Microeconomics: The labour market

Question 1

What is the definition of the labour market?

Answer 1

When households and firms come together to buy and sell labour.

Question 2

What is demand for labour?

Answer 2

An inverse relationship between demand for labour and the market wage rate.
If the wage rate is high, then it is more costly for a business to hire extra employees.
When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might then create a substitution effect between the labour and capital and lead to an expansion in labour demand (firms take on more workers).
The demand for labour is a derived demand (comes from demand for goods and services).
Firms do not hire workers simply for the sake of having workers; they hire workers to produce goods and services that can then be sold in the market.

Question 3

What are the shifts in labour demand for an industry?

Answer 3

A rise/fall in consumer demand which means that a business needs to take on more workers in order for them to produce the additional output.
A change in the price of the product that labour is making. As price rises, supply rises because suppliers earn more profit so there is a greater incentive.
An increase in the productivity of labour which makes labour more cost efficient than capital (it affects product revenue). This increases demand for labour.
An employment subsidy which cuts labour costs and thus allows a business to employ more workers.
A change in the cost of capital equipment (a substitute for labour) e.g. effects of robotic technologies and AI so demand for labour decreases as there is a lower opportunity cost.

Question 4

What is marginal revenue product of labour (MRPL) and can it be calculated?

Answer 4

MRPL is the extra revenue generated when an additional worker is employed.
MRPL= marginal product of labour x marginal revenue.
Also the money value of the addition to a firm’s total output brought by employing one more worker.

Question 5

What does the theory of MRPL state?

Answer 5

Firms are assumed to be profit maximisers and they will choose a level of employment that maximises profit.
MRPL falls when diminishing returns set in.
A profit maximising firm should employ workers up to the point where the MRPL = the marginal cost of labour.
When 6 people are employed MRPL and MCL both equal $160. Employing the 7th worker would lead to a fall in profits.

Question 6

What are the limitations of the MRPL concept?

Answer 6

Measuring labour efficiency/productivity can be difficult e.g. education, and consultancy.
Collaborative work makes it difficult to establish the productivity of individual workers.
Many products result from inputs drawn from different countries each contributing to value added.
Many people set their own pay e.g. self-employed and directors which is not a reflection of productivity.

Question 7

What is the wage elasticity of labour demand?

Answer 7

Measures the responsiveness of demand for workers when there is a change in the wage rate.

Question 8

What does the wage elasticity of labour demand depend on?

Answer 8

Labour costs as a % of total costs- when labour expenses are a high % of total costs, then labour demand is more wage elastic.
Ease and cost of factor substitution- labour demand is more elastic when a firm can substitute easily and cheaply between labour and capital inputs.
Price elasticity of demand for the final product- determines whether a firm can pass on higher labour costs to consumers at higher prices. If demand is inelastic, higher costs can be passed on.
Time period- long run, easier for firms to switch factor inputs e.g. bring more capital in perhaps replacing labour.

Question 9

What is labour supply?

Answer 9

Measures the hours that people are willing and able to supply at a given wage rate.

Question 10

How is labour supply influenced in an occupation/industry?

Answer 10

Real wage rate in the industry plus extra pay- overtime payments, productivity pay.
Wages on offer in substitute occupations e.g. an increase in the earnings per plumbers and electricians may cause people to switch jobs.
Barriers to entry- artificial limits to an industry’s labour supply (minimum qualifications needed) can restrict labour supply and increase wages. e.g. doctors.
Improvements in the occupational mobility of labour (how easy is it to switch jobs) as a result of the expansion of apprenticeships and other types of work experience- increase the number who can work in each job.
Non-monetary characteristics of specific jobs such as the need to work anti-social hours, job security, working conditions, career progression, chance to live and work overseas, and occupational pension schemes.
Net inward migration expands the available labour supply in occupations such as people working in the NHS and farming. This increases the active labour supply.

Question 11

What are non-wage factors affecting labour supply?

Answer 11

Job risk and job security
Career opportunities
Anti-social hours
Generosity of occupational pensions
Strength of vocation such as in teaching, food industry
Working conditions- terms of contract
Quality of training/professional development
Opportunity for living and working overseas

Question 12

What might cause an outward shift in labour supply?

Answer 12

Increase in net migration of workers with relevant skills.
Impact of extra investment in human capital (training + education).
Decrease in relative wages in substitute jobs.
Demographic trends e.g. increase in number of school and college leavers.

Question 13

What are the causes of wage elasticity of labour supply?

