The Labour Market

Question 1

What type of demand is labour?

Answer 1

derived demand

Question 2

What is meant by labour being derived demand?

Answer 2

it means that the demand for labour comes from the demand for what is being produced

Question 3

What is the marginal productivity theory of the demand for labour?

Answer 3

that the demand for labour is dependent on the marginal revenue product (MRP)

Question 4

How do you calculate MRP?

Answer 4

marginal (physical) product multiplied by marginal revenue

Question 5

What is the marginal product of labour?

Answer 5

the additional output each unit of labour can produce

Question 6

What is the marginal revenue of labour?

Answer 6

the additional revenue derived per extra unit of labour

Question 7

How does the MRP relate to the demand curve?

Answer 7

the demand curve shows the MRP

Question 8

Give 3 factors that affect the demand for labour?

Answer 8

• the wage rate
• demand for products
• productivity of labour
• substitues for labour
• number of firms in the market

Question 9

State and explain 2 factors that affect the wage elasticity of demand for labour?

Answer 9

• labour costs as a % of total costs. When labour costs are a high % of total costs, then the labour demand is more wage elastic
• ease and cost of factor substitution. Demand is more elastic when firms can easily substitute between labour and capital inputs
• the PED of the product. The more price elastic the product, the more price elastic the demand for labour

Question 10

What are the 3 assumptions of a perfectly competitive labour market?

Answer 10

• no barriers to entry or exit
• perfect information on wages
• labour is homogenous

Question 11

What is the difference between the labour market model we use and the real labour market?

Answer 11

• Keynes described ‘sticky wages’ - wages in an economy do not adjust quickly or easily to changes in demand
• the minimum wage makes wages sticky and means that during a recession, rather than lowering the wages of several workers, a few workers may be sacked instead

Question 12

Define the labour supply / the supply of labour

Answer 12

the number of hours individuals are willing and able to supply at a given wage rate

Question 13

Give 3 possible causes of an outward shift in the supply of labour

Answer 13

• net inward migration of suitable qualified and/or experienced workers
• lower entry barriers to this particular job
• fall in relative pay in substitute jobs
• demographic factors causing a rise in the active labour supply

Question 14

Give 3 possible causes of an inward shift in the supply of labour

Answer 14

• brain drain effects - when an economy loses skilled workers overseas
• decline in non-monetary rewards associated with the job, e.g. job dissatisfaction
• fall in relative pay in this occupation compared with other jobs
• rise in minimum qualifications needed to work in an occupation

Question 15

Give 3 factors that affect the wage elasticity of supply of labour

Answer 15

• the level of skill required
• time taken for the necessary skills to be acquired
• the extent of employment/unemployment in that sector
• the availability of suitable labour in other industries

Question 16

Describe the substitution effect in relation to labour

Answer 16

as the wage rate increases, the opportunity cost of not working increases - thus the worker substitutes leisure for work

Question 17

Describe the income effect in relation to labour

Answer 17

as wage increases, so does one’s ability to enjoy leisure. Thus workers may supply less labour at higher wage rates to enjoy more leisure time

Question 18

When we model labour markets, what do we assume about the substitution and income effect in relation to labour?

Answer 18

that the substitution effect outweighs the income effect

Question 19

What is a monopsony?

Answer 19

a sole dominant buyer of labour that has the ability to set wages

Question 20

At point will a monopsony employ?

Answer 20

When MC(L) (marginal cost of labour) = MRP(L)

Question 21

For a monopsony employer, the supply of labour equals…?

Answer 21

the average cost of labour

Question 22

A monopsony employer can use their buying power…?

Answer 22

to pay a lower wage than the value of the marginal revenue product of workers employed

Question 23

What negative outcome can a monopsony lead to?

Answer 23

the exploitation of employed labour

Question 24

Give an example of a monopsony

Answer 24

• the UK government
• teachers and NHS (nurses)

Question 25

For a monopsony, why is the MC(L) greater than the AC(L)?

Answer 25

because in order to employ another employee, the firm has to raise its wage rate, but it has to do this for all its workers

Question 26

Define a trade union

Answer 26

an organisation that aims to protect workers, secure jobs, improve working conditions, and try to achieve higher wages

Question 27

What is the effect of a trade union on a perfectly competitive labour market?

Answer 27

- the increase in wage rates from trade union influence increases unemployment in the industry - trade unions distorts market, and market loses efficiency (for perfectly competitive)

Question 28

What is the name for the type of unemployment caused by a minimum wage in a perfectly competitive labour market?

Answer 28

real wage unemployment

Question 29

What is the effect of a trade union on a monopsony employer?

Answer 29

- the increase in wage rates from trade union influence pushes wages and employment closer to a competitive equilibrium - trade union improves market efficiency

Question 30

What is economic rent?

