Micro part 16- Labour markets

Question 1

What is derived demand

Answer 1

1. labour is an example of this since the demand for labour is driven by the demand for the g/s that labour produces

Question 2

What is Nominal wage

Answer 2

1. monetary value of wages

Question 3

What is Real wage

Answer 3

1. wage adjusted for inflation

Question 4

What is Productivity

Answer 4

1. output per unit of labour per period of time

Question 5

What is Human capital

Answer 5

1. the value of productive potential of an individual made up of the skills/talents they acquire through education and training, representing productivity and the earning potential of a worker

Question 6

What are Sub-markets

Answer 6

1. Exist because of barriers to entry between labour markets e.g. government regulation
2. Mean that wage differentials between occupations can exist so workers cannot move between markets if there’s a change in wage rate
3. E.g. some sub-markets may be effected by migration more than others like unskilled vs skilled

Question 7

What are the Determinants of demand for labour

Answer 7

1. Will change if the marginal revenue product (MRP) of a given quantity of labour changes.
2. If the physical productivity of labour increases then MRP increases do demand increases
   3 . Changes in the price of the good since if the price increases then firms are willing to pay for more labour.
3. Since labour is derived demand then a change in the demand for product will affect demand for labour
4. How many substitutes for labour there are since if labour can be replaced by capital then it will so demand for labour falls
5. Changes in the cost of workers which can include wages but also things like training and uniforms

Question 8

What is wage elasticity

Answer 8

1. The responsiveness of quantity demanded of labour to a change in the wage rate
2. = % change in quantity demand of labour/ % change in wage rate

Question 9

What are the Determinants of wage elasticity

Answer 9

1. The time period
2. The availability of substitutes since if there are many substitutes then labour is elastic
3. The elasticity of demand for the product
4. The proportion of labour costs to total costs

Question 10

How does the time period determine wage elasticity

Answer 10

1. since labour is more elastic in the long run it is easier for firms to substitute labour for a substitute
2. since in the short run they may be locked into contracts with their workers (e.g. financial penalties for making workers redundant)

Question 11

How does the proportion of labour costs to total costs determine wage elasticity

Answer 11

1. since if wages are a small proportion of total costs then a small change in labour cost will have little impact on their total costs
2. so labour is more inelastic

Question 12

How does the elasticity of demand for the product determine wage elasticity

Answer 12

1. since as labour is derived demand then the demand for it will be directly affected by the demand for the product it produces

Question 13

What is unit labour cost

Answer 13

1. Unit labour cost – cost of employing labour per unit of output or production
2. =Total cost of labour/Output

Question 14

What does increased unit labour cost do to the MRP of labour

Answer 14

1. Increased unit labour costs will decrease the MRP of labour
2. this means the revenue gained from employing more labour is falling

Question 15

What happens to unit labour cost of productivity rises

Answer 15

1. If productivity rises then unit labour costs fall since each unit of output can be produced with less labour
2. Higher costs/lower productivity means firms will be less competitive against each other and internationally since they need to raise price to cover their higher costs.
3. Alternatively they can choose to raise prices but this will mean they make less profit

Question 16

How does the effects on wages depend on market structure

Answer 16

1. If perfectly competitive then no change in wages but increase in employment
2. if upwards sloping then extent to which increase in wages will offset the reduction in labour costs will depend on the WES

Question 17

What are the determinants of the supply of labour

Answer 17

1. The wage rate
2. The presence of non-pecuniary benefits (welfare from non-wage benefits of their job).
3. The size of population since if there are many economically inactive people then little supply
4. The advertisement of jobs
5. The mobility of labour i.e. how well labour can move between occupations or regions
6. How much training is needed
7. The presence of trade unions
8. Government policy e.g. low taxes may incentivise working

Question 18

How does the wage rate determine the supply of labour

Answer 18

1. since as it rises then there is greater incentive to work so supply increases.
2. This can be influenced by job satisfaction since if workers enjoy their jobs then they are more willing to accept a lower wage

Question 19

How does the advertisement of jobs determine the supply of labour

Answer 19

1. since workers may not be aware of job opp. thus meaning they do not make themselves available for the job s there is less supply

Question 20

How does the training required determine the supply of labour

Answer 20

1. since if lots of expensive, long training is needed to be qualified then fewer people suitable for job

Question 21

How does trade unions required determine the supply of labour

Answer 21

1. since if workers feel their rights are more likely to be protected then more willing to work

Question 22

What are the determinants of wage elasticity of supply of labour

Answer 22

1. The skills required
2. The time period since it is more likely to be inelastic in the s.r. since the work force cannot change their skillset quickly or suddenly train for certain jobs
3. If labour is more immobile then more inelastic

Question 23

How does skills required determine wage elasticity of supply of labour

Answer 23

1. meaning that skilled jobs are more inelastic since it is harder to attract due to barriers of entry to that occupation.
2. If it is low skilled then a high proportion of the workforce can do the job so a change in the w.r. will quickly attract more workers to that job

Question 24

How does labour motility determine wage elasticity of supply of labour

Answer 24

1. geographical since cannot move to different locations easily
2. occupational if hard to acquire the needed skills for a job

Question 25

Describe s.r supply curve

Answer 25

1. The s.r. is rising upwards since as wages increase then there is greater incentive to work
2. People are willing to work longer hours since they have the opportunity to earn significantly higher wages and increase their standard of living.
3. The opportunity cost of not working has risen so substitute in work over leisure

Question 26

Describe l.r supply curve

Answer 26

1. In the l.r. it is argued that the supply curve begins to bend backwards.
2. This is due to the income and substitution effects
3. bends backwards past the circle on the graph
4. slopes upwards due to the effect of income increases in s.r. meaning the substitution effect is becoming greater
5. after the circle the income effects becomes greater
6. this is because work is arguably an inferior good after this point so the higher the income the fewer hours workers are willing to work
7. e.g. you cannot increase your s of l from having higher incomes if you have no spare time to enjoy them, more income means more leisure demanded
8. this means workers have reached their target income and can afford to enjoy more leisure time over work, so will not increase their hours

Question 27

What are transfer earnings

Answer 27

1. the minimum payment needed to keep a FoP in its present use. It is the opportunity cost of the factor

Question 28

What is economic rent

Answer 28

1. Economic rent – difference between the wage received and the t.e. of a factor

Question 29

What happens to the wage when supply is perfectly elastic

Answer 29

1. When supply is perfectly elastic then the wage is the transfer earnings
2. because no matter the quantity bought the factor cannot earn more than the minimum needed to keep it in use

Question 30

What happens to the wage when supply is perfectly inelastic

Answer 30

1. When supply is perfectly inelastic then the wage is the economic rent
2. t.r. are 0 because the factor will be supplied whether the payment is zero or infinity
3. This will be affected by the wage in her current job and the wage in the next best alternative occupation