Microeconomics part 4- The Labour Market Flashcards
What is the demand for labour derived from?
The demand for the goods and services that labour produces. Therefore it will only change if AD changes
Theory of marginal productivity of labour:
The demand for workers depends on their marginal revenue product
Assumptions of the theory of marginal productivity of labour (for the supply of labour):
- All workers are homogeneous
- Firms have no buying power (can’t attract workers)
- Trade unions have no impact
- The physical productivity of each worker can be accurately measured
- Industry supply of labour is assumed to b geographically and occupationally mobile and can be hired at a constant wage rate
Why the assumptions about the supply of labour for the theory of marginal productivity of labour are not true:
- Workers are not homogeneous
- There is some trade union power
- Workers are not completely mobile
Marginal physical product (MPP) definition:
Change in total output arising from hiring one extra worker
Marginal revenue product (MRP) definition:
The value of the physical addition to output arising from hiring one extra unit of labour
What is the equation for MRP?
Marginal revenue product= marginal physical product x marginal revenue
MRP = MPP x MR
What is the demand for labour equal to ?
MRP
What shifts MRP?
- Price
- Changing demand for the product
- Changes in productivity (MPP)
- Change in price of technology/ price of substitute used to make goods
- Change in cost of national insurance
What does the supply of labour look like and equal in a perfectly competitive labour market?
Sl=MCl=ACl=W
Horizontal line
What does the demand curve for labour look like and equal?
Dl=MRP Downwards sloping (providing list of assumptions regarding the theory of marginal productivity of labour are true)
Elasticity of demand for labour definition:
The responsiveness of quantity of labour demanded to a change in the wage rate
Formula for elasticity of demand for labour:
%change Ql / % changeW
Determinants of the elasticity of demand for labour:
- Time
- Substitutes
- Elasticity of demand for the product
- Proportion of labour costs to total costs
Assumptions of demand for labour in a perfectly competitive labour market:
- Perfect knowledge
- All workers and employers are wage takers
- No barriers which prevent wages rising and falling with change in supply and demand
- Firms aim to maximise profit and workers aim to maximise wages
- Large number of small firms hiring large number of workers
What would all workers be paid in a perfectly competitive labour marker?
The same rate
Where does a firm employ, assuming it is a short run profit maximiser?
At Q where MCl = MRP
Why do wage rates differ?
- Age, gender, ethnic background, discrimination
- Education, training, experience, ability to perform tasks
- Region
- Workers don’t necessarily seek to maximise wages, relative bargaining strength
- Labour is not perfectly mobile
- Trade unions, monopsonists, government policy
- Full/part time workers
- Basic supply and demand
- Imperfect information
Imperfectly competitive labour market definition:
Either the firm in a dominant or monopoly buyer of labour, or, the firms is faced by a monopoly supplier of labour, usually a trade union
Monopsony diagram:
- Downward sloping demand curve. Dl = MRP
- Upward sloping supply curve. S l= ACl = W
- Upward sloping MC curve above supply
- Firm employs at Q where MCl = MRP. Wage is read off supply curve
- In a more competitive labour market, employment would be where supply and demand meet at a higher wage rate and number of workers
Why does the MCl curve go up?
- To attract more workers the wage rate must increase
- If a new worker is paid more, all workers must be paid the new wage rate
- This causes the MCl curve to go up more steeply that the supply curve
Why are monopsonists a market failure?
They restrict employment and wages
Why are monopsonists able to restrict employment?
They are the sole employer. If there was competition, employment and wages would be higher
Determinants of PeD for labour:
- Time (Short run- long run): Steep then flattens. Training, technology
- Substitutes: Machines. CEOs are harder to substitute. More substitutes for labour mean the PeD for labour is more elastic
- PeD for product
- Proportion of labour costs to total costs
Non-monetary factors affecting whether someone works in a particular industry:
- Flexibility
- Status
- Promotion possibility
- Working conditions
- Job satisfaction
- Holidays/ leisure time
- Location
Labour force definition:
Those willing and able to work
Trade unions definition:
An organisation of workers who join together to further the interests of their workers
Collective bargaining definition:
Process of negotiating on wages, pensions and working conditions
What trade unions do:
- Improve working conditions
- Protect against unfair dismissal
- Improve workplace training and education
- Protect pensions
- Counters monopoly pay
- Improves the real pay of its members
Factors affecting the success of trade unions:
-Economic climate
-Public support
-Union density
-Legislation
These factors determine how high the wage can be
Problems with trade unions:
- Distort labour market
- Drive wages and unemployment higher
- Prevent the introduction of new, flexible work practices
- Higher wages can lead to cost push inflation
The power of trade unions has…
decreased in recent years
What can trade unions counteract?
Some of the labour market failure arising from monopsonists
Benefits of minimum wage:
- Increase standards of living
- Incentivises people to work
- Prevents exploitation of workers
- Reduces poverty
- Reduces inequality
- Reduces the need for lower paid workers to claim benefits. The firm is helping to reduce poverty
Problems with the minimum wage:
- Disequilibrium leading to unemployment
- Cost push inflation
- Reduces our comparative advantage
- Less than the living wage
- Doesn’t necessarily reduce relative poverty- pay leap-frogging
Evaluation of minimum wage:
- Increase in NMW increases AD
- Labour is derived demand so demand for labour increases
- The extent to which there is excess supply of labour depends on how much demand for labour increases as a result of the increase in AD (labour intensive)
- Minimum wage leads to greater unemployment in industries where labour can be easily replaced with machines e.g. self check out
Main beneficiaries of the minimum wage:
- Young people
- Women
- Part-timers
- Has helped to slightly narrow the gender pay gap at the bottom of earnings
Alternatives to minimum wage:
- Welfare benefits
- Free school and NHS
- Progressive income tax system
- Tax allowance
- Pay caps
