The labour market

Question 1

Define labour

Answer 1

a factor of production compromising the effort of workers to create goods and services

Question 2

What are sub markets

Answer 2

part of the market with unique characteristics

Question 3

What is derived demand

Answer 3

where the demand for a factor of production or good derives not from the factor or good itself, but from the goods or services that it provides

Question 4

What is the marginal physical product of labour (MPPL)

Answer 4

the additional quantity of output made by an additional unit of labour input

Question 5

What is the marginal revenue of product labour

Answer 5

The additional revenue received by a firm as it increases output by using an additional unit of labour input. (MPPL X MR)

Question 6

What is the marginal revenue product theory

Answer 6

the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour.

Question 7

What is labour productivity

Answer 7

a measure of output per hour worked

Question 8

What is unit labour cost

Answer 8

the average cost of labour per unit of output

Question 9

What factor causes a movement for the demand of labour

Answer 9

wage rate

Question 10

What factors cause a shift in the demand for labour

Answer 10

demand for product, productivity of workers and as a substitute for capital, price of the good, cost of capital, employment subsidy

Question 11

What factors effect wage elasticity of demand

Answer 11

time (long run more elastic), substitutability, proportion of total costs (small proportion more inelastic), PED of product (more elastic the good the more elastic for labour)

Question 12

How does a profit maximising firm choose labour

Answer 12

MCL = MRPL

Question 13

Why is the demand curve for labour downward sloping

Answer 13

diminishing marginal returns

Question 14

What does the position of the firms labour demand curve depend on

Answer 14

technology and efficiency

Question 15

Supply of labour in a perfectly competitive market

Answer 15

firm cannot influence market wage and can get as much labour as required so MCL is horizontal

Question 16

WED formula

Answer 16

% change quantity of labour demand / % change in wages

Question 17

What are the main influences of labour productivity

Answer 17

skills and training of workforce, availability of capital and technology, organisation of production process

Question 18

What are non pecuniary benefits

Answer 18

benefits offered to workers by firms that are not financial in nature

Question 19

What is the income effect

Answer 19

the change in demand for a good or service caused by a change in a consumer’s purchasing power

Question 20

What is the substitution effect

Answer 20

as price rises - or income decreases - consumers will replace more expensive items with cheaper alternatives

Question 21

What are transfer earnings

Answer 21

the minimum payment required to keep a factor of production in its present use

Question 22

What is economic rent

Answer 22

a payment received by a factor of production over and above what would be needed to keep it in its present use

Question 23

What does an increase in wage rate do to workers

Answer 23

encourage workers to substitute work for leisure at higher income levels ‘9substitution effect), and workers will demand more leisure at higher income levels(income effect). Causes supply curve to become backwards bending and is more elastic in long run.

Question 24

What factors cause a shift in the supply of labour

Answer 24

competitiveness of the supply of wage sin other industries, skills needed and difficulty acquiring them, number of people with qualifications, non-pecuniary benefits

Question 25

What factors effect wage elasticity of supply

Answer 25

skill level required to do the job, number of unemployed workers, mobility of labour (occupational/geographical mobility), time

Question 26

Factors effecting economic rent and transfer earnings

Answer 26

wage rate, non-monetary factors, net migration, elasticity of supply of labour

Question 27

What are wage differentials

Answer 27

difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or locations

Question 28

What is a monopsony

Answer 28

market in which there is a single buyer of a good, service or factor of production

Question 29

What is a trade union

Answer 29

organisation of workers that negotiate with employers on behalf of its members

Question 30

What is a bilateral monopoly

Answer 30

A situation in which a monopoly seller of labour (trade union) faces a monopsony buyer of labour (employer)

Question 31

Why do wage differentials exist

Answer 31

compensation (risk taking/unsocial hours), human capital (training), different skill level, difference in productivity, trade unions, discrimination

Question 32

What do trade unions negotiate

Answer 32

pay, working conditions and job security

Question 33

How do trade unions restrict supply of labour

Answer 33

with barriers to entry which reduces firms ability to adapt to changing market conditions and can lead to wages above market equilibrium

Question 34

Analysis of trade union diagram (elastic wed)

Answer 34

negotiate higher pay for workers with firms WTU such that firms are unable to hire workers below this rate. Leads to a reduction in demand for labour from L0 to LD. Wages increase from W0 to WTU. Leads more workers to enter the market and supply of labour increases from L0 to LS. Disequilibrium of LS-LD leads to a surplus of labour which is unemployment and allocatively inefficient

Question 35

Analysis of trade union diagram (inelastic wed)

Answer 35

trade union cuases unemployment of L0-D1 for incumbent workers, which is smaller than L0-D0. The unemployment for new workers attracted by higher wages to enter the market LS to L0 is unchanged. Therefore overall surplus of labour or unemployment is smaller LS-LD1 than LS-L0

Question 36

How has the government affected trade unions

Answer 36

reduced their power to increase labour flexibility by reducing their ability to strike leading to a reduction in their collective bargaining power leading to wages being less ‘sticky downwards’. Because workers are more likely to receive a market equilibrium pay award, and less likely to be unemployed due to disequilibrium in the wage level, the labour market is more flexible

Question 37

What does trade union activity depend on

Answer 37

militancy of trade union(willingness to with hold labour), government policies to increase labour flexibility

Question 38

what does a monopsony employer in a perfectly competitive market do to labour

Answer 38

receive lower wages and fewer are employed

Question 39

Analysis of monopsony employer diagram

Answer 39

we assume firms in labour market face perfect competition so must accept market wage. the monopsony views the supply curve as the AC of labour as it shows the wage rate needed to attract labour. MC labour is the cost of hiring an extra worker and raising wages for all other workers to that level. To profit maximise the monopsonist hires labour to MCL=MRPL (L0) and pays W0 based on supply curve S0. Firms are productively inefficient so employ less and pay less than MC so are allocatively inefficient

Question 40

How does the monopsony employer’s objective effect them

Answer 40

if profit max is the objective then L0 will be targeted level of employment but if objective is sales maximisation then firm employ more than L0.

