The Labour Market

Question 1

What is derived demand?

Answer 1

Derived demand refers to the demand for a factor of production (such as labour, capital, or raw materials) that arises from the demand for the final goods and services it helps produce. In other words, it is not demanded for its own sake but because it contributes to the production of something that consumers want.

Example: bricklayers and houses are derived demand

Question 2

What does marginal productivity theory of labour demand states?

Answer 2

This theory states that a firm’s demand for labour depends on the marginal revenue product of labour (MRP), which is calculated as:

MRP = MPP x price (MR)

Where:
• MPP (Marginal Physical Product) = the additional output produced by an extra worker
• MR (Marginal Revenue) = the additional revenue gained from selling this extra output

A profit-maximising firm will hire workers until MRP = wage rate. If MRP exceeds the wage, hiring more workers is profitable. If MRP is lower than the wage, the firm will reduce employment.

Question 3

What does labour demand curve show?

Answer 3

The labour demand curve shows the relationship between the wage rate and the quantity of labour employed. It is generally downward sloping, meaning that:

•	At higher wages, firms demand less labour because hiring workers becomes more expensive.
•	At lower wages, firms demand more labour, as the cost of employing workers is lower.

Question 4

What factors can causes the shifts of the labour demand curve?

Answer 4

1. Changes in Product Demand
   If demand for the final product increases, firms need more workers to produce more goods, shifting labour demand right.
   If product demand falls, labour demand shifts left.
2. Labour Productivity
   Higher worker productivity (more output per worker) increases MRP, shifting the demand curve right.
   Lower productivity shifts labour demand left.
3. Price of Capital (Substitutes and Complements)
   If capital (e.g., robots, machines) becomes cheaper and replaces labour, demand for labour falls (left shift).
   If labour and capital are complements (e.g., workers needed to operate new machines), cheaper capital may increase labour demand (right shift).
4. Changes in the Cost of Other Factors of Production
   If raw materials become expensive, firms may cut production, reducing the demand for labour (left shift).
   If energy costs fall, firms may expand production, increasing labour demand (right shift).
5. Technology
   Automation can reduce the demand for certain jobs (left shift).
   Technological advancements in industries that require human oversight can increase demand for skilled labour (right shift).
   
   6. Government Policies & Regulations
      • Higher employment taxes or stricter labour laws (e.g., minimum wages, union regulations) increase costs, shifting labour demand left.
      • Subsidies for hiring workers (e.g., apprenticeship incentives) can shift labour demand right.

Question 5

What the determinants of the elasticity of demand for labour?

Answer 5

1. Labour Substitutability
   If workers can easily be replaced by machines or other inputs, demand for labour is elastic (e.g., factory workers).
   If workers are difficult to replace (e.g., highly skilled professionals), demand is inelastic.
2. Labour’s Share of Total Costs
   If labour costs form a large proportion of total costs (e.g., hospitality sector), firms are more sensitive to wage changes, making demand elastic.
   If labour costs are a small proportion (e.g., capital-intensive industries), demand is inelastic.
3. Price Elasticity of Demand for the Final Product
   If the final product has elastic demand (luxury goods), firms are more sensitive to labour cost changes, making labour demand more elastic.
   If the product has inelastic demand (necessities), firms can pass on wage increases to consumers, making labour demand inelastic.
4. Time Period
   In the short run, labour demand is more inelastic because firms cannot easily adjust workforce sizes.
   In the long run, firms can invest in automation or restructure, making demand more elastic.

Question 6

What monetary factors to affect the supply of labour?

Answer 6

Wage rate – Higher wages attract more workers, increasing labour supply.

Bonuses and overtime pay – Extra financial incentives encourage more people to enter a profession.

Pensions and benefits – Good retirement plans, healthcare, or insurance can make a job more attractive.

Tips - Some services jobs may get tips from customers.

Question 7

What non monetary factors that may affect the supply of labour?

Answer 7

Job satisfaction – Enjoyable and meaningful work can increase labour supply even if wages are lower.

Working conditions – Safe, comfortable, and flexible work environments attract more workers.

Work-life balance – Jobs with flexible hours or remote work may encourage more people to join.

Career progression – Opportunities for promotion and skill development increase the attractiveness of an occupation.

