Theme 3 - Labour markets Flashcards
what is supply of labour
the number of hours people are willing and able to supply at a given wage rate
what is demand of labour
the quantity of labor that employers are willing and able to hire at a given wage rate in a given time period
how can net migration affect the supply of labour
- Increased Labor Supply → Lower Wages (Especially for Low-Skilled Jobs) → Cost Savings for Firms → Higher Profits
A rise in net migration increases the number of available workers, shifting the labor supply curve outward.
If demand for labor remains the same, wages in low-skilled jobs may fall due to increased competition.
Businesses benefit from lower labor costs, allowing them to increase production and profitability.
This can make industries more competitive, particularly those relying on low-cost labor (e.g., hospitality, agriculture).
- Increased Labor Supply → Reduces Skill Shortages → Higher Productivity & Efficiency
If high-skilled workers migrate (e.g., engineers, doctors, software developers), they help fill skill gaps.
Businesses benefit from a larger talent pool, improving innovation, efficiency, and productivity.
A more skilled workforce allows firms to expand operations, boosting output and competitiveness.
Over time, labour market flexibility improves, reducing wage pressures in high-demand sectors.
- Increased Competition for Jobs → Displacement of Domestic Workers → Risk of Structural Unemployment
Migrants may be more willing to accept lower wages or worse working conditions than local workers.
This can result in domestic workers struggling to compete, particularly in low-skill sectors.
If domestic workers become unemployed long-term, it leads to structural unemployment due to skill mismatch.
Over time, this could increase reliance on welfare benefits and reduce social mobility.
- Higher Population Density → Increased Demand for Housing → Higher Rents & Property Prices
A rise in net migration increases demand for rental properties and housing.
If housing supply does not keep up, rents and house prices rise, making it harder for low-income households.
Landlords benefit from higher rental incomes, but it increases living costs for workers.
This can make some cities less affordable, pushing workers to commute longer distances or relocate elsewhere.
- More Entrepreneurs & Business Creation → Increased Market Competition → Lower Prices for Consumers
Many migrants start small businesses, increasing market competition and product variety.
This can drive innovation and lower prices, benefiting consumers with cheaper goods/services.
More competition can challenge monopolies, forcing established firms to improve quality and efficiency.
Over time, this can lead to greater economic dynamism, with new businesses disrupting old industries.
how can the income effect affect the supply of labour
- When wages increase, workers experience a rise in their income, which can lead to a desire for more leisure time. As a result, some individuals may choose to work fewer hours because they can maintain their desired standard of living without working as much
- Some workers have specific income targets or financial goals. Once these targets are met, they might reduce their work hours, showing a negative relationship between income and labor supply.
how can the minimum wage affect the supply of labour
- Higher Wages → Increased Incentive to Work → Greater Labour Participation
A higher minimum wage increases earnings for low-paid workers, making work more attractive.
More people enter the labour market, shifting the labour supply curve outward.
This can reduce labour shortages in industries reliant on low-wage workers (e.g., retail, hospitality).
Over time, economic participation increases, especially for young workers and those re-entering employment.
- Higher Wages → Increased Opportunity Cost of Not Working → Reduced Voluntary Unemployment
A higher minimum wage raises the financial benefit of employment relative to welfare benefits.
Some people who were previously discouraged from working (due to low pay) now find it worthwhile to seek jobs.
This can reduce voluntary unemployment, particularly among low-income and part-time workers.
As more people move into work, dependency on government benefits may decline.
- Higher Wages → Increased Competition for Jobs → Higher Job Requirements → Barriers to Entry for Low-Skilled Workers
Employers facing higher wage costs may demand higher skills and productivity from workers.
This can make it harder for low-skilled, inexperienced, or younger workers to get hired.
If firms cut entry-level positions or replace workers with automation, job seekers struggle to find work.
Over time, this may reduce the supply of low-skilled labour, increasing long-term unemployment in that group.
- Minimum Wage Above Equilibrium → Potential Job Losses → Reduced Labour Supply in Certain Industries
If the minimum wage is above the market-clearing wage, some firms cut jobs or reduce working hours.
Workers who lose jobs may exit the labour force, decreasing the overall supply of labour.
