Micro- The Labour Market

Question 1

What is the labour market

Answer 1

The labour market is a factor market. The supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers.

Labour is a derived demand. This means that the demand for labour comes from the demand for what it produces.

For example, the demand for people who make cars is derived from the demand for cars. With no demand for cars, there will be no demand for car manufacturers.

-so in simple context ‘demand for labour is a derived demand from g/s’

Question 2

What is demand related to

Answer 2

Demand is related to how productive labour is and how much the product is demanded. The elasticity of demand for labour is linked to how price elastic the demand for the product is.

• Demand curve for labour shows the different quantities of labour employers are willing to have at different wage rates in a given period of time. Firms continue to hire if it’s profitable for them to do so.

Question 3

What leads the movement along the supply and demand curve

Answer 3

The wage rate will lead to movements along the supply and demand curves for labour.
All other factors will shift the curves.

So demand is affected by The wage rate: demand curve for labour shows the inverse relationship between how
much the worker is paid (wage rate) and the number of workers employed. (Downward sloping)

When wages get higher, firms might consider switching production to capital, which might be cheaper and more productive than labour.
Also due to cost of employment-wage isn’t the only cost firms pay when hiring as there’s training cost, national insurance contributions.
So hiring less people becomes less costly.

Question 4

The causes of shift in demand curve for labour

Answer 4

Demand for products. Since the demand for labour is derived from the demand for products, the higher the demand for the products e.g. apple laptop)= the higher the demand for labour(apple employees)

Productivity of labour. The more productive workers are, the higher the demand for them.
This is because they are producing more at the same time, so firms will be willing to pay them more as they are producing more value for them.. this can be increased with education and training, and by using tech.
This increase productivity = increase MRP= shift to the right

The substitute for labour: if labour can be replaced for cheaper capital= demand for labour will fall= shift the demand curve to the left

How profitable firm is= higher the profit of the firm= more labour they can afford to employ

The number of firms in market: if there are only one buyer such as the NHS, the demand for labour is lower than if there are many employers such as in the supermarket industry
The lower demand for labour can mean wages are lower= so trade unions try to encourage higher wages

Question 5

What is the marginal productivity theory of the demand for labour

Answer 5

This theory states that the demand for labour is dependent on the marginal revenue product (MRP).

• MRP is calculated by marginal product multiplied by marginal revenue. MRP =
MP x MR.

• The marginal product of labour is the additional output each unit of labour can produce.

• The marginal revenue of labour is the additional revenue derived per extra unit of labour.

• Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour. The demand curve shows the MRP.

• In a perfect competition P=MC, so in a perfectly competitive labour market,
MRP=MC (cost of an additional worker)

• This will result in the optimum number of workers to maximise profit. The firm keeps hiring workers as long as the revenue gained by the extra workers is greater than the workers’ cost.

• If MRP is lower than MCL = the revenue gained by hiring additional workers is lower than what the workers costs. This can lead to firms increasing their profitability by hiring less workers

Question 6

Why is the MRP downward sloping

Answer 6

due to law of diminishing returns -
if you hire more workers, the extra output they generate becomes less and less with each extra person hired. Means the marginal product is also going down with more units of labour.

Question 7

What is the elasticity of demand for labour

Answer 7

depending on how elastic the other curve is.
• Elastic demand- means employers are very wage sensitive. Small changes in the market wage have a profound effect on quantity demanded
due to workers can be substituted easily
Also in the long run- you will be more sensitive to changes in the wage as there has been more time to adapt)

• Inelastic demand- means employers are not very wage sensitive. Large changes to the market wage don’t have much of an effect on labour demand.
can be because in the short run, your trying to hire someone to fill in the position right now= less sensitive to wages when hiring)

If labour demand is inelastic, because there are few or no substitutes(so somebody you hired is irreplaceable), an increase the wage rate but not affect the employment rate significantly.

