A LEVEL ECONOMICS > THEME 3, Labour Market (3.5) > Flashcards

THEME 3, Labour Market (3.5) Flashcards

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1
Q

What are labour markets?

A
  • Factor markets
  • Demand for labour comes from firms
  • Supply for labour comes from households
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2
Q

How are labour markets linked with product markets?

A
  • Labour is a derived demand (demand for workers demands on demands for goods)
  • G+S cannot be produced without labour
  • G+S cannot be purchased without being paid a wage
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3
Q

What other words mean “product”?

A

Product = Return = Output

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4
Q

What is the demand curve given by in a labour market?

A

MRP (Marginal Revenue Product)

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5
Q

How can we tell how many people to employ using MRP?

A
  • Value of MRP –> How many workers will be employed
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6
Q

How is MRP calculated?

A

MRP = MPP x MR

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7
Q

What is MPP?

A

Marginal Physical Product

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8
Q

What is MPP affected by?

A
  • Productivity
  • Firms will pay more for more productive workers because their MPP is higher
  • As MPP increased, the MRP will also increase
  • OR, it will shift price (MR) of the product
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9
Q

What is MR, in perfect competition?

A

MR is constant because firms are price takers

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10
Q

What is MR, in imperfect competition?

A

the D curve clopes down, as does MR

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11
Q

Relation from MR to output

A
  • MR decreases as output expands because
  • MRP = MPP X MR
  • (Note MRP and MPP will have different slopes)
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12
Q

Labour marker in the Long Run

A

In the LR, all factors of production are variable. This means when labour is cheap relative to capital, the firm will choose labour intensive methods of production. In the developed world, labour is usually expensive and so there are more capital intensive methods of production

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13
Q

Labour marker in the Short Run

A

In SR, firms have fixed levels of capital, and so diminishing marginal productivity means that adding extra workers fives a lower return, so to employer these workers, wage rates have to fall.

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14
Q

How is demand for labour influenced by the general state of the economy?

A
  • Product for demand is affected
  • This will affect expectations for the future and business confidence, so if confidence is low, the business may start laying off workers and are less likely to employ more.
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15
Q

TRUE OR FALSE: In the SR, MPP will fall because of the law of diminshing marginal returns

A

TRUE

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16
Q

TRUE OR FALSE: The MPP curve is the same as the demand curve for labour

A

FALSE

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17
Q

TRUE OR FALSE: The D curve for labour shows the relationship between wage and output

A
  • FALSE
  • The demand (D) curve for labor shows the relationship between the wage rate and the quantity of labor demanded by employers, not between wages and output
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18
Q

What is wage elasticity of demand?

A

Wage elasticity of demand measures how much the quantity of labor demanded changes in response to a change in the wage rate

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19
Q

How is Wage elasticity of demand calculated?

A
  • % change quantity demanded labour /
  • % change wage rate
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20
Q

What is WED affected by?

A
  • Time, the longer the time period the easier it is to substitute other factors of production
  • In SR, it may be hard to shed labour if staff are employed on contracts
  • Availability of substitutes (how easy it is to substitute capital for labour)
  • PED of the good or service that labour is used to produce
  • Proportion of labour costs in total costs in product market
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21
Q

What do we assume for the supply curve of an individual worker?

A

Assume: Workers have flexibility on how much they work

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22
Q

What is the substitution effect:

A
  • Opportunity cost of work is leisure
  • As work increases, the opportunity cost of leisure increases
  • Therefore people work more
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23
Q

What is the income effect?

A

As wages increase, the amount of work needed to achieve a specific income decreases

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24
Q

Why is the supply curve for an individual worker backward bending? (INCOME EFFECT)

A

Because at high levels of income, the worker will prefer to work shorter hours, rather than receive the extra income the worker could’ve earned (income effect)

