The Labour Market Flashcards
the demand for labour
derived demand aka marginal revenue productivity
marginal revenue productivity
the addition to a firms total revenue from employing an additional unit of FoP
Determinants of Labour demand
1) wage rates
2) Labour productivity
3) price of substitute factors
wage rates
- the price of labor
- increase in wage rates, contraction along demand curve for labour
labour productivity
as output per worker / hour increases = more valuable to employer - demand rises
what does a change in wage rate cause
- movement along demand curve
elasticity of demand for labor
measures the responsivness of the quantity demanded of labor following a change in the wage
LED equation:
percentage change in quantity of labor demanded / percentage change in wage rate
Determinants of LED
1) ease of substition of other FoP= more = elastic
2) time period- longer more easy to sub other fop = elastic
3) elasticity of demand for good/ service - if inelastic, labour inelastic
Determinants of supply of labour
1) wage rates- higher wages, extension in supply curve
2) size of working population
3) non- monetary factors eg job security promotion
elasticity of supply of labour
measures the responsiveness of quantity supplied of labour following a change in wage rate
LES equation
percentage change in quantity supplied of labour / percentage change in wage rate
Determinants of supply of labour
1) time- longer - workers more able to complete training = elastic
2) Length of training period - longer = inelastic
Wage differential:
differences in wages arising between individuals, occupations
Monopsony
a market with a single dominant buyer
nmw
statutory policy used to increase earnings of low paid
leads to an excess supply of labour = unemployment
monopsony labour market
marginal costs of employing workers exceeds the average cost
- to attract an additional worker firm has to pay more to this worker as well as other employees
Trade union
a group of workers that bargain collectively with employers to increase its members wages
Effect of trade unions on perfectly competitive market
increase wages
reduce employment levels - excess supply of workers
Effect of trade unions on imperfectly competitive market
- increase wages
- increase employment
Conditions necessary for wage discrimination
- firms must have some wage setting ability, therefore labour market must be imperfect
- distinct seperate labour market
- lack of legal protection/ imperfect information about the discrimination on the part of the gov
Economic Disadvantages of wage discrimination
1) may lead to some groups being underpaid , worsening relative poverty
2) inceeased gov spending on welfare
3) increased litigation as workers attempt to take legal action against employers
Marginal Physical Product
The addition to output from employing an additional unit of fop usually labour
Perfectly competitive labour market
- each unit of labour is homogenous, unable to influence the wage rate
- workers must therefore accept going wage rate
- individual firms are wage takers : if they pay a wage below equilibrium , workers will work for rival firms
- profit maximise : MRP = MC
Monopsony Labour Market
employer can use market power to reduce wage rate and level of employment below perfectly competitive labour market
marginal cost of employing workers exceeds average cost , to attract an additional worker firm has to pay more to this worker as well as other employees
Evaluation of trade unions
too simplistic, trade unions may not reduce employment
could lead to pay rises for workers in return for agreement to adopt more productive working methods, such as using computers or agreeing to retrain
- Increase worker’s MRP and demand for labour, no excess demand arising
Evaluation national minimum wage
by increasing the incomes of the low paid who tend to have to a high marginal propensity to consume, extra demand is created in the product market which increases worker’s MRP, hence demand for labour actually increases
Negative Discrimination
where employers treat a specific group of workers less favourably than others in terms of pay and employment levels
Positive Discrimination
where employers treat a specific group of workers more favourably than others in terms of pay and employment levels
Low pay can result from labour market failures such as:
- Lack of skills leading to a very elastic demand for labour, therefore a ‘higher wage would reduce demand, workers have to accept this wage or remain unemployed
- inward migration: workers from low pay countries prepared to accept extremely low wages, drives down wages for indigenous employees
