The Labour Market Flashcards
How do we measure the extra revenue gained from the extra person hired in gaining extra output?
MRPL (Marginal Revenue Product of Labour) = MPL x MR
How do we measure the extra revenue gained from extra capital?
MRPK (Marginal Revenue Product of Capital) = MPK x MR
What is the cost of hiring extra units of labour?
Wages
What is the rental cost?
The interest rate of obtaining capital, plus depreciation
How far will firms hire extra labour?
As long as the marginal product of labour (MPL) is greater than the wage; will maximise profits until wages = MPL
How far will firms obtain extra capital?
As long as the marginal product of capital is greater than the rental cost; until the cost of capital = MRPL
What is the MRPL for a price taker?
MRPL = MPL x P (because MR = P)
There is an _____ relationship between the wage rate and the amount of employment the firm will offer
Inverse; when wages decrease, firms will want to hire more people and vice versa
What determines the prevailing wage rate?
Labour demand and labour supply; market demand for labour is the total amount of labor that firms in the market wish to employ; the market supply of labour is the total amount of labour that households are willing to offer to firms in the market
What is the equilibrium wage rate?
The wage rate that balances firms’ demand of labour and workers’ supply of labour
What happens to the MRPL when more labour is employed?
It falls because the MPL declines as employment rises
Why might the labour supply curve for skilled labour be steeper?
Because the marginal productivity of labour MPL is greater (low supply + high productivity = higher wages)
Why might the labour supply curve for unskilled labour be flatter?
Because the MPL is smaller (high supply + low productivity = lower wages)
What impact does unionisation have?
It restricts employment and raises the wage rate
Wages in each sector of the economy are determined by what?
The interaction of labour demand and supply
What does the GDP (aggregate output) of an economy depend on?
How much labour is available, how much capital equipment is available, and how much technology we have access to
What is the aggregate output of the economy?
The sum of all the different sectors of activity
In the short run, the MPL dY/dL is ______
always positive, but declines as L rises
Another way to calculate the MRPL is:
dY/dL x P
The profit maximisation point in the economy is:
(dY/dL) x P = W OR dY/dL = W/P
How do we calculate the labour force?
Working age population x participation rate
Why will the labour supply always be smaller than the labour force?
Due to voluntary, frictional and structural unemployment
What happens when there is a reduction in the labour supply?
This will generate a lower level of employment - the real wage will rise because firms are competing for a smaller amount of labour, and this means a fall in output (GDP) because of the reduced availability of labour
What would happen if real wages were pushed above the equilibrium level?
Firms would cut the number of people they are employing
In the long run, why might the labour market change?
Population growth and changes in the participation rate
In the long run, how might capital stock rise?
If there is net investment (in excess of depreciation)
What happens to prosperity if there is more employment in creating output?
It would decline because the MPL would decrease - prosperity in terms of output per person would decline if the sole source of prosperity was increasing the labour force
How might the average wage level of the economy be raised?
Increased production from a larger labour force, enhanced by capital accumulation and technology
When labour productivity is enhanced by K or A rising/improving, what happens to the labour demand curve?
It moves to the right because the MPL is higher at every employment level
What did Malthus predict?
That population growth would outstrip any improvements in productivity in agriculture, and that living standards (wages) would eventually fall to a bare minimum subsistence level; technological innovation would cause output and productivity to rise arithmetically, but the population would rise geometrically
According to Malthus, what would prevent an exponential population growth that was a strain on resources?
Misery (war and plague), vice (birth control) or moral restraint (late marriage)