Answer 30

- earnings over and above that necessary to keep the factor in its present use - in the case of wages, it is the difference between the market wage rate above that which an individual would have been willing to work at

Question 31

Define transfer earnings

Answer 31

- the minimum payment necessary to keep the factor in its present use - i.e. the opportunity cost of employing a factor

Question 32

List 3 causes of occupational immobility

Answer 32

- the education and training needed - the cost of training - the level of skill required

Question 33

List 3 causes of geographical immobility

Answer 33

- family and social ties - regional variations in house prices - cultural and language barriers - lack of infrastructure - cost of infrastructure

Question 34

Why does geographical and occupational immobility represent a case of imperfect labour markets?

Answer 34

- as it creates barriers to entry into a labour market - labour is not mobile - labour is not homogenous

Question 35

Define wage differentials

Answer 35

the differences that exist in wages between different groups of workers, or between workers in the same occupation

Question 36

Give 2 reasons why wage differentials exist

Answer 36

- difference in skill - difference in regions or industries - trade union influence can influence the wage rate paid to a group of workers

Question 37

LIST 4 arguments for wage differentials

Answer 37

- provides an incentive to work harder - encourages the trickle down effect - encourages enterprise - encourages work not welfare

Question 38

Explain how wage differentials provide an incentive for individuals to work harder, and how this affects the macroeconomy

Answer 38

- if wages are higher elsewhere, individuals are incentivised to gain new skills & qualifications to get the higher wages - this increases productivity, long-run growth, international competitiveness, and FDI - it's also good for the individual

Question 39

Explain how wage differentials encourage the trickle down effect, and how this affects the macroeconomy

Answer 39

- higher wage earners spend their money, setting off the multiplier effect - this leads to incomes created elsewhere and job creation

Question 40

Explain how wage differentials encourage enterprise, and how this affects the macroeconomy?

Answer 40

- wage differentials provide an incentive to take risks to raise your MRP, in order to chase the reward of high wages - this increases long-run growth, job creation, productivity, and FDI

Question 41

Explain how wage differentials encourage work and not welfare, and how this affects the macroeconomy?

Answer 41

- wage differentials incentivise individuals to not be on welfare payments, and instead to seek employment - this means gov revenue can be used elsewhere, and may reduce taxes on individuals

Question 42

LIST 2 arguments against (large) wage differentials

Answer 42

- the trickle down effect may not occur - may increase income inequality

Question 43

Explain why the trickle down effect may not occur

Answer 43

- higher earners may save a lot of their money (are likely to have a low MPC) - or they may spend it abroad

Question 44

Explain why income inequality is bad for the macroeconomy

Answer 44

- government may have to give out more unemployment related benefits and welfare spending (less spending elsewhere) - more social costs are likely to occur, e.g. high crime, divorce, etc - (bad for the individual as well)

Question 45

List and explain 2 points when evaluating wage differentials

Answer 45

- how much inequality? - compare costs and benefits, i.e. do the incentive benefits trump the social costs? Is the income inequality large or small? - SR vs LR - is it worth it in the LR? - increased entrepreneurship, productivity, innovation, etc all happen in the LR

Question 46

What is your conclusion when considering wage differnetials?

Answer 46

- wage differentials are worth it if the income inequality is relatively small - such that the incentive benefits still outweigh the social costs - moreover, these benefit of these differentials are worth it in the LR, but may not be in the SR, so it is dependent on the economic objectives of the country/government

Question 47

List and briefly explain 3 advantages of a minimum / national living wage

Answer 47

- improves labour productivity - workers are more motivated - increases incentive for people to enter labour market and accept jobs, leads to less welfare payments and benefits and more opportunity for spending elsewhere - reduces wage differentials - firms have a greater incentive to invest in labour productivity (invest in workers)

Question 48

Give 3 disadvantages of a minimum / national living wage

Answer 48

- can cause unemployment in competitive labour markets - some firms may not be able to afford the wages - could lead to higher prices as firms pass on the wage increases - there are regional differences, the north minimum wage shouldn't be the same as the south minimum wage

Question 49

Give 2 points for when evaluating a minimum wage

Answer 49

- depends on the wage elasticity of supply and demand for labour, the more inelastic, the less unemployment - depends on the labour market, benefits for a monopsony, but not for a perfectly competitive labour market

Question 50

Give 3 ways an employer may discriminate

Answer 50

- in the form of: - age, disability, gender, race, religion

Question 51

Give 2 examples of regulations/laws that tackle discrimination

Answer 51

- Equal Pay Act 1970 - Equality Act 2010

Question 52

Explain the labour market diagram that shows discrimination

Answer 52

- employers who are influenced by their own prejudices believe that the MRP of the discriminated group of workers is lower than it really is - this means they demand fewer of these workers

Question 53

List and briefly explain 3 costs of discrimination for the government and the economy

Answer 53

- gov need to increase welfare payments to support discriminated workers - discriminated workers get unfairly low wages which will reduce the government's tax revenue - if discriminated workers are overqualified, their levels of productivity can fall, which leads to a loss of international competitiveness