The Labour Market 3.5

Question 1

Define derived demand

Answer 1

When demand for a good results from the demand for an end product e.g. labour – demand for App programmers is derived from the demand for apps.

Question 2

Define the Marginal Physical Product of Labour (MPP)

Answer 2

The addition to output produced by one more unit of labour.

Question 3

What is the law of diminishing returns?

Answer 3

When you add more of a variable factor to a fixed factor, eventually the marginal product (MP) starts to fall – diminishing returns is said to happen when MP starts to fall.

Question 4

Define Marginal Revenue Product and write down the formula

Answer 4

The value of the output produced by the last unit of labour added. MRP = MPPxMR (Where MPP = Marginal Physical Product, and MR = Marginal Revenue).

Question 5

What is Marginal Productivity Theory?

Answer 5

Marginal Productivity Theory states that a firm will employ labour up to the point at which the MRP of labour is equal to the Marginal Cost of the extra worker. In this way the firm will be profit maximising.

Question 6

Identify and explain 6 factors that would shift the demand curve for labour

Answer 6

• If the price of the end product increased – this would increase the marginal revenue and so the MRP would increase.
• If the MPP increased because of an improvement in labour productivity this would also increase the MRP.
• A fall in non-wage costs of employing workers – this would make it cheaper for firms to employ workers and increase demand at every price level.
• A decrease in the price of capital that replaces labour – this would make the substitute to labour cheaper, and so firms may swap labour for capital, reducing demand for labour.
• Changes in the level of consumer demand for the product – demand effects the MRP of labour as the output produced will be sold at a different price.
• Labour costs as a percentage of total costs – demand for labour is less elastic when labour costs overall are small.

Question 7

What is the formula for calculating the Marginal Product if you were given a table of data?

Answer 7

Change in Total Product/change in labour.

Question 8

Identify and explain 4 factors that would affect the elasticity of demand for labour

Answer 8

• Availability of capital that could replace labour – if labour is easily replaced with a machine, then demand will be elastic.
• Price elasticity of the end good – if this is very inelastic, then firms can pass on any wage increase in higher prices, without worrying too much about losing market share making demand for labour inelastic.
• Labour cost as a % of total costs – the higher the % of costs made up by labour, the more elastic demand for labour will be.
• Time – the longer the time period, the more elastic demand for labour will be, as the firm will be able to find ways of substituting labour.

Question 9

Using MRP theory, explain why a footballer gets paid more than a plumber

Answer 9

The extra revenue generated by a footballer in higher ticket sales, and increased merchandise and advertising/sponsorship revenue means that the MR is higher than a plumber.

Question 10

How does elasticity of labour affect the impact of a NMW?

Answer 10

The more elastic the demand for labour the more unemployment will be created as firms are very sensitive to the wage rate and will decrease the quantity of employee significantly if wages rise.
The more elastic the supply of labour is, the more unemployment will be created as the higher wages will attract many more workers, but there will not be demand for them.

Question 11

Explain 3 labour laws that are used to protect workers from monopsony power in labour markets

Answer 11

• National Minimum Wage regulates the minimum amount that a worker can be paid legally.
• Dismissal laws make it illegal for firms to sack employees or make them redundant without going through steps such as proving that the job rather than the person is no longer required – they must also pay redundancy wages to help the worker whilst they look for another job.
• Discrimination laws prevent firms from paying or treating workers differently based on their gender, ethnicity or sexual orientation.

Question 12

What are the advantages of minimum wages

Answer 12

• Boosts take home pay of low paid workers.
• Encourages firms to up-skill their workers.
• Work incentive increases resulting in a larger pool of workers.
• Businesses can’t be accused of exploitation (or discrimination).

Question 13

What are the disadvantages of minimum wages

Answer 13

• Causes unemployment.
• There are better incentives for training than a minimum wage e.g. tax relief on apprenticeships.
• Might make firms less competitive globally.
• High labour costs might cause cost-push inflation.

Question 14

What are the advantages of maximum wages

Answer 14

• The price of the final product won’t rise.
• Costs to firm do not rise.
• Firm may be able to employ more workers.

Question 15

What are the disadvantages of maximum wages

Answer 15

• May act as a disincentive to work.
• Potential employees may leave the country - brain drain.
• Quality of final product may deteriorate.

