The Labour Market

Question 1

Demand for Labour

Answer 1

The demand for labour is a derived demand (a demand resulting from demand for something else) from demand for goods and services that labour can produce. Labour is only employed if they provide a net benefit to the firm.

Question 2

Marginal productivity of labour

Answer 2

MRP = the additional revenue from hiring one more worker.
Firms should only employ workers that increase revenue by a greater amount than their cost to the firm.
According to marginal productivity theory, MRP of labour determines the demand for labour.

Question 3

MRP Labour

Answer 3

MRP= MPP x MR

Question 4

Elasticity of demand for labour

Answer 4

A measure of how much demand for labour changes as wages change.
= % change in the quantity of labour demanded / % change in the wage rate.
More elastic in the LR as there’s more time to find a replacement worker.
Easier to replace a worker = more elastic demand.
The more price elastic the demand for the product is, the more elastic the demand for labour will be.

Question 5

Factors affecting labour demand

Answer 5

• How easily labour can be swapped for capital.
• How much waged make up total cost.

Question 6

Marginal cost of labour

Answer 6

The change in total labour costs from employing one extra worker

Question 7

Market equilibrium wage

Answer 7

Firms will employ workers as long as the extra revenue the workers generate from producing goods and services is greater than the cost of employing them. The market equilibrium wage is where MRP=MC.

Question 8

Factors shifting labour demand

Answer 8

• Increased gov regulation
• New technology
• Level of education
• Change in demand for a product
• Number of rims producing a product

Question 9

Wage increase and productivity

Answer 9

Ceteris Paribus, if wages rise, the quantity demanded for labour decreases, the same as for goods and services.

Question 10

Competitiveness

Answer 10

High labour costs per unit imply that a firm has low labour productivity. If a firm can boost labour productivity and reduce labour costs per unit, that firm will boost its competitiveness.

Question 11

Factors that cause a shift in the MRP of labour curve

Answer 11

• changes in labour productivity
• rising labour cots
• a good/service’s price

Question 12

Individual labour supply

Answer 12

The number of working hours labour are willing to work at a particular wage rate for a job. If wages rise workers are incentivised to work longer hours.

Question 13

Occupational labour supply

Answer 13

The number of employees who will work at their wage rate. The supply curve for occupational labour is upward sloping.

Question 14

Non-monetary considerations for labour

Answer 14

Both monetary and non-monetary considerations affect supply of labour. Non-monetary considerations are the benefits a job offers on top of the wage (monetary) that attract prospective workers.
- Net advantage
- Monetary factors = wages
- Non-monetary factors: free food, dental care, gym facilities, training, job satisfaction.

Question 15

Backward bending supply curve

Answer 15

A theory in which after a certain point, rising wages lead to a reduction in labour supplied.
- initially as wages rise it becomes more valuable to work rather than to take leisure, due to the substitution effect of work becoming more beneficial.
- After wage W, the benefit of the extra money earned diminishes and instead labour chooses to take more leisure than work as long. This is due to the income effect.

Question 16

The labour supply curve

Answer 16

The labour supply curve is upward sloping. Higher prices (wages in this case) lead to a higher quantity of labour being supplied. Many things can shift the labour supply curve:
- Government policies
- Level of education
- Wage rates
- Quality of job advertising
- Number of workers

Question 17

The Elasticity of Labour Supply

Answer 17

• Elastic in low-skilled jobs. Small wage rate increases will result in large increases in quantity supplied.
• Supply is more elastic if workers are mobile.
• Often inelastic in skilled jobs. Takes a long time to train, while supply may change in the long term, it won’t in the short term.

Question 18

Economic rent

Answer 18

Economic rent is an excess payment made to or for a factor of production over and above the amount expected by its owner. As supply gets more elastic, economic rent reduces to zero (as the labour market for this particular job becomes more competitive).

Question 19

Transfer earnings

Answer 19

Every worker has a minimum amount that they are willing to accept to stay in their current job (and not switch to another job). This minimum amount of money is called transfer earnings.

Question 20

Wage differentials

Answer 20

Wage differentials is described as the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or localities.

Question 21

Factors causing wage differentials

Answer 21

• Skill differences
• Location
• Trade unions
• Industry
• Location
• Monopsony

Question 22

The model of wage determination

Answer 22

In a perfectly competitive labour market, wages are determined by the forces of demand and supply. In this type of market firms are price-takers so they don’t have control over the wage they pay. This wage is = to the MC and AC for the firm because the supply is perfectly elastic for an individuals firm’s labour.

