Micro part 17- Labour markets (2), Trade unions, min/max wage

Question 1

Describe wage determination in a competitive labour market

Answer 1

1. Determined where labour supply meets labour demand, determining equilibrium wage
2. Demand curve for labour = MRP = MPP x MR
3. We is determined by the forces of demand and supply
4. Individual firms have no power to influence wages so accept market wage rate. This means firms are wage takers
5. The market wage is the individual’s labour supply curve.
6. It is perfectly elastic since the w.r. is set by the market and firms can hire as many workers as they want at this w.r.

Question 2

To maximise profits firms should employ workers when..

Answer 2

1. To maximise profits firms should employ workers at a quantity where MRP = MC
2. MR > MC then employ more
3. MR < MC then employ less

Question 3

What is Marginal revenue product theory

Answer 3

1. the demand for any FoP depends on its MRP. 2. Workers are paid the value of their MRP to the firm

Question 4

What is MRP theory based on

Answer 4

1. Based on a perfectly competitive labour market where:
2. workers are homogenous in terms of ability/productivity and this can be easily measured
3. Firms are wage takers
4. no trade unions
5. industry supply curve is perfectly elastic
6. Workers employed to where MRP = MC

Question 5

What are the limitations of MRP theory

Answer 5

1. hard to measure productivity since no price for some output in some markets e.g. education or teamwork making it hard to measure individual productivity
2. difficult for the self-employed who don’t pay themselves based on MRP, engaging in entrepreneurship and labour
3. presence of imperfect labour markets e.g. trade unions

Question 6

What is a Monopsony

Answer 6

1. one buyer in an industry so are wage setters

Question 7

What can a Monopsonist employer do

Answer 7

1. Can exploit monopoly power so expected to drive down wages (not always e.g. education)
2. The MC of employing an extra worker is greater than the AC because the firm has to raise wages to employ an extra worker.
3. This means they then have to raise the wages for all existing workers as well
4. The firm profit maximises where MC = MRP so employ Q2 workers and gives wages at W2.
5. This is lower than in competition where wages would be W2

Question 8

What is a trade union

Answer 8

1. an organisation that represents the interest of a group of workers
2. If the t.u. can restrict the supply of labour then can act like a monopolist

Question 9

What is a bilateral monopoly

Answer 9

1. Bilateral monopoly – one buyer and one seller, both monopsony and monopoly in same market
2. Buyer will typically try to reduce w.r. and employment at W1

Question 10

What are wage differentials

Answer 10

1. They occur because of differences in the demand, supply, WES and WED for labour
2. This is due to workers not being homogenous, they all have varying amounts of human capital and levels of productivity
3. If supply is low/demand is high or WED/WES is low then wages will be high, and vice versa

Question 11

What are reasons for wage differentials

Answer 11

1. Can be for non-economic reasons e.g. discrimination based on gender
2. Can be to reflect non-wage aspects of employment e.g. level of danger a worker is in by doing that job
3. Managers are expected to earn more since they have a higher MRP than a cleaner and also less people qualified for the job so supply is low
4. but may earn more than they actually contribute which can be due to the divorce of ownership from control meaning managers will boost their salaries more than needed
5. Not all workers aim to maximise their wages
6. Labour is immobile

Question 12

Why can the immobility of labour lead to wage differentials

Answer 12

1. even if there is strong demand for demand in one part of the country then workers far away may not be able to respond to this due to geographical immobility because of a lack of perfect information.
2. Can be occupationally immobile if there are job absences for one occupation but few people possess the skills needed so there is excess demand.
3. This is especially true when WES is inelastic as it may take years of training to become qualified

Question 13

Give an example of when a worker may not aim to maximise their wages

Answer 13

1. can base individual supply depending on things like chances for progression in a company so may not always go to a job where the current w.r. is higher

Question 14

Define Labour force

Answer 14

1. those in work or actively seeking work a.k.a. economically active

Question 15

Define Working population

Answer 15

1. those between ages 16-65

Question 16

Define Unemployed

Answer 16

1. those in the labour force that are actively seeking a job at the current wage rate but cannot find one