Industries with tight profit margins (e.g., small businesses, care work) may be forced to downsize.
Over time, fewer low-wage jobs may exist, making labour supply more constrained in affected sectors.
- Higher Wages → Substitution Effect → More People Seeking Part-Time or Flexible Work
A higher minimum wage makes each hour of work more valuable, encouraging some workers to work fewer hours.
Workers may prioritise work-life balance, leading to more part-time and flexible working patterns.
This can increase supply in part-time jobs but reduce full-time labour availability.
Over time, employers may struggle to fill full-time roles, especially in physically demanding jobs.
what is minimum wage
the national living wage is an example of a price floor set above price equilibrium that employers cannot legally undercut
what is a monopsony
a single dominant buyer of a specific good
national minimum wage figures 2024
- £11.44 for over 21
- £8.60 18 - 21
- £6.40 under 18s and apprentices
how do the non monetary characteristics of a job affect the supply of labour
Jobs that offer a positive work environment, including supportive management, friendly coworkers, and a healthy work-life balance, are more attractive to workers. These can increase job satisfaction, encouraging more individuals to supply their labor to these positions.
- jobs with poor working conditions, such as high stress, long hours, or unsafe environments, can deter individuals from entering or remaining in these positions, reducing the labor supply.
- Jobs that provide opportunities for career development, such as training programs, promotions, and skill development, are likely to attract more workers. They appeal to workers who want to further their careers
- Jobs that offer job security and stability, such as permanent contracts, benefits, and strong union presence, tend to attract a higher supply of labor. Workers value the assurance of steady income and long-term employment, which can outweigh higher wages in less secure positions.
- Conversely, jobs with high turnover rates, temporary contracts, or volatile industry conditions may find it harder to attract and retain workers
how does the substitute effect affect the supply of labour
- When wages rise, the opportunity cost of leisure increases because the potential earnings forgone by not working become higher. This incentivizes individuals to substitute leisure for labor, leading to an increase in the supply of labor
- Higher wages make working additional hours more appealing. For example, a part-time worker earning a higher hourly wage might decide to switch to full-time employment to take advantage of the higher earnings, thereby increasing their total labor supply.
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how do barriers to entry affect the supply of labour
- Occupations that require extensive education, specialized training, or certifications can create significant barriers to entry. These barriers limit the number of individuals qualified to enter the field, thereby restricting the supply of labor.
- Certain industries or occupations require significant financial investment to enter, such as starting a business, purchasing equipment, or undergoing costly training programs. These economic barriers can deter potential entrants, thus limiting the labor supply.
how would the price of a good or service influence the demand for labour
- Labor demand is derived from the demand for goods and services that labor helps produce. When the price of a good or service rises, it often indicates higher demand for that product. To meet this increased demand, firms typically need to produce more, which usually requires hiring additional workers.
- When the price of a good or service rises, firms typically enjoy higher profit margins. This increased profitability can lead to greater investment in production capacity, including hiring more workers.
how can labour productivity impact the demand for labour
- When workers become more productive, they can produce more output in the same amount of time. This increased efficiency can lower the average cost of production for firms, making their products more competitive in the market. As a result, firms may experience higher demand for their products, prompting them to expand production and hire more workers.
- : Significant improvements in labor productivity often come from technological advancements and better capital equipment. While this can initially increase labor demand due to higher production levels, over time, firms might invest more in capital equipment that can substitute for labor, particularly for routine and low-skill tasks.
- When labor productivity increases, firms may pass on some of the productivity gains to workers in the form of higher wages. dditionally, higher wages can lead to increased consumer spending, further driving demand for the firm’s products and potentially increasing the demand for labor to meet this higher demand.
how does cost of labour affect the demand for labour
- When the cost of labor rises, firms face higher expenses for each worker they employ. To minimize costs and maintain profitability, firms may reduce their demand for labor by hiring fewer workers, reducing hours, or even laying off employees.
- When labor costs are high, firms have an incentive to substitute labor with capital. For example, a company might invest in automation or more advanced machinery to reduce its reliance on costly human workers, thereby decreasing the demand for labor.
