The Labour Market

Question 1

Sketch and explain the backwards bending individual supply of labour curve

Answer 1

correct graph with target wage indicated and correct labels (hours worked, wage rate) on axes

Question 2

Sketch the equilibrium of a perfect labour market

Answer 2

SL and DL intersect to give W1 and Q1

Question 3

Sketch the individual firm demand curve for labour and explain why it is the shape it is, adding in the market Supply of labour

Answer 3

DL = MRP, MRP initially increases before decreasing, market wage rate is fixed horizontal line

Question 4

Sketch the effect of trade union intervention on a perfect labour market and its individual firms

Answer 4

Wage fixed higher at WU, creates disequilibrium. SL shifts upwards for firms, rationing their demand.

Question 4

Sketch and explain the effect of trade union intervention on an imperfect (Monopsony) labour market

Answer 4

Wages are negotiated upwards to WU. ACL1 = WU until intesecting with the original ACL, where it kinks to follow the original ACL. MCL1 = WU until MCL1 = ACL = WU, beyond which it kinks discontinuously up to the original MCL. This is because a pay increase must apply to all previously employed workers as well as the new one, leading to a very high marginal cost.

Question 5

Describe the difference between wage differentials and wage discrimination.

Answer 5

Differentials: legal differences in wages as a result of factors such as position, experience, location.
Discrimination: illegal differences due to factors such as gender, race, sexuality