Question 17

Define Dependency ratio

Answer 17

1. The number of dependant people (not working) / The number of people in labour force

Question 18

Define Participation rate

Answer 18

1. number of people who are employed or looking for work, economically active

Question 19

Define Replacement ratio

Answer 19

1. the ratio of benefits compared to the wage that an unemployed worker could receive if they worked

Question 20

Define minimum wage

Answer 20

1. a legal minimum wage rate per hour which employers must pay their workers. Must be set above equilibrium wage to make a difference

Question 21

What does increase in unemployment depend on

Answer 21

1. The increase in unemployment (due to excess supply) will depend on the elasticity
2. e.g. more inelastic demand for labour will mean there is little increase in unemployment, and depend on how much above the equilibrium wage rate it is set
3. these unemployed are likely to be the least employable people i.e. those with the lowest MRP

Question 22

What are the advantages of minimum wage

Answer 22

1. If workers are costing firms more to hire then they are more likely to trade them well
2. higher wages can increase the incentive to work harder due to higher morale.
3. reduces wage discrimination
4. creates a greater incentive to work.

Question 23

What does increased incentive to work harder result in

Answer 23

1. This can increase productivity and raise the MRP for workers, which can increase demand for labour and reduce any potential unemployment created by the minimum wage

Question 24

How does minimum wage create a greater incentive to work

Answer 24

1. This is because it increases the opportunity cost of not working, so are more likely to come off benefits (depends on level of benefits).
2. It reduces the amount of the working population in the unemployment trap.
3. This increases supply of labour

Question 25

What are the disadvantages of minimum wage

Answer 25

1 . can make it harder for young people to get a job since if firms are paying more for their labour then they expect higher skills.

2. can result in unemployment
3. if they don’t significantly reduce the amount of workers then this will increase their costs.
4. This can lead to cost-push inflation and reduced international competitiveness

Question 26

Why can minimum wage make it harder for young people to get a job

Answer 26

1. Young people tend to have less experience so have a lower human capital, meaning their MRP is lower.
2. This can increase intergenerational inequality and reduce the skills able to be gained by young people.
3. This can mean there is a generation of lower MRP due to being out of work longer from low skilled jobs.
4. This can reduce the productive potential of the economy in the future

Question 27

What is maximum wage

Answer 27

1. acts as a wage ceiling, limiting how much income someone can earn.
2. Needs to be set below equilibrium wage to be effective
3. Can be used to redistribute income and increase equality
4. Amount of excess demand created is dependant on elasticity of demand for labour since if its inelastic then there will be little excess demand

Question 28

What are advantages of a maximum wage

Answer 28

1. can control inflation.
2. can increase equality, especially between chief executive wage and average pay.
3. allows shareholders to limit wages.

Question 29

How can a maximum wage control inflation

Answer 29

1. This occurs when productivity increases at a lower rate than wages.
2. This means wages can be limited and therefore so will consumer demand so no d-p inflation.
3. It can also mean there isn’t a high rise in costs for a firm and reduce chance of a wage-price spiral, reducing c-p inflation

Question 30

How can a maximum wage increase equality

Answer 30

1. This is because chief executives’ wages have been rising at a greater rate than the average pay, so inequality increases.
2. This maximum wage means wages for some workers can only increase by so much, and allows relative increases of average pay to increase, so inequality is reduced

Question 31

How does a maximum wage allow shareholders to limit wages

Answer 31

1. Wages may have risen lots due to the divorce of ownership from control creating x-inefficiencies.
2. This brings the wage of executives down to the MRP and reduce market failure resulting from asymmetric info

Question 32

What are the disadvantages of a maximum wage

Answer 32

1. can cause many workers to leave the country if other places don’t have a maximum wage and they can earn more elsewhere.
2. disincentivise working hard due to reduced reward for labour
3. ineffective as workers can still be rewarded in other ways which will increase inequality e.g. non-pecuniary benefits

Question 33

What will the results of workers leaving the country due to a maximum wage be

Answer 33

1. This will typically be the most skilled/lowest supply workers in an economy since the reward for working their high stress/long training requirement jobs is reduced.
2. This will reduce the productive capacity of the economy and reduce supply of labour for high skilled jobs