- Higher labor costs can lead to higher production costs, which often get passed on to consumers in the form of higher prices. This can reduce the competitiveness of a firm’s products in the market, potentially leading to lower sales and reduced production, further decreasing the demand for labor, and also contributes to cost push inflation
how does the cost and availability of substitutes affect the demand for labour
- When the cost of substitutes such as automation, machinery, or software decreases, firms may opt to replace labor with these more cost-effective alternatives.
- : As technology becomes more advanced and readily available, it can more effectively substitute for labor, particularly in routine and manual tasks
- Human workers often have the advantage of being flexible and adaptable to a variety of tasks and changing conditions, something that substitutes like machinery may not be able to match easily. In dynamic industries where tasks frequently change, the adaptability of human labor can be more valuable than rigid automation,
how does the level of government intervention affect the demand for labour
- Imposing a minimum wage can lead to higher labor costs for employers. While this aims to improve living standards for workers, it can also result in reduced demand for labor, particularly for low-skilled positions. Employers facing higher wage bills may reduce hiring, cut hours, or automate tasks to manage costs.
- Payroll taxes increase the cost of employing workers. Higher payroll taxes can discourage firms from hiring, leading to a decrease in labor demand
- government subsidies or tax credits for hiring can stimulate labor demand. Programs that offer financial incentives for hiring certain groups, such as veterans, young workers, or long-term unemployed individuals, can encourage firms to increase their workforce.
- Governments can directly increase labor demand by hiring workers in the public sector. This can be particularly effective during economic downturns when private sector demand is weak. For example, New Deal programs in the United States during the Great Depression involved large-scale public works projects that created jobs and boosted labor demand.
- Investment in infrastructure projects, such as building roads, bridges, schools, and hospitals, can create significant labor demand in construction and related industries. These projects not only create immediate employment opportunities but also have long-term benefits by improving productivity and economic growth.
how can the level of economic activity affect the demand for labour
- When the economy is expanding and GDP is growing, businesses tend to increase their production to meet rising consumer demand. This leads to an increased demand for labor as firms hire more workers to expand their operations and meet higher output levels.
- : During periods of economic expansion, businesses tend to invest in capital goods and infrastructure to expand their capacity and improve efficiency. This investment often requires hiring additional workers to operate new equipment, manage increased production, and support business growth.
- When consumer confidence is high, individuals are more likely to spend money on goods and services, stimulating demand across various industries. This increased consumer spending drives businesses to expand production, thereby increasing the demand for labor to meet growing consumer demand.
microeconomic impacts of an increase in the national minimum wage
Higher Wages → Increased Disposable Income → Higher Consumer Spending → Business Growth
Workers earning higher wages have more disposable income, allowing them to spend more on goods and services.
This increased demand can boost sales and revenue for businesses, particularly in consumer-facing industries like retail and food services.
Firms experiencing higher demand may expand production or hire more workers, offsetting some negative employment effects..
Incentivizing Productivity → Greater Worker Motivation → Improved Efficiency → Higher Firm Profitability
A higher minimum wage can encourage workers to be more productive, as they feel more valued and motivated.
This may lead to lower absenteeism, better job performance, and higher efficiency, improving overall business productivity.
Firms might also invest in training and technology to increase output per worker, making the higher wage more sustainable.
In the long run, this can contribute to higher firm profitability and competitiveness, particularly for businesses that successfully adapt to the wage increase.
Higher Wages → Increased Labor Market Participation → More Job Seekers → Potential for Structural Unemployment
A higher minimum wage makes low-paid jobs more attractive, encouraging more people to enter the labor market (e.g., students, part-time workers).
However, if firms cannot afford to hire more workers, it could create excess labor supply, leading to higher unemployment among certain groups.
Employers may become more selective, favoring more experienced workers over young or low-skilled applicants.
This can worsen structural unemployment if some workers struggle to meet new skill requirements.
Higher Wage Costs → Substitution of Capital for Labor → Increased Automation → Long-Term Job Losses
Firms facing higher labor costs may choose to replace workers with automation, especially in sectors like retail (self-checkouts) and fast food (robotic kitchens).
Over time, increased capital investment in technology may lead to fewer low-skilled job opportunities.