Question 41

How does the monopsony power depend on elasticity

Answer 41

If WED is inelastic, the extent to which wages are lower, and employment is lower, are smaller. If WES is relatively inelastic the monopsonist has greater power to offer lower wages compared to a more competitive equilibrium wage rate

Question 42

Analysis for bilateral monopoly

Answer 42

monopoly trade union faces monopsony. If unhindered by the trade union, the monopsony firm offers wage Wmonops and uses Lmonops labour assuming a profit maximising objective. But the trade union is likely to negotiate a higher wage rate above Wmonops, leading to the firm taking on more labour above Lmonops as described by the supply curve S0=ACL. The equilibrium moves towards the perfectly competitive level at wage WPC and quantity LPC, though we do not know the extent to which the equilibrium moves and where the final resting place lies - only that it is between L monops and LPC, and Wmonops and Wpc

Question 43

How does the relative strength of the 2 groups effect a bilateral monopoly

Answer 43

the more financially stable the monopsonist, the greater their bargaining power as the firm could ‘weather’ strikes. The more willing to strike (militant) the trade union, the greater their bargaining power

Question 44

How does elasticity of demand effect a bilateral monopoly

Answer 44

WED is more elastic when a firm can easily substitute labour for capital, so the trade union would be less able to negotiate higher wages. If PED is inelastic, higher costs can be passed on and the trade union can negotiate higher wages

Question 45

What is the impact of a power imbalance in a bilateral monopoly

Answer 45

trade unions ability to strike has been significantly reduced. This favors the firms, the monopsonist, over the trade unions in their negotiations. In response to this power imbalance, rather than negotiate for higher wages, a trade union may therefore seek to improve working conditions for their members

Question 46

Define occupational mobility

Answer 46

The ability of workers to move between jobs, which depends on the extent to which their skills are transferable and the cost of retraining

Question 47

Define geographic mobility

Answer 47

The ability of workers to move between locations for work depends on their willingness to uproot family and education ties, and their ability to pay to move

Question 48

Analysis of occupational mobility

Answer 48

Apprenticeships act as paid retraining, reducing opportunity cost of workers moving from one industry to another. Workers receive pay while training instead of paying to retrain, making it more affordable for workers that have families to support and mortgages to pay. The apprenticeships levy to tries to overcome the free rider problem (firms recruiting apprenticeships trained by another firm); when large employers take on an apprentice they must also pay a levy which, when they later employ that apprentice, only they can reclaim (along with an extra subsidy).

Question 49

Analysis of geographical mobility

Answer 49

Differences in house prices may make it unaffordable for workers to move between regions of the UK, especially with the high rate of owner-occupied homes(as opposed to rented homes), and long waiting lists for council houses.

Question 50

Regional policy analysis

Answer 50

Differences in average incomes can be mitigated with government intervention by locating government departments in regions to create jobs, or developing powers and money to regions for the creation of transport infrastructure.

Question 51

Technology analysis

Answer 51

Investment in new technology increases productivity and marginal revenue product of workers if labor markets are sufficiently flexible, and can be retrained fast enough, and at large enough scale, to take advantage of new opportunities. Economies of scale can be gained if workers specialize.

Question 52

Contracts and legislation anlaysis

Answer 52

Firms must give notice before firing workers and pay redundancy, increasing the potential costs of hiring new workers, reducing employment in the short run. Zero hour contracts mean workers have no guaranteed working hours, so actual hours worked vary from week to week. As redundancy pay is based on contractual hours, this reduces the cost of both hiring, and firing, workers.

Question 53

Evaluating occupational mobility - depends on cause of change

Answer 53

The impact of changes in occupational mobility depends on the cause of changes; if improved education leads to workers with more transferable skills, the productivity of the workforce may increase more than if firms have to retrain workers themselves.

Question 54

Evaluating occupational mobility - depends on level of apprenticeship pay

Answer 54

The minimum level of pay for an apprentice is £4.81 per hour, which is below the National Minimum Wage and far below the National Living wage of £9.90. So, the extent to which apprenticeships reduce labour immobility depends on how large pay a cut workers are willing to take, as older workers are both the most likely to want to retrain and the highest paid.

Question 55

Evaluating geographical immobility

Answer 55

Depends on the cause of change - the impact of changes in geographical mobility depends on the cause of the changes; if domestic workers are less able to afford the move location due to uneven increases in house prices, then firms may have to offer increased remuneration to attract workers, whereas more days off would be more effective if the immobility were caused by unwillingness to leave friends and family.

Question 56

Evaluation regional policy

Answer 56

Depends on size of intervention - a large department or a large amount of devolved funding will have a larger impact, but recent policies have been limited in scope compared to the differences in incomes.

Question 57

Technology - evaluation

Answer 57

Depends on safety nets - the willingness of workers to retrain, and move from one declining industry to another growing industry depends on whether they are sufficiently incentivized. A disproportionate number of former coal miners gained disability incomes instead of moving into alternative professions.

Question 58

Contracts and legislation evaluation

Answer 58

Depends on the prevalence of zero hour contracts - zero hour contracts increase the flexibility of the labour market, and allow some workers, such as parents with childcare commitments, to join the workforce. However, workers may only be able to find part time work when they have a preference for full time work.