYMENT.

Question 2

Define demand for labour

Answer 2

The demand for labour shows how many workers an employer is WILLING AND ABLE to hire at a given wage rate in a given time period.

Question 3

Why might lower wage rates cause an extension of demand? (Think capital)

Answer 3

When wages are lower, labour becomes relatively cheaper than capital - a fall in the wage rate might therefore create a substitution effect and lead to an expansion in labour demand.

Question 4

Define marginal revenue productivity of labour (MRPL)

Answer 4

Marginal revenue product of labour (MRPL) is the extra revenue generated when an additional worker is employed.

Question 5

How is the demand curve for labour fundamentally linked to the law of diminishing returns?

Answer 5

The demand curve for labour is derived from the marginal revenue product of labour (MRPL) because a firm’s demand for labour depends on the productivity of additional units of labour (MPP) (multiplied by selling price of the product). The MPP is closely related to the law of diminishing returns.

Question 6

What is the formula for MRPL?

Answer 6

MRPL = MPP X MR (same as price)

Question 7

In the theory of the labour market, the MRPL is taken as the basis of the labour demand curve (so the marginal revenue productivity of labour is what we assume the demand for labour is based on).
However, this assumption can be critiqued. What are the issues with the MRPL theory?

Answer 7

1. It is difficult to measure labour productivity - it is not easy to measure labour efficiency in every industry e.g. consultancy and education
2. Collaborative work makes it difficult to establish the productivity of individual workers
3. Many people have the ability to set their own pay e.g. self-employed

Question 8

Define wage elasticity of labour demand

Answer 8

Wage elasticity of labour demand measures the responsiveness of quantity of labour demand following a change in the wage rate

Question 9

How do we calculate elasticity of demand for labour?

Answer 9

Elasticity of demand for labour = % change in quantity of labour demanded / % change in wage

Question 10

What is the mnemonic for the factors that affect the elasticity of demand for labour? - and what each letter means

Answer 10

S - substitutability of capital for labour
E - elasticity of demand for the final product
C - cost of labour as a proportion of total cost
T - time period

Question 11

How does the substitutability of capital for labour affect the elasticity of demand for labour?

Answer 11

The easier it is to substitute labour for capital machinery, the more elastic the demand for labour will be

Question 12

How does the elasticity of demand for the final product affect the elasticity of demand for labour?

Answer 12

Since labour is a derived demand, if the PED for the good or service that workers produce is inelastic, then demand for labour will also be inelastic.

Question 13

How does the time period available affect the elasticity of demand for labour?

Answer 13

The longer the time period, the asker it comes to substitute labour with other factors such as capital, making labour more elastic.

Question 14

What factors might shift the labour demand curve?

Answer 14

Factors aside from the wage:
1. The productivity of workers
2. Price of other substitute factors of production
3. Supplementary labour costs such as National insurance (for employers)
4. The level of demand in the market for goods and services

Question 15

Define labour supply

Answer 15

The QUANTITY OF LABOUR workers are willing and able to supply at a given wage rate

Question 16

Why is the labour supply curve upward sloping?

Answer 16

Higher wages act as an incentive to join the labour market

Question 17

A change in the wage rate will lead to a movement along the supply curve for labour, while a change in the other determinants will lead to shift of the supply curve for labour. What are these determinants? [6]

Answer 17

1. Barriers to entry - artificial limits to an industry’s labour supply (e.g. minimum qualifications might be needed) can restrict supply and increase average wages compared to other jobs.
2. Improvements in the occupational mobility for labour and the stock of human capital - numbers of people who can work in a given job increases ; as a result more of apprenticeships and other types of work experience
3. Non-monetary/non pecuniary characteristics of specific jobs - risk, anti-social hours, career progression, job security, pension schemes
4. Net migration of labour - net inward migration expands the active / available supply of labour in many occupations. Relieves shortages of skilled labour to meet seasonal demand for workers e.g. in NHS or construction industries
5. Demographic factors affecting overall population size
6. People’s preferences between work/leisure and desire for work flexibility (increased post Covid-19)

Question 18

Define elasticity of labour supply

Answer 18

Elasticity of labour supply measures the responsiveness of quantity of labour supplied to a change in the wage rate

Question 19

List the factors that may affect the wage elasticity of supply of labour to an industry?

Answer 19

1. Level of skill required
2. Vocation
3. Length/time/cost of training period
4. Time period considered

Question 20

Give 6 sources of labour market failure

Answer 20

1. Geographical immobility of labour
2. Occupational immobility of labour
3. Monopsony employers
4. The poverty trap - effects of tax and benefits system
5. The unemployment trap - hysteresis
6. Training gaps

Question 21

What are the assumptions of a perfectly competitive labour market?

Answer 21

• there are many workers and firms, all of whom are homogenous
• firms are wage takers
• there are no barriers to entry
• there is perfect knowledge for both workers and firms

Question 22

Where will profit maximising employers employ labour (graph)?

Answer 22

There will employ labour at the quantity where MC = MRPL

Question 23

What are the three specification named factors for imperfect labour markets?

Answer 23

1. Monopsony power
2. Trade unions
3. Imperfect information

Question 24

What is a monopsonistic labour market?

Answer 24

A monopsony occurs when there is a sole or dominant employer in a labour market

Question 25

What is a trade union?

Answer 25

A trade union is a group of workers that bargains collectively with employers to increase its members’ wages

Question 26

What does economic theory say about what trade unions do to wages and employment in a previously competitive labor market?

Answer 26

Economic theory suggests that the introduction of a trade union to a perfectly competitive labour market will increase wages for those who keep their job but reduce employment levels.

Question 27

How might modern instances of bargaining between unions and employers result in both pay rises and employment in a competitive labour market?

Answer 27

Employers may raise wages on the condition that workers agree to adopt more productive working methods such as using computers or agreeing to retrain. This will increase workers’ MRP and hence demand for labour, which may lead to no excess demand arising.

Question 28

What effect do trade unions have on wages and employment in imperfectly competitive labour markets?

Answer 28

In imperfectly competitive labour markets such as monopsonies, the introduction of a trade union is predicted to increase both the wage rate and the level of employment.

Question 29

What is a bilateral monopoly?

Answer 29

A Bilateral Monopoly is when there is only one producer of a good and only one supplier. It means there is a monopsonist (buyer of labour) and a monopoly (single supplier)

Question 30

What is the NMW?

Answer 30

National Minimum Wage: a statutory minimum wage used to increase the earnings of the low-paid. This legally obliges employers to pay their workers at least a certain hourly rate.

Question 31

What is the difference between the NMW and the NLW ?

Answer 31

The National Minimum Wage is the minimum pay per hour almost all workers are entitled to. The National Living Wage is higher than the National Minimum Wage - workers get it if they’re over 23.

Question 32

What is the NMW and NLW right now (march 2024)?

Answer 32

NMW (16-17 yrs old): £6.40
NMW (18-20 yrs old): £8.60
NLW: £11.44

All per hour

Question 33

What is the suggestion for why empirically, a minimum wage may not lead to unemployment

Answer 33

One suggestion is that by increasing the incomes of the low-paid, who tend to have a high marginal propensity to consume, extra demand is created in the product market, which increases workers’ MRP, and hence the demand for labour actually increases.