Section 7 - The Labour Market Flashcards
Economically active population - definition
> The economically active population is the people in an economy who are capable of, and old enough to, work (regardless of whether they’re employed or unemployed).
Labour
> The demand for labour comes from firms and the supply of labour comes from the economically active population.
Demand for labour
> The demand for labour is derived demand.
When firms demand workers it’s because they need them to make the goods that are being demanded by their customers.
So the demand for labour is driven by the demand for the goods that this labour would produce - this is derived demand.
When demand for these goods increases, so does the demand for labour.
When demand for these goods decreases, the derived demand for labour also decreases resulting in unemployment.
Firms and demand for labour
> Firms demand labour in order to make revenue from selling the goods/services that the labour produces.
The marginal productivity theory says that the demand for any factor of production depends on its marginal revenue product (MRP).
Firms will only hire workers if they add more to a firm’s revenue than they add to costs.
Marginal revenue product of labour (MRPL)
> The MRPL is the extra revenue gained by the firm from employing one more worker.
It is calculated by multiplying the MPPS by the marginal revenue (MR, price per unit).
Marginal cost of labour
> The cost of hiring one additional worker.
>In a perfectly competitive labour market the MCL is equal to the wage paid to the additional worker.
Perfectly competitive labour market and wages
> In a perfectly competitive labour market the firm can’t influence the wage - the wage on the diagram is the equilibrium wage (the wage where supply equals demand in the market).
If you compare the wage to the MRPL, this indicates the quantity of labour a firm needs to use to be most cost-effective.
When MRPL is equal to the market equilibrium wage, the firm as the optimum number of workers to maximise profits.
When MRPL is greater than the wage then firm is employing too few workers and vice versa.
MRPL and MPPL
> MRPL = MPPL x MR.
As the values on the MPPL curve are multiplied by the MR to form the MRPL curve, the curves are the same shape.
The MPPL curve is downward sloping because of the law of diminishing returns.
In other words, as each new worker is employed the amount of additional output that’s produced falls.
What is demand for labour affected by?
> Productivity
>Wage
Demand for labour and productivity
> Generally, a firm’s demand for labour will decrease if wages rise. However, this depends on whether the wage increase is accompanied by an increase in productivity.
Higher levels of productivity reduce unit labour costs.
So if wages increase but are accompanied by an equivalent increase in worker productivity, this means that the unit labour cost stays the same and demand for labour is unaffected.
Unit labour costs - definition
> Unit labour costs are the labour costs per unit of output.
Unit labour costs - info
> High unit labour costs suggest there’s low productivity and this would reduce a country’s international competitiveness.
If a firm’s unit labour costs are reduced as a result of an increase in labour productivity, it’ll become more competitive - unless the increase is due to something which will improve the labour productivity of competing firms too, such as new technology, in which case relative competitiveness won’t change.
International competition may mean the unit labour cost in a particular industry is too high and in some countries for them to be competitive and production in that industry will stop.
MRPL curve
> The MRPL curve is also the demand curve for labour.
Anything that affects the MRP (or MPP or MR) will shift the demand (MRPL) curve for labour.
Examples include:
-A change in the price of goods sold (MR) - if demand falls for a firm’s product and its price falls, this would decrease the firm’s demand for labour and the MRPL curve would shift left.
-Factors that affect labour productivity - e.g. if new technology or training increase the productivity of workers, this would increase the demand for labour and the MRPL curve would shift to the right.
-Increases to the costs of labour - the cost of labour doesn’t only include wages. It also includes costs such as training, uniforms, safety equipment, and NI contributions. If any of these labour costs increased, this would decrease the demand for labour and the MRPL curve would shift to the left.
Elasticity of demand for labour - basic
> A.k.a wage elasticity of demand for labour.
Elasticity of demand for labour measures the change in demand for labour when the wage level changes.
It’s calculated by dividing the % change in the quantity of labour demanded by the % change in the wage rate.
When demand for labour is elastic, small wage changes can cause large changes in the quantity of labour demanded.
Elasticity of demand for labour - factors
- The demand for labour is always more elastic in the long run as firms can make plans for the future to replace labour (or take on more). In the short run, changes are more difficult to make, so demand for labour is more inelastic.
- If labour can be substituted easily by capital (e.g. machines), then the demand for labour will be elastic.
- If wages are a small proportion of a firm’s total costs then the demand for labour will be more inelastic - this is because a wage increase will have little impact on total costs. If wages are a large proportion of a firm’s total costs then demand for labour will be more elastic - even small wage increases will have a large impact on total costs.
- It’s important to consider the PED of the product being made. The more price elastic the demand for the product is, the more elastic the demand for labour will be. In this situation when wages rise, firms aren’t able to pass the increase in costs (higher wages) to consumers by increasing prices. If they did their sales would decrease by a greater proportion than the increase in price - so overall their sales revenue would fall.