Job risk and stress – Dangerous or highly stressful jobs (e.g., firefighters, air traffic controllers) may have a lower labour supply unless wages are significantly high.

Question 8

What is labour supply curve? What does it show?

Answer 8

The labour supply curve shows the relationship between the wage rate and the number of workers willing to work in an occupation.

It generally slopes upward, meaning that higher wages attract more workers.

However, at very high wage levels, workers may prefer leisure over work, leading to a backward-bending supply curve.

Question 9

What factors could causes the shifts of labour supply curve?

Answer 9

1. Changes in Working Population
   An increase in immigration or a growing working-age population shifts supply right.
   An ageing population or decline in birth rates shifts supply left.
2. Education and Training
   Improved education and training increase the number of qualified workers, shifting supply right.
   A lack of training opportunities reduces supply, shifting it left.
3. Wages in Alternative Occupations
   If wages rise in alternative jobs, workers may switch, reducing supply (left shift).
   If alternative job wages fall, more workers stay, increasing supply (right shift).
4. Non-Wage Benefits
   Better working conditions, flexible hours, or strong career growth shift labour supply right.
5. Barriers to Entry
   High qualifications or strict licensing reduce supply (left shift).
   Reduced entry barriers (e.g., removing degree requirements) increase supply (right shift).
6. Social and Cultural Factors
   Changing attitudes towards work (e.g., more women joining the workforce) shift supply right.
   Social norms discouraging certain jobs (e.g., stigma around manual labour) shift supply left.
7. Government Policies
   Lower income tax or increased childcare support can increase labour supply (right shift).
   Higher income tax or strict employment laws can discourage work (left shift).

Question 10

What is the economist’s model of wage determination in a perfect competitive labour market?

Answer 10

In a perfectly competitive labour market, wages are determined by the interaction of labour demand and labour supply. The key assumptions of this model include:
Many employers and many workers, none of whom can influence the wage rate.
Homogeneous labour (all workers have the same skills and productivity).
Perfect information (both employers and workers know all available job opportunities and wages).
No barriers to entry or exit in the labour market.

Question 11

What effects of market changes on wage determination?

Answer 11

1. Increase in Labour Demand (Shift Right in DL)
   Causes: Higher product demand, improved worker productivity, or new technology complementing labour.
   Effect: Higher wages and more employment.
2. Increase in Labour Supply (Shift Right in SL)
   Causes: More immigration, better education, or social changes increasing workforce participation.
   Effect: Lower wages but more employment.
3. Decrease in Labour Demand (Shift Left in DL)
   Causes: Recession, automation replacing workers, or falling product demand.
   Effect: Lower wages and fewer jobs.
4. Decrease in Labour Supply (Shift Left in SL)
   Causes: Ageing population, reduced migration, or strict licensing laws.
   Effect: Higher wages but fewer workers available.

Question 12

What is the role of market forces (supply and demand) in determining relative wage rates?

Answer 12

1. Skill Levels and Training Requirements
   Highly skilled jobs (e.g., doctors, engineers) have lower supply due to long training periods, leading to higher wages.
   Low-skilled jobs (e.g., retail workers) have higher supply, leading to lower wages.
2. Labour Productivity
   More productive workers contribute more to a firm’s revenue (higher MRP), increasing demand for their labour and raising wages.
3. Compensating Wage Differentials
   Dangerous, unpleasant, or stressful jobs (e.g., oil rig workers, night shift jobs) must offer higher wages to attract workers.
4. Barriers to Entry
   Occupations with high qualifications, licensing, or union restrictions (e.g., doctors, pilots) have limited supply, leading to higher wages.
5. Union Influence
   Strong labour unions can negotiate higher wages (e.g., for teachers or airline pilots), while non-unionised jobs may have lower wages.
6. Gender and Discrimination
   Wage differentials can exist due to gender gaps, ethnicity, or historical discrimination, though many policies aim to reduce these differences.
7. Geographical Immobility
   If workers are unwilling or unable to move to high-wage areas (e.g., due to housing costs or family ties), regional wage differences persist.

Question 13

How does monopsony power contribute to imperfections in a labour market?

Answer 13

A monopsony is a market where there is only one dominant employer (or very few employers), giving them significant control over wages and employment levels.