While this improves long-run productivity, it could displace workers who lack the skills to transition into more complex roles.
This might widen wage inequality, as low-skilled workers lose jobs while high-skilled workers benefit from technological advancements.
what is a trade union
an organised group of employees who work together to represent and protect the rights of workers, usually by collective bargaining techniques
key roles of trade unions
- improving the real wages of employees
- improving working conditions
- preventing exploitation
- protection of pension rights
- protection against unfair dismissal
what is trade union density
the proportion of workers in a particular workforce or labour market who are members of a trade union
how is trade density important
- the higher the trade union density, the higher the level of disruption that could be caused by a strike as there is higher bargaining power
trade union figures in uk
in 1999, 237 unions
in 2023, 124 unions
what is the marginal revenue product (MRPL)
the extra revenue generated when an additional worker is hired
what is the marginal revenue product of labour (MRPL)
the extra revenue generated when an additional worker is hired
MRPL equation
marginal product of labour x marginal revenue
why does the MRP curve increase then decrease
because of the law of diminishing marginal returns -
why is the wage rate constant
because we assume that firms are operating in a perfectly competitive labour market, meaning they have no control over the wages they can pay their workers
what is another word for wage rate
marginal labour costs
what information does the MRP curve give us
gives a condition for firms to maximise revenue brought in by workers
if a firms marginal revenue product = wage rate, why would it be inefficient to higher another worker
- marginal costs will be higher than marginal revenue
- another worker will cost more to the firm than they will bring in revenue
if a firms marginal revenue product = wage rate, why would it be inefficient to hire less workers
- all current workers are bringing in more revenue to the firm than costs
- so by hiring another worker, the firm can make more revenue
factors affecting supply of labour
Wage Rates
Higher wage rates generally attract more workers to enter the labour market.
Workers are incentivised to supply more labour when the reward (wage) is higher, leading to an increase in supply.
Lower wages, however, may cause a reduction in the supply as workers may choose to work fewer hours or not work at all.
📌 Example: If the minimum wage rises, more people may be willing to take up jobs, increasing the supply of labour.
- Population Size & Demographics
The size and structure of a country’s population significantly affect the labour supply.
An increase in population size (due to natural growth or immigration) generally leads to a higher supply of labour.
Demographic factors such as the age structure (working-age population) can also impact the supply. An ageing population may reduce the labour force, while a youthful population might increase supply.
📌 Example: Countries with higher rates of immigration often experience an increase in the supply of labour.
- Education & Skills
The level of education and training available to workers affects the quality and quantity of labour supplied.
Better education and vocational training can increase the supply of skilled labour, attracting workers to take up jobs that require higher levels of expertise.
Conversely, limited access to education can restrict the supply of skilled workers, leading to a lower supply of labour in high-skilled sectors.
📌 Example: A rise in the number of universities and training programmes will likely increase the supply of skilled workers in the economy.
- Social and Cultural Factors
Social norms and cultural expectations can influence the supply of labour. For example, in some cultures, there may be a preference for certain types of employment or a disinterest in certain sectors.
Attitudes towards gender roles, for example, can affect the participation of women in the workforce.
In some societies, there may be cultural pressures on individuals to stay at home or not pursue certain jobs.
📌 Example: In some countries, there may be cultural resistance to women working in certain industries, affecting the overall supply of labour.
- Government Policies
Government policies such as taxation, welfare benefits, minimum wage laws, and pension schemes can influence the supply of labour.
High taxes or generous welfare benefits may reduce the incentive for individuals to work, leading to a lower supply of labour.
On the other hand, policies that incentivise work participation, like childcare subsidies or tax credits, may increase the labour supply.
📌 Example: A universal basic income (UBI) policy might reduce the incentive to work for some individuals, leading to a decrease in the supply of labour.
- Migration
Immigration can directly increase the supply of labour, while emigration (the movement of workers out of a country) can reduce it.
If a country experiences economic growth, it may attract more immigrants seeking work, increasing the supply of labour.
Push factors like war, political instability, or lack of job opportunities in one country can lead to emigration, reducing the labour supply in the country of origin.
📌 Example: Brexit led to a reduction in immigration to the UK, causing a decline in the supply of labour in some sectors like agriculture and healthcare.