Question 23

Wage

Answer 23

The sum of economic rent and transfer earnings.

Question 24

Imperfections in the labour market

Answer 24

• Imperfect information
• Trade unions
• Labour immobility

Question 25

Monopsony power

Answer 25

Monopsony power exists when one buyer faces little competition from other buyers for that labour or good, so they are able to set wages or prices for the labour or goods they are buying at a level lower than would be the case in a competitive market.
In a perfectly competitive labour market, a firm will hire where supply is equal to the marginal revenue product (MRP).
A monopsony employer looking to maximise profits will hire labour at the point where the MRP is equal to the marginal cost.
At this point, the wage is lower than under a perfectly competitive labour market.

Question 26

Bilateral Monopoly

Answer 26

Exists when a market has only one supplier and one buyer. The one supplier will tend to act as a monopoly power and look to charge high prices to the one buyer. The lone buyer will look towards paying a price that is as low as possible.

Question 27

Monopsony and Trade Union

Answer 27

• With a monopsony employer, a trade union can again drive up the wage to Wc.
• A trade union introduction creates a bilateral monopoly (single buyer and seller).
• The trade union changes the shape of the cost curves.
• So at the new higher wage, the firm will still hire at the profit maximising level.
• But this could lead to an increase in employment to Qc.

Question 28

Collective bargaining

Answer 28

Level depends on:
- The number of workers in the TU
- The amount of legislation
- If there is a monopsony employer

Question 29

TU impact

Answer 29

W/ perfect competition, a TU can drive up the minimum wage. The wage that workers are paid then becomes higher.
But, employment will fall because firms can’t afford to keep the same number of employees because costs have risen with the wage increase. If worker’s productivity also rises, then the demand for labour may increase too.

Question 30

Costs and Benefits of Trade Unions

Answer 30

Benefits:
- Reduced discrimination in the workplace
- Higher pay
- Superior working conditions

Disadvantages:
- By demanding wages that may be above the market equilibrium wage, TU’s could increase unemployment. They may also hold back technological advances that could benefit society.

Question 31

National minimum wage

Answer 31

The National Minimum Wage is a government-imposed law to try to improve the equality of living standards. National minimum wage makes sure the poorest in society have enough for their own basic needs.
Establishes minimum hourly pay rates for various age groups.

Question 32

Living wage

Answer 32

The Living Wage is paid voluntarily by employers and set according to the cost of achieving an adequate standard of living.

Question 33

Labour Market discrimination

Answer 33

A situation where workers or groups of workers are treated differently in terms of recruitment, pay, benefits and promotion from other workers or groups due to their non-economic characteristics, including gender, race, religion and age.

Question 34

Conditions for discrimination

Answer 34

• Needs to be a monopsony employer
• Needs to be some form of negotiation about wage levels

Question 35

Negative impacts of discrimination

Answer 35

Workers may be less incentivised to work. This will reduce their productivity. By not hiring certain workers employers may be missing out on workers with a higher marginal revenue productivity which is costly.

Question 36

Positive impact of discrimination

Answer 36

Young people and immigrants tend to be willing to work for lower pay. A firm can segregate its workers into groups according to the wage that they will be willing to work for. This reduces economic rent needed, and so workers just earn the transfer earnings, increasing profits.

Question 37

Advantages and disadvantages of wage discrimination

Answer 37

Advantages:
- Businesses can make higher profits and reduce their costs. Can lead to more jobs which are better for supporting the macroeconomic objectives of the economy.
Disadvantages:
- Time cost to implementing this strategy = opportunity cost. Widens levels of inequality. Could drive down wages and workers may be exploited.

Question 38

Costs of discrimination to employers

Answer 38

Think these groups have lower MRP than they actually do. They demand fewer of these employees and the demand curve shifts left. Wages fall and employers reduce the pool of workers they can hire name. If employers are excluding suitable workers, they may be increasing their production costs and generating higher prices.

Question 39

Costs of discrimination to governments

Answer 39

Workers who are discriminated against my be less productive which can have knock-on effects such countries becoming less internationally competitive impacting the balance of payments, export sales and increase unemployment. Tax revs will decrease if workers are paid less. Govs will need to respond to instances of discrimination by upping welfare payments.