Labour supply - definition
> Can refer to individual or occupation.
An individual’s labour supply is the total number of hours that the person is willing to work at a given wage rate. In the short run the supply of labour depends on an individual’s decision to choose between work or leisure at a given wage rate.
For an occupation, the labour supply is the number of workers willing to work in that occupation at a given wage rate.
Labour supply - trend
> As the wage rate for an occupation rises, the quantity of labour supplied increases:
- Usually, individuals are prepared to work more hours as the wage rate increases. However, there’ll be a limit to how many hours an individual will be prepared to work, even if wages continue to rise.
- Although individual workers have a limit to the amount of labour they’re willing to supply, high wages will attract more workers to an occupation and increase the labour supply.
- This means that the supply curve for labour in an occupation slopes upwards.
Influencing the supply of labour
> The supply of labour in the long run is determined by pecuniary (monetary) and non-pecuniary (non-monetary) factors. These factors determine the welfare gained by working, which is known as the net advantage.
The net advantage of a job can be divided into 2 types of benefits - pecuniary and non-pecuniary benefits.
When a worker enjoys their job (has high job satisfaction) they’re more willing to accept a lower wage (low pecuniary benefits) because they gain high non-pecuniary benefits from their job.
People are likely to gain low non-pecuniary benefits from unpleasant of boring jobs with low job satisfaction. Everything else being equal, workers doing these jobs will want a higher wage to compensate for the low non-pecuniary benefits they receive.
Net advantage
> The welfare gained by working.
Can be divided into 2 types of benefits:
1. Pecuniary benefits: this is the welfare the worker gains from the wage they receive (or more specifically, what’s bought with it).
2. Non-pecuniary benefits: this is the welfare a worker can gain from non-wage benefits of their job. Firms offering non-pecuniary benefits can encourage workers to supply more labour at a given wage rate. So they can effectively cause the position of the labour curve to shift.
Examples of non-pecuniary benefits
>Flexible working hours >Employee discount >A generous holiday allowance >Convenience of job location >Training available >Opportunities for promotion >Job security >Perks of the job (e.g. a company car) >Job satisfaction.
Factors that can affect the supply of labour (other than wage and non-pecuniary benefits)
> Factors that affect the supply of labour include:
-the size of the working population in an area or the country as a whole. For example, if there’s an ageing population with a large proportion of people in retirement then there may be insufficient workers to meet demand for labour.
-the competitiveness of wages - workers may pick the job that will pay them the highest wage. Firms/industries that pay poor wages may struggle to attract enough labour.
-the publicising of job opportunities - it may be difficult to attract sufficient workers to a particular job/industry if jobs aren’t advertised effectively.
Net migration.
What does the quantity of labour supplied depend on?
> The elasticity of labour supply.
Elasticity of labour supply
- The main determinant of the elasticity of labour supply is the level of skills and qualifications needed for a job.
- The mobility of labour.
Elasticity of labour supply - skills and qualifications
> Low-skilled jobs:
1. In low-skilled jobs the supply of labour tends to be elastic. This means that a small rise in the wage rate causes a proportionally larger rise in the quantity of labour supplied. This is because there’s a large pool of low-skilled workers and many may be unemployed and looking for work (i.e. very willing to work).
2. It’s also important to remember that most low-skilled jobs tend to have similar wage rates. If one low-skilled job increases its wage rate, even by a small amount, low-skilled workers from other occupations will be attracted quickly.
Skilled jobs:
1. The supply curves for skilled jobs such as doctors, pilots and lawyers tend to be inelastic, particularly in the short run. This can be explained by looking at the following example.
2. If there was a shortage of doctors in the UK, a rise in the wage rate would not be enough to increase the supply in the short run as it takes several years to train to become a doctor. Increasing wage rates would have the effect of persuading more people to choose medicine at uni (in order to become doctors), but this would only have an effect in the long term.
-(net migration of doctors from other countries into the UK could increase supply in the short run).
Elasticity of labour supply - mobility of labour
> The mobility of labour is also another important factor that affects the elasticity of supply.
- if workers are occupationally mobile (they can move from one occupation to another quickly), then wage rises will cause greater increases in the supply of labour - labour supply will be more elastic.
- if workers are geographically mobile (they can move locations to where the jobs are), then wage rises will cause greater increases in the supply of labour - labour supply will also be more elastic.
Supply of labour and net migration
> Net migration of labour can increase the supply of labour.
The EU supports the free movement of labour between its member states.
Net migration of workers to a state can increase the supply of labour and help alleviate shortages of skilled workers.
It can also help with the increased demand for seasonal workers, for example in agriculture and constructions.