- Labour Market Conditions & Job Opportunities
The availability of job opportunities can significantly affect the supply of labour. If there are more job openings, the supply of workers may increase as people are encouraged to enter the labour force.
Conversely, if job opportunities are limited due to a recession or economic downturn, fewer people may be willing to enter the labour market.
📌 Example: During economic booms, more people are likely to look for work, thus increasing the supply of labour.
- Retirement Age & Pension Systems
The retirement age and the availability of pension schemes can influence the supply of labour, especially among older workers.
If the retirement age increases, more workers may choose to stay in the labour force longer.
Pension systems that provide benefits may incentivise individuals to retire earlier, potentially reducing the labour supply.
📌 Example: Raising the retirement age to 70 could keep more older workers in the labour force for a longer time.
- Health & Life Expectancy
Health and life expectancy also play roles in the labour supply. A healthier population with a longer life expectancy is likely to have a larger supply of labour over time.
However, if people experience declining health or if there are health crises (such as a pandemic), the labour supply could decrease.
📌 Example: The COVID-19 pandemic reduced the labour supply in many countries due to illness, lockdowns, and restrictions.
- Technological Advances
Technological advancements can lead to changes in the types of jobs available and workers’ ability to do certain tasks.
Advances in technology can lead to higher productivity and may demand more skilled workers, which can increase the supply of skilled labour. However, automation can also reduce the demand for some types of labour, decreasing the supply of workers for those jobs.
📌 Example: Automation in manufacturing may reduce the demand for low-skilled labour while increasing demand for tech-savvy workers.
supply of labour for software engineers
- High Demand for Software Engineers
Tech industry growth has accelerated in recent years, and many sectors rely heavily on software development and IT infrastructure. This increases the demand for software engineers at a faster rate than they can be trained and hired.
The expansion of tech companies, including start-ups and established firms in various industries (healthcare, finance, etc.), increases the number of job vacancies and job offers, driving up competition for skilled talent.
Global competition also plays a role, as software engineers are sought by companies worldwide. As the tech industry is very dynamic, shortages can arise when demand outpaces supply.
📌 Example: The rise of cloud computing, machine learning, and AI has increased demand for skilled engineers, leading to a shortage of talent in these areas.
- Skills Gap and Lack of Training
The availability of training and education in software engineering is limited in certain regions, contributing to the shortage of qualified workers. Although many people may aspire to become software engineers, the necessary specialised knowledge (e.g., advanced coding languages, frameworks, and software development techniques) may not be readily available to them through formal education.
Furthermore, the pace of technological change means that software engineers need to constantly upskill to stay relevant, and many may not have the time, resources, or ability to continuously learn the latest technologies.
📌 Example: Software engineers with expertise in emerging technologies like blockchain, artificial intelligence, or cybersecurity may be in particularly short supply, as these fields evolve quickly, requiring highly specific skills that are harder to acquire.
- High Barriers to Entry
The barriers to entry for software engineering can be high. While there are coding bootcamps and online courses available, many positions still require advanced degrees or experience working with specific technologies.
Some companies demand not just proficiency in coding, but also a strong background in problem-solving, algorithms, and data structures, making the recruitment process more competitive and narrowing the pool of eligible candidates.
Additionally, many software engineering roles require a certain level of experience (e.g., 3-5 years), which can make it challenging for new graduates to break into the industry.
📌 Example: The expectation of advanced degrees or several years of hands-on experience with certain languages (e.g., Java, Python, Swift) may exclude qualified candidates who lack that specific background, exacerbating shortages.
Stability vs. Volatility in Tech Industry
The tech industry is known for its rapid growth and change, but this can also lead to job insecurity. Many software engineers work for start-ups or contract-based positions, which can be risky in terms of job stability.
Frequent layoffs, especially during periods of economic downturn or tech company restructuring, may deter potential candidates from entering the industry. People may hesitate to pursue a career in software engineering if they perceive it as being unstable.
📌 Example: Many start-up companies, despite their rapid innovation and growth, are often prone to layoffs if their funding runs out or their business model does not succeed.
where should a company hire up to
MRC=MRP