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25
Assumptions for perfectly competitve labour markets:
* Many firms and workers * Both firms and workers cannot influence the wage rate * No barriers to entry in the LR * Perfect information * Homogenous workers and firms * Firms can employ as much labour as they want at the prevailing market wage
26
Where is profit maximising in labour markets?
P = MRP
27
Reasons why a supply curve of labour could shift outward
* Increased population (inward net migration) * Changes to required qualification which make it easier for people to get in the industry * Improved non-monetary factors * Social trends
28
Labour market failure reasons:
* Occupational, geographical immobility * Immobility means that there can be excess suppky of labour in one area/occupation and excess demand in another * Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation because of their immobility
29
What is wage elasticity of supply?
● This is the responsiveness of supply to a change in wage rates . ● It will depend on the level of qualifications and training since if there is a high level of qualifications necessary for the job, people will not easily be able to take up the job so the supply of labour will be inelastic.
30
How can an industry increase supply of labour?
* Increase hours for existing workers * Recruit new workers from outside the industry * For existing workers a wage increase may or may not increase hours. But its very likely that an increased wage will attract new workers
31
How is wage elasticity of supply of labour calculated?
% Change in supply of labour (divided by) % Change in wage
32
What is WES affected by?
- Availability of suitable labour in other industries - Qualifications required + how easy qualification is obtained - Time - Amount of underemployment - Amount of unemployment
33
Examples of occupations with wage inelastic supply of labour
Doctors, Architechts, Top Athletes
34
Who counts as economically inactive?
Caregivers, caretakers, disabled, long term illness, students, early retirees, discouraged workers
35
Who is the monopoly seller of labour?
TRADE UNIONS
36
What do we assume about monopoly sellers of labour?
* **We assume everyone employed in the market is in the trade union** * A trade union is an organisation that represents labour collectively --> therefore increased bargaining power
37
What other objectives can trade unions have?
- Smoothing the introduction of technology - Improving working conditions ○ If done right, this will increase productivity
38
When productivity increases, why will the demand curve also shift?
* BECAUSE * D = MRP * MRP = MPP X MR
39
What is a bilateral monopoly in the context of labour markets?
* When we put a trade union in to a monopsony market
40
Why are trade unions very powerful in bilateral monopoly labour markets?
* The minute you have to start paying your additional worker more you pay everyone more - MC goes up * Therefore: Trade union in a monopsony world has increased wage and number of people employed
41
Will wage differentials exist in perfect competition?
NO
42
Why do wage differentials exist in reasonably competitve markets?
* Different position and wage elasticity of the demand curve * Different position and elasticity of supply curve
43
Non monetary conditions examples:
* Hours worked * Danger --> health and safety * Vocational? * Status * Opportunity to be promoted
44
Will people working for a monopsonist employer earn the same amount as those in competitive markets?
* Ceteris paribus, those working for a monopsonist employer will **earn less** * In a perfectly competitive market, many firms compete for the same workers, so no single firm can set the wage below the market rate without losing all its employees to competitors. Firms are "wage takers". A monopsonist, however, faces little or no competition in hiring, allowing it to act as a "wage setter". * Lower Wages: To maximize profits, the monopsonist hires fewer workers and sets a wage that is lower than what would prevail in a competitive market. The monopsonist only needs to pay the minimum wage required to attract the number of workers it wants, rather than the higher, competitive wage that reflects the workers' full value (marginal revenue product).
45
What do wage differentials depend on?
* Which group the worker is in * Wage elasticities * Objectives of trade unions
46
What is unconscious bias?
* When people are unknowingly discriminatory * Employers are highly likely to face bounded rationality in deciding wage rates for labour. * Unconscious bias can come from using heuristics
47
What is economic rent?
* Economic rent is the income earned by a factor of production, such as labor, above the minimum amount necessary to keep it in its current occupation * (Triangle above S curve, up to Wage)
48
Geographical mobility definition
The ability of labour to take available work in different areas/ regions
49
Occupational mobility definition
The ability of labour to change occupations to take other available work
50
Minimum wage definition
Price floor established by the government, to improve quality of life, poverty and inequality.
51
Who typically benefits the most from an increase in minimum wage?
Those in: retail, hospitality, cleaning, maintenance
52
How can monopsony employers affect wages?
* Power to depress wages as they're the only employer in the industry
53
What was unemployment level in Nov 2025?
5% (highest level since the pandemic)
54
What happens to labour supply when there is a rise in minimum wage?
* Supply increases, demand decreases * Labour surplus --> unemployment
55
Where must minimum wage be in a competitve market and imperfect market?
* Minimum wage has to be above equilibrium in a competitive market, * But only above monopsony wage in imperfect market
56
In reasonably competitve markets, why do wage differentials exist?
* Different positions available * Different WED curve * Different WES curve
57
Wage differential definition
The difference in wages between different groups of workers, which can be caused by a variety of factors such as skill level, experience, industry, or geographic location
58
When WED is more elastic, how is the MRP affected?
* More elastic (flat) WED curve = lower MRP
59
When WED is more inelastic, how is the MRP affected?
* More elastic (steep) WED curve = higher MRP
60
What does elastic WES signify about the level of skill for workers needed?
* Elastic WES = Unskilled work * Inelastic WES = Skilled work
61
Relatively low WES --> Where does the majority of adjustments go when there is a new equilibrium.
Most of the adjustments for new labour market equilibrium will go on the WAGE
62
Is low WES inelastic or elastic?
INELASTIC
63
EVAL: For minimum wage
* Depends on Wage elasticities * Better training, education, will increase MRP * Thus increased labour and market flexibility
64
EVAL: For monopsony labour market employers
Would a trade union be more effective?
65
What is GOVT intervention in the labour market?
Interventions to improve labour mobility and incentives
66
Examples of policies to improve labour mobility:
* Better access to training (e.g. Workplace Levy) (occupational mobility) * Better funding for vocational education (e.g. T-Levels) * Improving affordability and reliability of transport (e.g. Great British Rail --> "in the interests of passengers, not shareholders") * Improving affordability of housing (e.g. maximum rent)
67
Examples to improve labour incentives:
* Creating a bigger difference between pay in work and welfare benefits for those without a job * Lowering thr burden of direct taxes for low income families to encourage work incentives * Raising minimum wage * Proviiding tax-free child care for all children aged 3 and over (e.g. up to 30 hours of free childcare per week for children from nine months old up to school age --> brought by Theresa May)
68
In a monopsony, where does the employer place the quantity/ buyer place the wage?
Where MRP = MC
69
Reasons for labour market failure:
* Discrimination * Economic inactivity * Skills shortage * Action of Trade Union * Action of monopsony employers * Labour immobility
A LEVEL ECONOMICS
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