Question 8

The determinants of the elasticity of demand for labour

Answer 8

The elasticity of demand for labour measures how responsive the demand for labour is when the wage rate changes. This is affected by:

How much labour costs as a proportion of total costs.
The higher the cost of labour as a proportion of total costs, the more elastic the demand. If your spending more on employing your workforce= small changes to wages will be very costly for you in total

The easier it is to substitute factors
e.g. capital, the more elastic the demand for labour, because firms can easily to switch to cheaper forms of production, such as capital. =wage sensitive

In long run firm has a decision to hire more workers or capital= if prices of capital goes down= demand of labour will decrease= shift left

The PED of the product also affects labour. The more price elastic the product, the more price elastic the demand for labour. Inelastic PED = inelastic demand of labour as consumers not very price sensitive so if price goes up = wont lose many customers, in fact your making more
revenue with increase in price= being less sensitive to wage changes to

Question 9

Definition of supply of labour

Answer 9

Is calculate by the number of workers willing and able to work at the current wage rate, multiplied by the number of hours they can work

It is influenced by the monetary and non monetary decisions

The supply curve show the relationship between wage rate and the numbers of workers willing to work in an occupation (upward sloping curve)

• The supply of labour is affected by wage rate

• When the wage rates rises= people being more rewarded of their time= can expect labour supply curve to rise - explains why curve is upward sloping
Higher wages is an incentive

Question 10

What are monetary and non monetary considerations

Answer 10

Non monetary considerations include how satisfied workers are with their jobs and their working conditions. It’s the welfare that is gained by an employee from their job, excluding the wage rate they receive e.g. employee discounts, holiday allowance, opportunity for promotion, job security

• Monetary considerations - benefits the employee gets from the wages they receive from employers e.g. cars, clothes. Some choose to sacrifice their welfare for the monetary benefits of a job even if job don’t make them happy.

Question 11

The causes of shifts in the market supply curve

Answer 11

Demographic of the population
— the more people there who are willing and able to work= the higher the supply of labour
— this changes with retirement and school leaving ages, the number of uni students and immigration= illustrated by shift to the left

Migration- migrants are usually of working age, so the supply of labour at all wage rates tend to increase.
Migration particularly affects the supply of labour at the lower wage rate as migrants usually from economies with average wages lower than UK minimum wage

Advantages of work: can influence how much people prefer to work, is linked to non monetary advantages. =people are more likely to work. If the benefits of working are high, e.g., holiday entitlements and the potential to be promoted, the supply of labour likely to increase. It also considers job satisfaction and how good the working conditions are.

Leisure time: is a substitute for work, which is why part-time work and early retirements are attractive options for some people. People have to choose whether to spend their time on work or leisure. Its influence by age, the amount of taxes paid, how many dependents the worker has and income from not working

Trade unions - These could attract workers to the labour market, as they know their employment rights will be defended. However, the limits on workers, such as limiting their ability to strike, might cause some people to withdraw from the labour market.

Taxes and benefits - If taxes are too high and benefits are too generous, people might be more inclined to withdraw from the labour market.

Training - If a lot of training or high qualifications are required for a job = the supply of labour may fall. However, if the government subsidise training = easier for workers to gain the necessary skills for a job = the supply of labour could increase

Question 12

Perfectly competitive labour market

Answer 12

— equilibrium in the labour market exist when the supply of labour I.e. the number of people offering themselves for work matches the demand in for labour I.e. the number of jobs being offered by firms

Market force will act to either
- pull wages down if there’s excess supply
- push wages up if there’s excess demand

Question 13

Characteristics in perfectly competitive labour market

Answer 13

There are many potential workers and employers - many firms out there able and willing to hire workers

Labour are homogenous- no difference in skills and qualifications

Perfect info of all market conditions for workers and firms so workers know the going wage rate, firms know the skills, qualification, productivity of all workers

Firms and workers don’t have the power to influence the wage level. Firms are price taker = they take from the market
If firm charged a higher wage rate= costing them more than MRP brought in by a worker= pointless for firms
Also no incentive to offer wage rate below the equilibrium wage set by market as workers will go to a different firm whose offering a higher wage rate

No barriers to entry/ exit= no extra skills, qualifications needed to take jobs

Question 14

Problem with perfectly competitive labour market

Answer 14

However, in the real labour market, wages are not this flexible. Keynes coined the phrase ‘sticky wages. Wages in an economy do not adjust tó changes in demand. The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead.

