The Labour Market Flashcards
What type of demand is labour?
derived demand
What is meant by labour being derived demand?
it means that the demand for labour comes from the demand for what is being produced
What is the marginal productivity theory of the demand for labour?
that the demand for labour is dependent on the marginal revenue product (MRP)
How do you calculate MRP?
marginal (physical) product multiplied by marginal revenue
What is the marginal product of labour?
the additional output each unit of labour can produce
What is the marginal revenue of labour?
the additional revenue derived per extra unit of labour
How does the MRP relate to the demand curve?
the demand curve shows the MRP
Give 3 factors that affect the demand for labour?
- the wage rate
- demand for products
- productivity of labour
- substitues for labour
- number of firms in the market
State and explain 2 factors that affect the wage elasticity of demand for labour?
- 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
- time period under consideration
What are the 3 assumptions of a perfectly competitive labour market?
- no barriers to entry or exit
- perfect information on wages
- labour is homogenous
What is the difference between the labour market model we use and the real labour market?
- 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
Define the labour supply / the supply of labour
the number of hours individuals are willing and able to supply at a given wage rate
Give 3 possible causes of an outward shift in the supply of labour
- 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
Give 3 possible causes of an inward shift in the supply of labour
- 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
Give 3 factors that affect the wage elasticity of supply of labour
- 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
Describe the substitution effect in relation to labour
as the wage rate increases, the opportunity cost of not working increases - thus the worker substitutes leisure for work
Describe the income effect in relation to labour
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
When we model labour markets, what do we assume about the substitution and income effect in relation to labour?
that the substitution effect outweighs the income effect
What is a monopsony?
a sole dominant buyer of labour that has the ability to set wages
At point will a monopsony employ?
When MC(L) (marginal cost of labour) = MRP(L)
For a monopsony employer, the supply of labour equals…?
the average cost of labour
A monopsony employer can use their buying power…?
to pay a lower wage than the value of the marginal revenue product of workers employed
What negative outcome can a monopsony lead to?
the exploitation of employed labour
Give an example of a monopsony
- the UK government
- teachers and NHS (nurses)
For a monopsony, why is the MC(L) greater than the AC(L)?
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
Define a trade union
an organisation that aims to protect workers, secure jobs, improve working conditions, and try to achieve higher wages