Question 16

Explain 2 possible solutions to a skills shortage

Answer 16

• Pay more to reduce the excess demand.
• ‘Import’ workers with the skills needed with an active immigration policy encouraging
  workers with particular skills.

Question 17

What is a skills shortage

Answer 17

A skills shortage means that there is excess demand for labour at the current wage rate.

Question 18

Why is youth unemployment more of an issue than unemployment amongst older workers?

Answer 18

Because if workers so not get a job when they are young, they may never work – hysteresis and discouraged workers may prevent them from entering the labour market. Youths generally have little experience of working so are more of a recruitment risk for firms, leading to a cycle of rejection – no experience = no job offer, but no job means no experience and so on….

Question 19

How does increasing the retirement age affect the labour market?

Answer 19

It increases the labour supply as there are less people leaving the active labour market, and ceteris paribus, the same number entering the market as school/university leavers.

Question 20

How does increasing the compulsory school age affect the labour market?

Answer 20

It decreases the supply of labour temporarily as in the first few years less students will be leaving school and entering the labour market.

Question 21

Define under-employment

Answer 21

When a worker wants to work more hours than they are given, and/or are working in a job for which they are over-qualified.

Question 22

How does the introduction of zero hours contracts affect the labour market equilibrium?

Answer 22

• It could lead to underemployment as workers are technically in jobs, but may not be given any hours.
• Skills may erode as workers are not able to be in training and education, but equally, they are not working either.
• Reduces job security.

Question 23

What are the aims of a NMW

Answer 23

• Protect workers against exploitation.
• Improve incentives to work - idea ‘work pays’.
  - Alleviate poverty by raising earnings of lowest earners.

Question 24

Define geographical immobility

Answer 24

When workers cannot or will not move from areas of high unemployment to areas where there are jobs.

Question 25

Define occupational immobility

Answer 25

When unemployed workers cannot or will not retrain so that they can get a new job in a different industry.

Question 26

Explain reasons for wage differentials existing

Answer 26

• Formal education. On average, those with a degree earn more over their lifetime than those who gain just A Levels.
• Pay gaps. The wage gap between skilled and unskilled workers has increased in the UK recently. This is due to technological change and globalisation, which has shifted production abroad.
• Wages and skills. Skilled workers produce higher outputs than unskilled workers because they are more productive, so the demand for their labour is higher. This means they can demand higher wages.
• Gender. Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part- time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. Although a gap still exists, it is narrowing.
• Discrimination. Workers might be discriminated against due to age, disabilities, gender and race.
• Skills, qualifications and training. Jobs which require more training and education offer higher wages. Training workers is expensive for firms, so they compensate for this by offering workers, who have already undergone education and training, higher wages.

Question 27

Explain the impact of migration on labour markets

Answer 27

• Increased competition to get a job due an increase in size of the working population.
• High quality skills brought to the domestic workforce- increase global competitiveness.
• Could displace domestic workers.
• Marginally brings the pay of the lowest paid workers down.

Question 28

Policies to tackle labour market immobility

Answer 28

• Trade union power- pushing for higher wages makes the market more flexible.
• Regulation- the more freedom firms have to hire and fire workers and the more freedom workers have in terms of their rights, the more flexible the labour market.
• Welfare payments and income tax rates- the reward for working should be high. If welfare payments are generous and income tax rates are high, labour market flexibility is likely to be lower.
• Training- more widely available training opportunities and a more skilled workforce makes the labour market more flexible.
• Infrastructure- improving infrastructure might help the geographical immobility of labour, since it becomes easier to move around the country.
• Housing- if housing became more affordable, then people might be more able to move around the country for work, which improves the geographical mobility of labour.

Question 29

Define a trade union

Answer 29

An organisation of employees whose primary purpose is to protect and advance the economic interests of its members by negotiating wage rates and employment conditions.

Question 30

Causes of geographical immobility

Answer 30

• Family ties and children’s education.
• Cost of moving.
• Housing issues such as house price differentials, and availability of council houses.
• Lack of information about job market/ vacancies available.

Question 31

Causes of occupational immobility

Answer 31

• Retraining required.
• Lack of information on what skills are needed for the jobs available.
• Inherent abilities of the structurally unemployed resources may not match jobs available.
• Lack of desire to retrain/fear of change.