Answer 13

Nature of skills + qualifications required to work in an industry (specific skills and educational requirements make supply inelastic. Lengthy and costly training periods makes labour supply inelastic. When the minimum skill factor needed is relatively low, then the pool of available labour will be large, making labour supply elastic. (If wages were to double, would the supply of labour double?)

Vocational nature of work- in jobs such as nursing, people are less sensitive to changes in wages when deciding whether to work and how many hours to work. ( not everyone is motivated by pay)

Time period- short run, labour supply tends to be inelastic. It takes time for people to respond to changes in relative wages or earnings- especially if people need to be re-trained.

When labour is geographically (get to work easily) and occupationally (skills to do other jobs) mobile, then labour supply will tend to be relatively elastic even in the short term.

Question 14

In relatively lower-skilled jobs, what is the wage elasticity of labour supply?

Answer 14

Elastic because a pool of labour is available to be employed at a constant market wage rate e.g. retail.

Question 15

In jobs where specific skills and training are required, what is the wage elasticity of supply?

Answer 15

Inelastic e.g. teachers, doctors, nurses

Question 16

What are the causes of occupational immobility? (barriers to people being able to switch between one job and another)

Answer 16

Skill gaps
Experience gaps
Education gaps
Low confidence

Question 17

What are the causes of geographical mobility? (stops people to move to take a job)

Answer 17

Family ties
High cost of poverty e.g. rent is too high
Migration controls
Language barriers
Access to good schools
High cost of commuting

Question 18

What are examples of net inflows of workers from overseas?

Answer 18

Agriculture
Hospitality and tourism
Health and social care
Construction
Transport and logistics
Labour market dynamics can change over time due to factors like changes in immigration policies and global events e.g. Brexit, pandemic.

Question 19

What is the equilibrium wage?

Answer 19

The wage rate at which the quantity at which the quantity of labour supplied by workers matches the quantity of labour demanded by employers.
LS=LD

Question 20

What are the conditions for a competitive labour market?

Answer 20

Many buyers (employers) and sellers (workers)
Perfect information
Homogenous labour- workers skills and abilities are similar
Mobility of labour
No monopsony power

Question 21

What are the main causes of wage differentials?

Answer 21

Compensating wage differentials- a reward for risk-taking, working in poor conditions, and during unsocial hours.
Reward for human capital- differentials compensate workers (opportunity and direct) costs of human capital (skills) acquisition. (compensate people for their hard work)
Differences in labour productivity and revenue creation.
Trade unions might use their collective bargaining power to achieve a mark-up on wages compared to non-union members.
Artificial barriers to labour supply e.g. professional exams, migration controls.
Employer discrimination

Question 22

Why does the financial sector earn the most?

Answer 22

Bring a lot of revenue to the company.
Work anti-social hours

Question 23

Why does the arts sector earn the least in society?

Answer 23

Don’t often need formal qualifications.
Enjoy their job so they are not pushing for higher wages.
Vocational nature of work

Question 24

What are the highest paid jobs in the UK?

Answer 24

CEOs, senior officials
Marketing sales and advertising directors

Question 25

What are the lowest paid jobs in the UK?

Answer 25

Coffee shop workers, bar staff, hairdressers, barbers

Question 26

What is a monopsony employer?

Answer 26

A situation where there is only one major buyer in a labour market.
In such a scenario, the monopsonist has significant market power and can pay lower wages than would prevail in a competitive labour market.
This is because workers have limited alternatives and are essentially forced to accept the wages offered by the monopsonist . The employer can exercise its market power to set wages below the level that would exist in a more competitive market.

Question 27

How is monopsony power shown in supply and demand analysis?

Answer 27

Initially, the competitive labour market is in equilibrium at E1 employment and w1 wages. All workers who want a job at that wage rate have one, and the firm has no vacancies.
However, profit maximising employment level is where MCL=MRPL where E2 number of people employed, which is less than the free market equilibrium.
Their marginal revenue product is valued at w2, but the monopsonist does not need to pay them w2.
At this lower unemployment level, the labour supply curve shows that E2 workers will actually be willing and able to work at a wage rate of w3.
Due to the lack of alternative employers, the monopsony power of the employer allows them to pay a wage rate of w3.

Question 28

How can a monopsony employer use their buying power?

Answer 28

To pay a wage lower than the value of the marginal revenue product of workers employed at E2.
Monopsony power can lead to exploitation of employed workers. e.g. NHS, Amazon

Question 29

How can monopsony power lead to labour market failure?

