The Labour Market Flashcards
what is the labour market composed of ?
sellers of labour (Households)
buyers of labour (firms)
who supplys the labour ?
workers
who demands the labour ?
firms
what type of demand is the demand for labour ?
derived demand
what is derived demand ?
demand that is dependent on the demand for goods and services
what does demand for labour depend upon ?
The Marginal Physical Product of Labour (MPPL)
The Marginal Revenue Product of Labour (MRPL)
what is marginal physical product of labour (MPPL) ?
is the extra output produced when an additional unit of labour is employed
what is marginal revenue product of labour (MRPL) ?
is the extra revenue earned when an additional unit of labour is employed
what are the factors that shift the demand for labour curve ?
change in the price of the final product the labour is producing (increases/decreases MRPL)
price
substatuitablity of labour for capital
productivity of labour
what is the elasticity of demand or labour ?
how responsive a firms demand for labour is to a change in price of labour
what are the factors that influence that PED of labour ?
proportion of labour costs to total costs
ease and cost of factor substitution
PED for final product
time period
monetary factors that influence the supply of labour ?
wages
salary
commission
bonus
piece rate pay
performance related pay
share options
fringe benefits
non-monetary factors that influence the supply of labour ?
length of training
job security
job satisfaction
level of challenge
what factors shift the supply curve for labour ?
training period
wages in other occupations
income tax levels
working conditions
in a perfectly competitive labour market, how are wage rates determined ?
DL = SL
what is the assumption of workers in perfect competition ?
workers possess identical skills
receive same wage rate
if there is excess demand of labour, what does that mean for labour rates ?
shortage of workers, causing wages to increase
of there is an excess supply of labour ?
causes wages to decrease
are perfectly competitive firms price takers of makers ?
price takers
if a perfectly competitive firm is a price taker, what does this mean in terms of labour ?
they have to accept the wage rate that workers are being paid in the industry (have to accept the industry wage rate)
what are the 3 main causes of imperfections in the labour market ?
monopsony power
trade unions
imperfect information
what is a monopsony ?
a single employer of labour in a market, giving the employer considerable labour market power to set wages and employment
the higher the percentage of workers from a firm that belong to a trade union, the greater the … ?
collective bargaining power
what are the other factors that influence trade union power ?
employee participation
state of the economy
unemployment level
productivity of labour
wage levels as a proportion of total costs
ability to swap labour for capital
size of trade union
firms profits
why do governments intervene in the labour market by setting a minimum wage ?
to improve equity
avoid exploitation of workers
what are the advantages of minimum wages ?
guarantees a minimum wage for the lowest paid workers
higher income levels help to increase consumption in the economy
may incentivise workers to be more efficient
what are the disadvantages of a national minimum wage ?
raises costs of production for firms which may result in firms raising the price of their goods/services
increase unemployment potentially, as they may lay off workers to lower production costs
where does wage discrimination occur ?
when there is imperfect information leading to a difference in wages between workers with comparable skills in the same job
what are the 2 most common wage discrimination scenarios ?
gender pay gap discrimination
ethnicity discrimination
if there is less competition in the labour market what does that mean in terms of power over wage setting ?
more power over wage setting
when do monopsonys occur ?
when there is a single buyer of labour in a market & wage setting is the same for all workers
what does ACL (average cost of labour) tell us ?
the wage emplyees are being paid
what does MCL (marginal cost of labour) tell us ?
the change in wage of the extra/new employee hired
at what point do monopsonys hire at ?, and why ?
profit maximising point, minimise their costs
in a perfectly competitive market what do trade unions do ?
set a trade union wage rate above the market rate and the market equillibrium
what are trade unions aiming to do in monopsony markets ?
improve wages and working conditions
where is the wage rate in monopsony markets before trade nion intervention ?
at the PM point below the Market Equilibrium
what does trade union intervention attempt to accomplish in monopsony markets ?
to set a wage rate at the market equilibrium, to raise wages and employment
why do governments often intervene in markets to set a minimum wage ?
to improve equity and avoid exploitation of workers
where is the minimum wage usually set in perfectly competitive markets ?
above the market equilibrium
what are the advantages of national minimum wages ?
+ guarantees a minimum income for the lowest paid workers
+ increased income levels for workers may increase consumption
+ may incentivise workers to be more productive
what are the disadvantages of national minimum wages ?
- raises costs of production, may lead to firms setting higher prices for their goods/services
- may force businesses to lay off workers to cut costs
why does minimum wages not always lead to unemployment ?
higher incomes for workers will lead to greater consumption and demand for goods/services
where does wage discrimination occur ?
when there is a difference between workers with comparable skills in the same job
what are the 3 factors of wage discrimination ?
- discriminatory attitudes towards particular groups
(Gender & Ethnic Minorities) - information asymmetry
(justifying lower wages due to a lack of financial transparency) - regulation
(lack of legislation or regulation may result in firms exploiting their power with no fear of consequence)
what is the Price Mechanism ?
the interaction of demand and supply in a market economy that allocates resources amongst competing needs and wants
what does Adam Smith refer to the Price Mechanism as ?
“The invisible Hand “
what are the 3 functions of the Price Mechanism ?
Rationing
Incentivising
Signalling
what happens if a function of the market mechanism breaks down ?
Market Failure
what is the Rationing function of the market mechanism ?
. when resources become scarce, the price will rise
only those who can afford them will receive them
This will disincetivise consumers to spend
what is the Incentive function of the market mechanism ?
. the incentive function encourages producer to increase or decrease output to increase profits.
Falling prices may incentivise firms reallocate resources to a new market
what is the Signalling function of the market mechanism ?
. a change in price provides a signal to consumers and producers about where resources are wanted.
increased prices -> signal producers to produce more of that product
decreased prices -> signal producers to produce less of that product
if there was an increase in the demand for honey (D1 -> D2), what would be the functions of the Price Mechanism ?
Rationing: a rise in price will lead to only consumer who can afford that product purchasing it
Incentivise: a higher price incentivises firms in that market to allocate more resources to that product to produce more
Signal: a rise in price and demand for that product in that market will signal other firms to enter the market
what are the advantages of the Price Mechanism ?
+ reduces are allocated more efficiently as the market adapts to changes quickly
+ consumers have more freedom of goods and services produced (wants and needs are better met)
what are the disadvantages of the Price Mechanism ?
- does not account for monopoly power, can lead to exploitation of consumers by firms
- can lead to an under-provision of public goods (lack of profit to be made of them, because they are non-excludable) this could cause market failure