How Monopsony Causes Labour Market Imperfections:
Employers can pay wages lower than the competitive equilibrium wage since workers have limited alternative job options.
Employment levels tend to be lower than in a perfectly competitive labour market.
Workers may lack bargaining power due to the lack of competing employers.

Examples of Monopsony Power:
The NHS in the UK, which is the largest employer of doctors and nurses.
Gig economy platforms like Uber, where workers have limited power to negotiate wages.

Question 14

How do trade unions contribute to imperfections in a labour market?

Answer 14

Trade unions are worker organisations that collectively bargain for better wages, working conditions, and benefits.

How Trade Unions Cause Labour Market Imperfections:
Higher wages above equilibrium – Unions may negotiate wages above the market rate, potentially leading to unemployment if firms hire fewer workers.
Restricted labour supply – Some unions limit membership, creating barriers to entry in certain professions (e.g., electricians, plumbers).
Labour market rigidities – Strong unions may resist necessary workplace changes or automation, reducing market efficiency.

Examples of Union Influence:
The RMT (Rail, Maritime and Transport) union in the UK, which negotiates pay for railway workers.
The British Medical Association (BMA), representing doctors in wage disputes

Question 15

How does imperfect information contributes to imperfections in a labour market?

Answer 15

Workers and employers often lack full information about wages, job opportunities, or working conditions, leading to inefficiencies.

How Imperfect Information Causes Labour Market Imperfections:
Workers may accept lower wages than they deserve because they are unaware of better-paying jobs.
Employers may struggle to find suitable workers, leading to skills mismatches and inefficient employment.
Delays in job mobility – Workers might remain in low-paid jobs due to uncertainty about new opportunities.

Examples of Imperfect Information:
Graduates may not know the full salary range for their field and accept lower wages.
Job seekers may not be aware of vacancies in other cities due to poor access to job postings.

Question 16

What other factors contributing to labour market imperfections?

Answer 16

1. Geographical Immobility – Workers may be unwilling or unable to move for better jobs due to housing costs or family commitments.
2. Discrimination – Wage disparities may exist due to gender, race, or other biases.
3. Government Regulations – Minimum wage laws, employment protections, and migration policies can distort market forces.

Question 17

How the employer in monopsony labour market can use market power to reduce both the relative wage rate and the level of employment below those that would exist in a perfectly competitive labour market?

Answer 17

In a monopsony labour market, a single dominant employer has significant market power, allowing them to set wages and employment levels rather than taking them as given. Unlike in a perfectly competitive labour market, where firms hire workers until the marginal revenue product of labour (MRP) equals the wage rate, a monopsonist faces an upward-sloping labour supply curve, meaning they must offer higher wages to attract additional workers. However, because hiring more workers raises the marginal cost of labour (MCL) faster than the wage rate, the monopsonist maximises profits by employing labour at the point where MCL = MRP, rather than where labour supply meets MRP as in perfect competition. As a result, both wages (Wm) and employment levels (Qm) are lower than in a competitive market. This leads to the exploitation of workers, as they are paid less than their true productivity, and creates inefficiency, as some workers who would be willing to work at a higher competitive wage (W*) are left unemployed.

Question 18

What are the various factors that affect the ability of trade unions to influence wages and levels of employment in different labour markets?

Answer 18

Trade unions’ ability to influence wages and employment varies based on labour demand elasticity, market conditions, union density, legal environment, and employer strength.

In monopsony markets or skilled labour industries, unions can effectively raise wages with minimal job losses. However, in highly competitive, low-skilled, or anti-union environments, their influence is limited.

Question 19

How does the elasticity of demand for labour affect the ability of trade unions to influence wages and employment?

Answer 19

If the demand for labour is inelastic, unions can negotiate higher wages without significantly reducing employment (e.g., healthcare, where workers are essential).

If demand is elastic, wage increases may lead to substantial job losses as firms cut costs or automate (e.g., manufacturing).

Question 20

How does market structure and employer power affect the ability of trade unions to influence wages and employment?

Answer 20

Monopsony Employers: Unions can be more effective in raising wages in monopsony markets, where employers exploit workers by setting low wages.

Competitive Labour Markets: In markets with many employers, unions may struggle as workers have alternative job options.

Question 21

How does union membership and density affect the ability of trade unions to influence wages and employment?