Different markets have different levels of demand and supply.
Factors that determine what somebody will be paid are:
-skills (more skills/qualifications= more you should be paid),
-where you live area with more economic activity e.g.London),
-trade union,
-if they are easily replaced = role is elastic, - supply low=wage rate high as it takes years of training maybe

So in the theoretical model of the labour market = there’s perfect allocation of labour resources. However in reality labour markets are more imperfectly competitive for various reasons

Question 15

What are market forces

Answer 15

— are the interaction between the demand for and supply of labour

Question 16

How does human capital of a worker lead to wage differentials

Answer 16

— human capital is the value of a worker. The value of a worker might be higher because of the MPP or the MRP
The human capital can lead to differentials as:
Skilled workers likely to have a higher MRP than unskilled workers do are worth more to an employer
Make workers are likely to have a higher MRP than female workers due to more experience in the workplace as women take time off to have families

Question 17

The determination of relative wage rates and levels of employment in imperfectly competitive labour markets

Monopsony

Answer 17

• monopsony power-. When there is only one buyer of labour in the markets. Means the firm has the ability to set wages

So they contribute to imperfection in a labour market

The monopsonist have a goal of profit maximizing. To them labour is a COP= the monopsony employer therefore wants to pay workers as little as possible= minimize cost so they make more profit

• the monopsonist is a price maker and therefore wages in this market are lower than competitive ones

In UK , there’s certain professions where workers can be employed by a monopsony employer:
-teachers and nurses both employed by state

Question 18

Market outcomes of monopsony

Answer 18

• the monopsonist still a profit maximiser

Workers are paid less than their MRP

Monopsonist reduce the quantity of workers e.g. reduce employment compared to competitive labour
- also lower wages than competitive labour market

Few workers willing to supply their labour as a he wage rate are lower
There would be more employed workers in a competitive market

Question 19

How does trade unions contribute to imperfection in a labour market

Answer 19

trade unions are pushing for higher wages above the market equilibrium, the labour market is likely to be more flexible.

Trade union has the bargaining power to ask for higher wages.

Trade unions can also increase job security.

Higher wages can be demanded by limiting the supply of labour, by closing firms, or by threatening strike action. Higher wages could cause unemployment, however.

Trade unions can counter-balance exploitative monopsony power.

Question 20

How does imperfect info contribute to imperfect labour market

Answer 20

Some qualified workers might not be aware of higher paying jobs in other industries or with other firms.

Some workers might not understand the long term benefits of investing in improving their skills and education.

This can limit the productivity and potential progression of workers. It makes the market inefficiency

Question 21

Influence of trade unions in determining wages and levels of employment
Trade union introduction

Answer 21

Is a group of workers who form an organization to protect the interest of workers .e.g. NUT( national union of teachers) and the professional footballers association(PFA)

Trade unions aim to protect workers, secure jobs, better pensions, improve working conditions and try and achieve higher wages. Also improve the standard of living in those industries

• Trade union negotiate with employers via a process called collective bargaining. The workers form a collective group= gives them more power when it comes to negotiating things like wages and breaks

• Trade union exist because markets are not competitively competitive. They exist as many large employers like gov., who pay workers below their MRP

• Trade unions was at its peak in the 1970’s but decline due to the people in the
conservative party acted to reduce the power of trade = was to make it more difficult to go on strike.
Reason for doing this is because strike caused labour force to become less flexible and strikes are often sources of supply-side shocks = can harm economic growth and deter future investment from firms

Question 22

What are trade unions aim

Answer 22

Trade unions aim to protect workers, secure jobs, better pensions, improve working conditions and try and achieve higher wages. Also improve the standard of living in those industries

