theme 3- 3.5 the labour market Flashcards
demand for labour definition
the amount that firms are willing to pay for a certain amount of workers
derived demand definition
the demand for labour is dependent on demand for the final good or service
relationship between wages and demand
price of workers = wage
demand varies inversely with wage
factors influencing demand for labour
- level of consumer demand for the final product
- productivity of labour
- price of the product
- cost of capital (a substitute for labour)
- wage rate relative to the price of capital
marginal revenue product
the additional revenue generated by the extra output from employing one more worker
is a key determinant of wages in competitive markets
supply of labour definition
the number of workers willing and able to work at any given wage
varies in direct relationship with the wage rate
i.e. more are willing to work if wages rise
factors influencing the supply of labour to a particular occupation
- size of the population inc. migrant workers
- quality and content of education and training- e.g. engineering firms face a lack of adequately trained workers
- income tax rates and out of work benefits
- strength of trade unions- may be able to restrict workers
- govt regulations e.g. occupational licenses
- opportunity cost of leisure
market failure in the labour market- geographical immobility of labour
some workers find it hard to move to diff places to seek and find work
may be due to:
- family ties
- cost of travel
- living costs + expenses
market failure in the labour market- occupational immobility of labour
some find it diff to move jobs as they lack the appropriate skills or training
in a dynamic economy, some jobs may become obsolete e.g. replaced by machines
skills set required for jobs will change over time
wage determination in competitive markets
wage rate = where demand and supply of labour meet
if wages are too high: excess supply -> unemployment, wages will fall as workers accept lower wages
if wages are too low: excess demand -> labour shortage, leads to a rise in wages
wage determination in non-competitive markets
if the firm has monopsony power, it can ‘exploit’ the workers and force wages down- pay them less than their value to the firm
BUT: workers may have significant power e.g. a trade union could have some monopoly power and therefore force wages above market level
current issues in the labour market
- unemployment- COVID
- ageing pop and dependency ratio
- gig economy- rise in short term contracts paid for small assignments e.g. Uber- no security or certain income
- 0 hour contracts = no stable income
- low productivity in the UK since the 2008 GFC
- AI means some jobs are being replaced
- discrimination
govt intervention in the labour market- minimum wages
many countries have a national min wage
UK also has the national living wage
these are an application of minimum prices
up to 2020 there was little evidence the min wage caused unemployment from the excess supply of labour
advantages and disadvantages of a national minimum wage
adv:
- prevent exploitation
- reduce poverty
- eliminate unemployment trap
disadv:
- cause unemployment
- inflationary if higher costs are passed to the consumer
- may not reflect regional differences in the cost of living
govt intervention in the labour market- maximum wages
an upper limit or ceiling placed on how much a worker can earn in a given time period
measure to reduce top earnings far from the median income
application of maximum prices
advantages and disadvantages of maximum prices
adv:
- reduce income inequality
- prevent top 1% earners ‘creaming off’ profit
- allow higher wages to be earned by more workers
disadv:
- shortages in certain types of worker
- destroy incentives for workers
public sector wage setting
govt is a major employer
e.g. NHS employs 1.2 million workers
through their own policy on public sector wages it directly determines the wages received by workers in the public sector
measures to reduce occupational immobility of labour
- training and retraining schemes
- apprenticeships
- improvements in job info
- reduce regulations, licensing or educational requirements
measures to reduce geographical immobility of labour
- production of affordable housing
- subsidies towards removal expenses
- improvements in transport e.g. HS2
price elasticity of demand for labour
how responsive the demand for labour will be to changes in wages
UK = -0.4
-1 to infinity = relatively elastic, more than proportional increase in job losses when wages increase
0 to -1 = relatively inelastic, vice versa
determinants of the elasticity of demand for labour
- labour costs as a proportion of the total costs of a business- inelastic if a small proportion
- PED of the final product- PED = elastic, PEDL elastic
- ease and cost of factor substitution
- time period- more elastic in the long run
price elasticity of supply for labour
measures responsiveness of labour supply to changes in the wage rate
1 to infinity = relatively elastic, more than proportionate increase in supply if wages rise
0 to 1 = relatively inelastic, vice versa
determinants of the elasticity of supply of labour
- level of skill required- low = elastic
- level of educational qualifications- less = elastic
- ease of migration- more = elastic
- time- short run = inelastic
- degree of mobility of labour- mobile = elastic
relationship between labour elasticity and wages
the higher the elasticity, the lower the wages tend to be