Answer 21

Higher union density (a larger proportion of workers in the union) strengthens bargaining power, increasing the likelihood of wage increases.

Declining membership reduces union influence, as seen in industries like retail and hospitality.

Question 22

How does the strength of union legislation affect the ability of trade unions to influence wages and employment?

Answer 22

In countries with strong labour laws, such as France and Germany, unions have more legal support for collective bargaining and striking.

In countries with anti-union policies (e.g., restrictive strike laws in the UK), unions have less power.

Question 23

How does substitutability of labour affect the ability of trade unions to influence wages and employment?

Answer 23

If skilled workers are difficult to replace, unions have more power (e.g., pilots, doctors).

If workers are easily replaceable, employers can resist union demands by hiring non-union workers.

Question 24

How does the financial strength of employers affect the ability of trade unions to influence wages and employment?

Answer 24

Large, profitable firms are more likely to afford union wage demands.

Firms under financial pressure may resist wage increases or relocate jobs to cheaper regions.

Question 25

How does government intervention affect the ability of trade unions to influence wages and employment?

Answer 25

Minimum wage laws may reduce union influence by setting a legal pay floor. Public sector wage caps (e.g., government-imposed limits on teacher or nurse pay) can limit union power.

Question 26

How does the public perception of unions affect the ability of trade unions to influence wages and employment?

Answer 26

Unions with public support (e.g., healthcare worker strikes) may be more successful. If unions are seen as disruptive (e.g., transport strikes causing inconvenience), public pressure may weaken their bargaining position.

Question 27

How wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market?

Answer 27

In a perfectly competitive labour market, there are many employers and workers, and wages are determined where the demand for labour (MRP) meets the supply of labour. Effect on Wages: Trade unions negotiate for higher wages above the competitive equilibrium wage (W*), aiming to secure better pay for their members. If the wage is pushed too high, it may lead to unemployment, as firms reduce hiring due to increased labour costs. Effect on Employment: Employment falls from Q* to Q1, as some workers lose their jobs or firms cut back on hiring. Some workers who would have been willing to work at W* are now unemployed, leading to labour market inefficiencies and a potential deadweight loss. Overall Impact: Higher wages for unionized workers. Lower employment if wages are set above the market-clearing level. Risk of inefficiencies, as firms may substitute labour with automation or outsourcing.

Question 28

How wages and employment are likely to be affected by the introduction of a trade union into a monopsony labour market?

Answer 28

In a monopsony, a single employer has significant market power and can suppress wages below the workers’ marginal revenue product (MRP). Effect on Wages: Trade unions push wages up towards the competitive level (W*), reducing monopsony exploitation. Since monopsonists pay Wm < W*, the union negotiates a fairer wage closer to workers’ productivity. Effect on Employment: Unlike in a competitive market, employment may actually increase from Qm to Q*. This is because a higher wage attracts more workers, and since the monopsonist was under-hiring, bringing wages up encourages the firm to employ more workers. Overall Impact: Higher wages, benefiting workers. Increased employment, as the firm moves closer to the efficient employment level. Reduced monopsony exploitation, leading to a more efficient labour market outcome.

Question 29

How wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market and into a monopsony labour market?

Answer 29

In a perfectly competitive labour market, a trade union raises wages but reduces employment, potentially causing inefficiencies. In a monopsony labour market, a trade union raises wages and employment, improving market efficiency and worker welfare. The impact of unions depends on the labour market structure, the elasticity of demand for labour, and how aggressively the union pushes for wage increases.

Question 30

What effects of a national minimum wage upon a perfectly competitive labour market?

Answer 30

A national minimum wage (NMW) is a legally mandated wage floor that employers must pay workers. In a perfectly competitive market, wages are determined by the interaction of labour supply and demand. If the government sets a minimum wage above the equilibrium wage (W*), it disrupts the natural market outcome. Impact on Wages: Wages increase from W* to Wm, benefiting low-paid workers. Impact on Employment: Unemployment may rise, as firms demand less labour at the higher wage. The excess supply of labour (workers willing to work at Wm but not hired) creates involuntary unemployment. The extent of job losses depends on the elasticity of labour demand: Inelastic demand: Small job losses, significant wage increases (e.g., healthcare, education). Elastic demand: Large job losses (e.g., retail, hospitality). Overall Effects: Some workers benefit from higher wages, while others lose jobs. Firms may substitute labour with automation or outsource jobs. If the minimum wage is too high, black markets or informal employment may emerge.

