Micro Pack 5 Flashcards
What are the causes of a shift in labour demand?
- derived demand: marginal revenue product theory: labour demanded for the revenue that workers can generate for the business from producing goods/services
Factors: - demand for final product
- labour productivity: change how many products a worker can produce/the revenue they can earn for the business
- change in price of capital: as machinery etc substitute for labour
- Developments in technology: change need for labour in production process
What is the wage elasticity of demand for labour?
% change in labour demand/% change in wage
What factors influence the elasticity of demand for labour?
- Labour as a percentage of total costs: large percentage=elastic
- price elasticity of demand for the final product: inelastic PED = inelastic WED as can pass higher wage costs un form of higher prices without losing significant numbers of customers
- ease of substitution between capital and labour: more elastic as can easily substitute labour with machinery
- time period: over time demand more wage elastic, as more substitutes improve such as capital goods
What is wage elastic demand for labour and what is wage inelastic demand for labour?
Wage Elastic:
- more than proportionate response in labour demand to a change in wage
WEDl = -1 and infinity
More likely to be the case:
- labour large % of total costs
- demand for final product price elastic
- labour easily substituted for capital
- long-run rather than short run
- shallow curve
Wage inelastic:
- less than proportionate response in labour demand to a change in wage
- WEDL is between 0 and -1
More likely:
- labour small % of total cost
- demand for final product inelastic
- labour not easily substituted for capital
- short-run
- steep curve
What factors could cause a shift in labour supply for an occupation?
- size of working population: influenced by changes in demographics, migration, income tax/benefits
- level of skill and qualifications required for the job
- wages in substitute occupations
- non-monetary characteristics of an occupation: risks, poor working conditions, anti-social hours
What is wage elasticity of supply for labour?
%change in labour supply/ % change in wage
Factors:
- time and cost of training/education needed
- geographic/occupational mobility
- time period: more elastic in long term as workers gain appropriate skills/training
What is wage elastic and wage inelastic supply of labour?
Elastic:
- more than proportionate response in labour supply to a change in wage
- WESL is between +1 and infinity
Because:
- time/cost of training/education needed low
- high labour mobility of workers
- long run
- shallow curve
Inelastic:
- less than proportionate response in labour supply to a change in wage
- WESL between 0 and +1
Because:
- time/cost of training/education needed is high
- high labour immobility of workers
- short run
- steep curve
What is Monopsony Power?
- employers may have monopsony power
- where there is a single or few dominant buyers, in this case firms employing worker
- could mean that the monopsony employer could drive wages down below equilibrium as workers cannot apply for jobs at other businesses
What are trade unions?
- workers may be represented by them, are associations of workers formed to promote/protect worker interests
- will collectively bargain on behalf of their members and so have as stronger negotiating position than a single worker
- workers may go on strike
- may result in wage bargained above market equilibrium, however will cause unemployment as higher wage lead to expansion in labour supply and contraction in demand
- can be useful in a labour market which is already non-competitive as can bargain wages back up to market equilibrium
What is labour immobility?
inability of workers to take available work, either geographically or occupationally
What factors affect labour mobility?
Geographic mobility:
- moving form an area of low house prices to one of high house prices
- lack of availability of affordable renting accommodation
- costly/time consuming to move house
- large differences in cost of living between regions
- social attachments to previous region
- barriers to international travel
Occupational immobility:
- workers lack appropriate training/education
- workers cannot take time off work to get trained
- lack of availability of affordable training or education
- workers lack of confidence or are apathetic
What are the government intervention policies to improve labour market immobility?
Geographic immobility:
- relocation subsidies
- improve supply of affordable housing
- maximum rents
- improving infrastructure (travel longer distances more easily, e.g HS2)
Occupational immobility:
- training schemes for unemployed
- improve vocational training - e.g funding education or subsidising private firms
Improve provision of information about job vacancies and requirements
What are the limitations of improving labour immobility?
- cost of policies: opportunity cost of subsidies/training programmes
- time lags: training programmes take time and infrastructure
- coverage and quality issues: if relocation subsidies only given to one area will not improve other areas, same with training schemes if just for one profession
- quality needs to be high and infrastructure needs to significantly reduce journey times
- side effects of policies: e.g max rents = contraction in supply of rental properties, environmental damage of expansion of housing
- other barriers to labour immobility: social ties not overcome by subsidies
How can government intervene in the labour market?
- policies to tackle labour market immobility
- public sector wage setting
- minimum wages
- maximum wages
What is public sector wage setting?
- government has considerable monopsony power when setting wages for teachers etc
- however, this can be offset to some extent by trade unions who bargain higher wages
Effectiveness:
High wages for public sector workers:
- living standards and multipliers
- improved recruitment
- avoid industrial action
Low wages for public sector workers:
- reduced government spending
- control budget deficit
- control inflation
