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Economics > THE LABOUR MARKET > Flashcards

THE LABOUR MARKET Flashcards

1
Q

What type of demand is labour?

A

derived demand

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2
Q

What is meant by labour being derived demand?

A

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

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3
Q

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

A

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

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4
Q

How do you calculate MRP?

A

marginal (physical) product multiplied by marginal revenue

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5
Q

What is the marginal product of labour?

A

the additional output each unit of labour can produce

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6
Q

What is the marginal revenue of labour?

A

the additional revenue derived per extra unit of labour

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7
Q

How does the MRP relate to the demand curve?

A

the demand curve shows the MRP

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8
Q

Give 3 factors that affect the demand for labour?

A

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

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9
Q

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

A

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

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10
Q

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

A

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

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11
Q

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

A

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

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12
Q

Define the labour supply / the supply of labour

A

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

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13
Q

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

A

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

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14
Q

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

A

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

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15
Q

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

A

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

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16
Q

Describe the substitution effect in relation to labour

A

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

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17
Q

Describe the income effect in relation to labour

A

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

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18
Q

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

A

that the substitution effect outweighs the income effect

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19
Q

What is a monopsony?

A

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

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20
Q

At point will a monopsony employ?

A

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

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21
Q

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

A

the average cost of labour

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22
Q

A monopsony employer can use their buying power…?

A

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

23
Q

What negative outcome can a monopsony lead to?

A

the exploitation of employed labour

24
Q

Give an example of a monopsony

A

the UK government
teachers and NHS (nurses)

25
Q

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

A

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

26
Q

Define a trade union

A

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

27
Q

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

A

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)

28
Q

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

A

real wage unemployment

29
Q

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

A

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

30
Q

What is economic rent?

A

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

31
Q

Define transfer earnings

A

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

32
Q

List 3 causes of occupational immobility

A

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

33
Q

List 3 causes of geographical immobility

A

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

34
Q

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

A

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

35
Q

Define wage differentials

A

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

36
Q

Give 2 reasons why wage differentials exist

A

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

37
Q

LIST 4 arguments for wage differentials

A

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

38
Q

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

A

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

39
Q

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

A

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

40
Q

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

A

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

41
Q

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

A

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

42
Q

LIST 2 arguments against (large) wage differentials

A

the trickle down effect may not occur
may increase income inequality

43
Q

Explain why the trickle down effect may not occur

A

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

44
Q

Explain why income inequality is bad for the macroeconomy

A

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)

45
Q

List and explain 2 points when evaluating wage differentials

A

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

46
Q

What is your conclusion when considering wage differnetials?

A

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

47
Q

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

A

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)

48
Q

Give 3 disadvantages of a minimum / national living wage

A

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

49
Q

Give 2 points for when evaluating a minimum wage

A

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

50
Q

Give 3 ways an employer may discriminate

A

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

51
Q

Give 2 examples of regulations/laws that tackle discrimination

A

Equal Pay Act 1970
Equality Act 2010

52
Q

Explain the labour market diagram that shows discrimination

A

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

53
Q

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

A

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

Economics (6 decks)

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