Question 31

What effects of a national minimum wage upon a monopsony labour market?

Answer 31

A monopsony employer pays workers below their marginal revenue product (MRP) and hires fewer workers than in a competitive market. Introducing a minimum wage can correct this market failure. Impact on Wages: Wages increase, reducing worker exploitation. Impact on Employment: Employment may increase because firms are now required to pay a fairer wage, which attracts more workers. If set at an appropriate level (between Wm and W*), a minimum wage moves employment closer to the competitive level (Q)*. Overall Effects: Higher wages and more employment (if well-calibrated). Less monopsony power, improving efficiency and worker welfare. However, if set too high, firms may still cut jobs.

Question 32

What other potential effects of a minimum wage?

Answer 32

On Firms: Higher costs → Firms may pass costs to consumers through higher prices. Investment in automation → Some jobs may be replaced by machines. Reduced profit margins, affecting small businesses more than large firms. On Workers: Improved living standards for those who remain employed. Greater motivation and productivity, as higher wages can boost morale. Risk of unemployment, particularly for low-skilled and young workers, if firms cut jobs. On the Economy: Higher consumer spending, boosting demand if most workers benefit. Potential inflation, as businesses raise prices to cover wage costs. Encourages workforce participation, attracting more people into jobs.

Question 33

What advantages of a national minimum wage?

Answer 33

1. Reduces Poverty and Income Inequality Helps low-income workers earn a living wage, reducing reliance on government benefits. Narrows the wage gap between low-paid and higher-paid workers. 2. Increases Worker Productivity Higher wages can improve motivation and job satisfaction, leading to greater efficiency and lower absenteeism. Reduces labour turnover, saving firms money on recruitment and training. 3. Boosts Consumer Spending Low-wage workers have a higher marginal propensity to consume, so wage increases lead to higher demand for goods and services, stimulating economic growth. 4. Reduces Exploitation in Monopsony Labour Markets In monopsony markets, where a single employer has wage-setting power, an NMW can increase both wages and employment, correcting the market failure. 5. Encourages Workforce Participation A higher wage attracts more people into the labour market, increasing employment opportunities, particularly for previously discouraged workers. 6. Reduces Government Welfare Spending As workers earn higher wages, fewer people rely on benefits such as unemployment aid and housing subsidies, reducing government expenditure.

Question 34

What disadvantages of a national minimum wage?

Answer 34

1. Can Lead to Unemployment If the NMW is set above the market equilibrium wage, firms may reduce hiring, leading to job losses. Industries with elastic labour demand (e.g., hospitality, retail) are more affected, as businesses replace workers with automation or cut hours. 2. Increases Business Costs Small businesses with tight budgets may struggle to afford higher wages, leading to closures or reduced investment. Firms may pass costs onto consumers, causing inflation. 3. Encourages Automation and Offshoring Firms may replace low-skilled workers with machines to save costs. Companies in labour-intensive industries may relocate jobs to countries with lower wages. 4. Risk of a ‘Wage-Price Spiral’ Higher wages increase production costs, leading to higher prices (inflation). Workers then demand further wage increases, causing a cycle of rising costs. 5. May Harm Young and Low-Skilled Workers Employers may prefer to hire experienced workers over young or low-skilled employees if the wage is the same for both. This can lead to higher youth unemployment and reduced job opportunities for inexperienced workers. 6. May Not Account for Regional Differences A single national rate may not reflect differences in living costs (e.g., London vs. rural areas). In low-cost areas, an NMW may increase unemployment, while in high-cost areas, it may still be too low.

Question 35

What is wage discrimination?

Answer 35

Wage discrimination occurs when workers with similar productivity and skills are paid differently based on characteristics unrelated to their job performance, such as gender, ethnicity, or age.

Question 36

What conditions are necessary for wage discrimination to exist?