Answer 29

Lower wages: the employers can set wages below the competitive equilibrium level because they are the primary buyers of labour. This can result in lower wages for workers, which can lead to underpayment and a reduced standard of living for employees.
Reduced employment: monopsonistic employers may also choose to hire fewer workers than they would in a competitive labour market. This can result in higher levels of unemployment (E1 to E2) or underemployment.
Diminished job quality: suboptimal working conditions, fewer benefits, and less job security. This can negatively impact the well-being and job satisfaction of workers.
Economic inequality: exacerbate income inequality as it concentrates bargaining power with employers. This leads to an increase in working poverty and rising welfare claims to the state. (all power with employers)

Question 30

What are interventions that might offset or reduce the monopsony power of employers?

Answer 30

Minimum wage laws- workers are paid fairly
Regulations and laws (trade union representation, employment protection laws)

Question 31

What is discrimination in the labour market?

Answer 31

Occurs when employers make decisions on wages and employment based on prejudices, such as race, gender, religion, disability, social class, accent, age, height, schooling, sexual preference, weight.
It can lead to big variations in wages for the same job and different employment rates within a population.

Question 32

How can discrimination lead to labour market failure?

Answer 32

Often the result of deep-rooted information failures and prejudice.
Causes resource misallocation.
Cause an increase in inequality which has social costs (human talent being wasted).
Leads to scarce human resources being under-utilised, slower trend growth rates. (loss of productivity if discriminating- not good for the business- less growth)
Lack of diversity in the workplace can hamper innovation and productivity. (same limited range of ideas)

Question 33

What are policies to tackle labour market discrimination?

Answer 33

Anti-discrimination laws and regulations. (equality act)
Affirmative action/diversity initiatives- increasing the representation of underrepresented groups in the workforce.
Access to quality education and training. (Universities offer contextual offers for poorer students).

Question 34

What is the equality act 2010 and the drawbacks of it?

Answer 34

A form of legalisation which protects employees-reduces discrimination.
However only cover 12 characteristics.

Question 35

What are the factors that might explain the gender pay gap in the UK labour market?

Answer 35

Discrimination- women are seen as less capable.
MRPL e.g. people watch more men sport.
Type of industry- most women jobs are care so more attracted to caring jobs.
Maternity leave which is an inconvenience for firms because it is costly to train someone.
Men have more work experience than women due to children.
Evaluation- not very women wants children/has children.
Shared parental leave (not many families do this).

Question 36

What is minimum wage?

Answer 36

A legally-enforced pay floor in the labour market.

Question 37

What are the minimum wages for different age groups?

Answer 37

21+= £11.44
18-20= £8.60
16-17= £6.40

Question 38

What is the London living wage?

Answer 38

To account the higher cost of living. It is not legal but recommended if a business wants to show it’s ethical.

Question 39

What is the minimum wage diagram

Answer 39

W1 is the free-market equilibrium wage without any government intervention.
To be effective, a minimum wage must be set above the free market equilibrium because it won’t make a difference if it’s below.
Demand for labour will contract to E2 (ceteris paribus) because the firm cannot afford to hire more workers.
The supply of labour will expand as more people are attracted to work at the higher legal pay floor. (greater incentive to go to work)
This can lead to an excess supply of labour (unemployment) shown by the distance E2-E3.

Question 40

What happens if demand for labour is elastic?

Answer 40

Employment will fall because workers are easily replaced by capital.

Question 41

What are the arguments in support of a minimum wage?

Answer 41

Poverty reduction- lifts workers and their families out of relative poverty because people have more disposable income to spend more on goods and services, leading to a better quality of life.
Reduces inequality by bringing up the pay from those who are at the bottom. This reduces the gap between the highest-paid and the lowest-paid workers.
Before the minimum wage, taxpayers are picking up the bill, which means the government is topping up their income via universal credit, an opportunity cost. Instead, the responsibility of paying workers should fall onto the firms because when firms do not pay the workers enough taxpayers pick up the bill.
Reducing reliance on state welfare.
Efficiency wages- offering a better pay rate can improve morale and increase labour productivity.
A more motivated workforce who are earning more so the incentive to work increases leading to a better quality of life.
Economic growth increases because more people are earning more so they spend more which increases consumption which is a component of AD.

Question 42

What are living conditions before the minimum wage?

Answer 42

People are having to choose between eating and heating.
Use of food banks is increasing (3 million in 2022-2023)
Housing costs have increased as inflation was at 10%.

Question 43

What are the disadvantages of a living minimum wage?