Wage differentials - definition
> Wage differentials are the differences in wages between different groups of workers, or between workers in the same occupation.
Wage differentials - info
> There are many reasons why these differentials exist, for example:
- workers that are highly skilled tend to be paid more, e.g. if they’re highly trained or have high-level qualifications (having lots of skills or experience to offer an employer is known as having high human capital).
- Wages vary in different regions and between industries - in some locations/industries workers will earn more.
- A trade union can influence the wage rate paid to a group of workers.
Wages - what makes them higher
> Wages will probably be higher if demand is high and inelastic, and supply is low and inelastic.
Wages tend to be low when demand is low and elastic, and supply is high and elastic.
Wage differences - lawyer
> Lawyers:
- lawyers are paid high wages.
- demand for lawyers is high because they have a high MRP (in other words they’re able to make lots of revenue 1900 for their firm.
- demand is also inelastic because lawyers aren’t easily replaced, few people have the right skills and experience.
- supply will be low, especially in the short run, as it takes a long time to train to become a lawyer, and not everyone has the abilities to become one.
Wage differences - office cleaners
> Office cleaners:
- office cleaners are paid fairly low wages.
- demand for cleaners is relatively low compared to the supply. The MRP for cleaners is low - this means demand for them is low as cleaners don’t contribute greatly to the revenue of their employer.
- supply will also be high and elastic as there are no long training periods involved. Many people can do the job as no specific skills or qualifications are needed.
What is meant by real wages
> Take inflation into account and represent the actual purchasing power of people’s wages.
What are wages made up of?
- Transfer earning = the minimum payment that’s required to keep labour in its current occupation - i.e. the minimum pay that will stop a worker from switching to their next best paid job.
>Workers are often paid in excess of their earnings - the excess above transfer earnings is called economic rent. - Economic rent.
>The more elastic the supply curve, the smaller the economic rent.
Perfectly competitive labour market
> In a perfectly competitive labour market firms are price takers.
The diagrams show the equilibrium wage rate and level of employment for a perfectly competitive labour market and an individual firm within it.
The ruling market wage is determined by the forces of demand and supply.
Individual firms have no power to influence the wage level so they’re forced to accept the ruling market wage - price takers.
The ruling market wage is also the individual firm’s labour supply curve. This curve is perfectly elastic because the wage rate is set by the market and the firm can hire as many workers as it wants at this wage rate.
Theoretical model.
Monopsony - definition
> A monopsony means there’s only one buyer in a market.
>In a monopsony labour market there’s a single employer, so workers have only one choice of employer to work for.
Monopsony labour market - info
> A monopsony labour market is an example of an imperfect market.
A monopsonist employer can pay a wage that’s less than a worker’s MRP and less than what would have been paid in a perfectly competitive labour market (wages are relatively lower than in perfect competition).
Monopsonist employers can also drive down the level of employment below the level that would exist in a perfectly competitive labour market.
Monopsony labour market - diagram explanation
> The wages and employment levels in a monopsony labour market can be shown using the diagram below:
- The MCL curve is above the ACL curve so the cost of employing one more worker is more than the average cost. MCL is above ACL because each time an extra worker is hired, not only does the firm have to pay that worker a higher wage to attract them, but the firm also has to increase existing workers’ wages to the same level.
- The ACL curve shows the number of workers that are prepared to work for the monopsonist at different wage levels - so the ACL is also the supply curve.
- Firms will hire the number of workers that maximise their profits (where MRPL = MCL).
- Unlike in a perfectly competitive market this wage is lower than the MRP of labour. The monopsonist could pay a higher wager, but it doesn’t need to as the workers will work for that wage. This means that monopsonists are price makers.
Trade union - definition
> A trade union is an organisation formed to represent the interests of a group of workers.
Examples include the NUT and PFA.
Trade unions - purpose
> One of the main purposes of a trade union is to bargain with employers and get the best outcome for its members.
E.g. they can bargain for improved pay, better working conditions and job security.
Members of a TU have increased bargaining power compared to individual workers.
When a TU negotiates with an employer this is called collective bargaining.
Productivity bargains can be made, which is where unions agree to specific changes that’ll increase productivity in return for higher wages or other benefits for its members. E.g. performance-related pay agreements may be negotiated.
TU can also have a role in making sure workers are safe at work by making sure any laws about working conditions are adhered to. E.g., they will ensure that workers have sufficient breaks and their place of work meets health and safety requirements.
TUs can also help protect their members from discrimination.
Collective bargaining
> When a TU negotiates with an employer.
Collective bargaining can be done on a national level (e.g. to secure a pay rise for all workers in a particular industry) or at plant level (e.g. negotiating improved working conditions for employees at an individual workplace).