Answer 36

1. Imperfect Labour Market Employers must have some degree of monopsony power or wage-setting ability. In perfectly competitive markets, wage discrimination is harder because firms must pay competitive wages to attract workers. 2. Worker Groups with Different Elasticities of Labour Supply If certain workers (e.g., women, immigrants) have a more inelastic supply of labour, they may accept lower wages due to fewer alternative opportunities. For example, if women have fewer job options due to career breaks for childcare, employers may exploit this by offering lower wages. 3. Limited Knowledge or Barriers to Job Mobility Workers must be unable to easily switch employers or sectors to escape discrimination. This can occur due to occupational segregation, education barriers, or informal hiring practices that disadvantage certain groups.

Question 37

What impact of gender discrimination on wages and employment?

Answer 37

Lower wages for women: Women often earn less than men for the same work due to bias and historical disadvantages. Occupational segregation: Women are overrepresented in lower-paid sectors (e.g., care work, education) and underrepresented in higher-paying STEM fields. The ‘glass ceiling’ effect: Fewer women reach top managerial positions, leading to wage gaps at senior levels.

Question 38

What impact of ethnic discrimination on wages and employment?

Answer 38

Wage disparities: Ethnic minorities often earn less than white workers, even with similar qualifications. Barriers to employment: Discrimination in hiring practices may lead to higher unemployment rates among minority groups. Concentration in low-paid jobs: Some ethnic groups may be concentrated in low-wage, insecure work, limiting opportunities for career progression.

Question 39

What impact of age discrimination on wages and employment?

Answer 39

Younger workers: May receive lower wages due to lack of experience, even when they perform the same tasks as older workers. Older workers: May face wage stagnation or forced retirement, reducing their lifetime earnings.

Question 40

What consequences of wage discrimination?

Answer 40

Lower earnings and living standards for affected groups. Reduced economic efficiency, as talent is underutilized. Higher reliance on welfare benefits, increasing government spending. Social inequality and reduced social mobility, as discrimination limits career progression.

Question 41

What are the government responses?

Answer 41

Equal Pay Laws (e.g., UK Equal Pay Act) to enforce wage transparency. Anti-discrimination policies in hiring and promotions. Affirmative action or diversity programs to improve workplace representation.

Question 42

What advantages of wage discrimination?

Answer 42

1. Workers Lower-wage workers may still find employment - If employers can pay lower wages to certain groups (e.g., women, immigrants), they may be more willing to hire them, increasing employment opportunities. Some workers may benefit from wage premiums - In cases of positive discrimination, firms may offer higher wages to attract underrepresented groups in specific industries. 2. Employers Cost savings for firms - Firms paying lower wages to certain groups reduce labour costs, improving profitability. Increased labour supply - If some workers accept lower wages due to discrimination, firms may have a larger workforce to choose from. Market segmentation and wage flexibility - Employers can adjust wages for different groups, keeping costs lower in some sectors while paying more in high-demand areas. 3. Economy as a whole Labour market flexibility - Wage discrimination may allow firms to adjust wages based on supply and demand, keeping businesses profitable and maintaining employment. Encourages investment in certain industries - Some industries (e.g., care work) benefit from cheap labour, which keeps costs lower for consumers and businesses.

Question 43

What disadvantages of wage discrimination?

Answer 43

1. Workers Lower wages for certain groups - Discriminated workers earn less than equally productive peers, reducing their standard of living. Reduced motivation and productivity - Knowing they are underpaid, affected workers may feel demotivated, leading to lower efficiency and job dissatisfaction. Limited career progression - The ‘glass ceiling’ effect can restrict promotions and access to senior roles for affected groups, widening long-term income inequalities. 2. Employers Lower employee morale and productivity - Discrimination can lead to low job satisfaction, increasing absenteeism and staff turnover, which raises recruitment costs. Potential legal costs and reputational damage - Wage discrimination can lead to lawsuits, fines, and public backlash, harming the firm’s reputation and brand image. Loss of skilled workers - Talented employees may leave firms that discriminate, reducing the firm’s competitiveness and innovation. 3. The economy as a whole Inefficient allocation of labour - If wages are not based on productivity, skilled workers may be underpaid and underemployed, leading to lower economic output. Lower overall wages reduce economic growth - Discriminated groups earn less income, leading to lower consumer spending and slower economic expansion. Increased social inequality and government welfare costs - Wage discrimination contributes to income inequality, forcing governments to spend more on welfare support and reducing overall economic efficiency.