Answer 43

Job losses- increasing the minimum wage can lead to job losses. Employers, especially small businesses with tight profit margins, may respond to higher labour costs by reducing their workforce, cutting hours, or automating tasks due to supply increasing and demand decreasing. (more likely if the demand for labour is elastic- easily replaced e.g. warehouse workers)
Higher prices to maintain prices- when businesses face increased labour costs due to a higher minimum wage, they may pass those costs on to consumers by raising prices for goods and services. This can lead to rising cost-push inflation and a full in real incomes. ( if a firm sells elastic products- don’t raise prices, it depends on the type of market e.g. monopoly can raise prices)
Small business struggles- challenges in adjusting to higher labour costs so they have limited resources and may find it difficult to absorb the increased expenses associated with a higher minimum wage. (makes it difficult for firms to start and innovate, not a priority)
Fall in investment- if a minimum wage causes higher costs and lower profits, this might harm planned business investment. (reduces dynamic efficiency)

Question 44

What are the evaluation points of the minimum wage?

Answer 44

Depends on whether there is inflation (if the minimum wage is not index-linked, it will have limited to no impact. As it’s not linked to inflation, it doesn’t reduce poverty)
Depends on the cost of living where you live (London is more expensive whereas outside of London is cheaper. However, this could be overcome through the London living wage which takes the higher cost of living into account. But the London living wage is not a legal requirement)
Higher income workers have a higher propensity to save whereas lower income workers have a higher propensity to spend.
It depends on the level of the minimum wage.
However people are more likely to spend this increased income on imports which is a leakage.
It depends whether the minimum wage is set above the free market equilibrium.

Question 45

What is a trade union?

Answer 45

A group of workers usually from the same industry who work together.
Strength in numbers

Question 46

What are examples of trade unions?

Answer 46

RMT (railways), RCM (nurses), NFU (teachers)

Question 47

How much does the government spend on topping up poverty wages?

Answer 47

£3.6 billion

Question 48

What are the key roles of trade unions?

Answer 48

Collective bargaining power: unions negotiate with employers to secure better wages and benefits for their members.
They advocate for improved working conditions, such as safer workplaces.
Unions negotiate employment contracts that outline the terms and conditions of employment for their members.
Worker representation: grievance handling- they help workers address grievances (mistreated in the workplace), resolve workplace conflicts, and enforce employment rights.
Legal support- unions provide legal assistance to members facing discrimination, wrongful termination, or other workplace issues.

Question 49

Why are trade union memberships falling in the UK?

Answer 49

Economic changes- the shift from manufacturing to a service-based economy in the UK has led to a decline in traditionally unionised industries.
Legal changes- UK has implemented various labour laws and reforms over the years that have made it more difficult for unions to recruit and maintain members e.g. laws that require a minimum level of support before strike action can occur and restrictions on picketing have limited the effectiveness of union activities. (Margret Thatcher 1980s- more hurdles to go on strike)
Changing workforce demographics- composition of the workforce has changed, with more part-time, temporary, and gig economy jobs. These types of jobs often have less job security and fewer benefits, making it challenging for unions to organise and retain members.

Question 50

Which countries have the highest unionisation?

Answer 50

Iceland, Denmark, Cuba= left wing

Question 51

What are the factors behind the rise of the gig economy?

Answer 51

Technological advancements- made it easier for workers to find gig work through online platforms and apps e.g. Uber.
Cost reduction for employers- often benefit from cost savings. They can avoid expenses associated with hiring full-time employees, such as providing benefits, office space, and training.
Desire for work-life balance- greater control over work schedules. (flexibility)
Entrepreneurial opportunities- workers can become self-employed and offer their services directly to clients or customers.

Question 52

What are the advantages for workers of zero-hour contracts?

Answer 52

Benefit students- more free time (flexibility)
People who don’t need a stable income e.g. 2nd job.

Question 53

What are the disadvantages for workers of zero-hour contracts?

Answer 53

Low job security- struggle to get loans
For those who require a stable income, lot of responsibility.
Lack of predictability

Question 54

What are the advantages for firms of zero-hour contracts?

Answer 54

Saves costs- don’t have to pay workers who don’t do any work.

Question 55

What are the disadvantages for firms of zero-hour contracts?

Answer 55

The skills of workers may not be as good as they have not been there for a long time so quality suffers.
Not being able to attract skilled workers.
Could be understaffed e.g. Pub on world cup.

Question 56

What are the factors that affect trade union strength?

Answer 56

If there is inelastic demand e.g. doctors, teachers.
Number of members (strength in numbers).
If the supply of labour is inelastic e.g. doctors aren’t easily replaced.

Question 57

How do trade unions achieve their aims?

Answer 57

Go on strike- withhold their labour so the firm is not producing enough output. Decreases revenue so increases pay. (private businesses)
For public services with inelastic demand e.g. doctors cancel planned surgeries causing quality of life to suffer so the government increases their pay because it is an inconvenience for people to have their screening postponed.