Question 23

The various factors that affect the ability of trade unions to influence wages and the level of employment in different labor market

Answer 23

• if trade unions try and increase wage too much = firm may be unable to afford to employ workers = cause to close down or reduce the number of workers they employ
  = cause unemployment
  Some workers may order low paid jobs rather then being without employment

Question 24

Evaluation of trade unions

Answer 24

• trade unions can positively impact in a monopsony labour market = makes thing better and not worse
  = trade unions can fight for higher wages close to the competitive labour market and increase employment = increasing quantity
  This improved outcomes and making them more efficient

Real world evidence proved limited power of TUs.
There’s strict legislation against trade unions since. 1970s
Lists of legislation reducing how easy it is to strike such as you are only allowed to strike against your own employer= limits the power to strike
ALSO there must be a high % for trade unions to agree to strike

Restructuring of UK economy =1980 we moved away from manufacturing jobs to service sectors jobs= there’s lots of different employers= organizing trade union activity very hard as different firms are offering different conditions and wages

Also there’s a tendency of workers to be offered flexible and part time contracts e.g. 0 hour contract= workers less likely to join union

Instead of trade unions= gov intervention may be more suitable such as national minimum wage

But trade unions have a significant value

Question 25

Example of Monopsony employers

Answer 25

• agencies who employ thousands of people in hotel catering industry
• government major employers in the. Teaching profession or national health sector

Question 26

Without trade unions….

Answer 26

Workers likely to be exploited.
If a worker gets into legal trouble at work= firm may not protect the worker and instead protect itself.
A union would protect the rights of the worker and pay for their fees =those with lower income will positively affected= increase in social welfare

In today’s world there are many large monopsony employees in labour markets such as the gov.
Without TU, they will have greater power = unfair to workers = cause labour failure itself=
So trade union improves the allocation of resources in the market as it removes some of the monopsony power

Question 27

The national minimum wage

Answer 27

• is the legal minimum hourly wage set by government.
  -is age dependent
• one of the problem created by labour market is low wages. Wages important to workers as they use earned money to buy goods/services which provide them omen their needs and want

Gov can intervene in labour markets to correct this problem by setting a minimum wage law

Question 28

Why do we have minimum wage laws

Answer 28

1. To protect workers from being paid unfairly low wages= allows income to be more fairly distributed= help with income inequality
2. For standard of living to be higher.
3. Increase spending for consumers as there’s boost in earnings

Question 29

Advantages in NMW

Answer 29

Boost productivity- of the lowest income workers- higher pay could mean workers work harder to keep their jobs

The NMW will yield the positive externalities of a decent wage= increases the standard of living of the poorest-= those who get minimum wage see boos it earning reduce poverty= provide incentive for people to work =psychological benefits

Gov. might make more tax revenue due to more people earning higher wages. Use the benefits to help redistribute income= fiscal benefits

Should also reduce the number of people claiming benefits= due to incentive to work =benefits for gov= as its reduce their spending . = also boost the labour force

Can help counter some of the negative outcomes of monopsonist
- by gov imposing minimum wage= wage will be higher and quantity of workers of employment will be higher

Question 30

Disadvantage of NMW

Answer 30

— can cause unemployment - if the NMW is set above free market wage rate= can cause imbalances between demand and supply
More people will be willing to work but less firms will be looking to hire as wage have increased= excess supply of labour =cost are higher= reduce in demand
- lead to labour market failing as unemployment can occur
= gov failure as they are worsening outcomes for workers who will struggle to get a job as wage rates are higher HOWEVER minimum wage with inelastic d and s of labour= less unemployment

Also don’t reduce poverty that much as it’s unlikely to be high enough to make a big difference to standard of living. Many accuse the NMW of being too low ( lower than living wage)

—-cost of business- may lead to shutting down also may relocate where wage legislation not tight
- significant risk of I’m economy losing its competitiveness= may translate higher cost to higher prices
- already significant uncompetitive economy when come to pricing= large trade deficit= will be worse

-conclusion- NMW can tackle poverty and inequality