Theme 3 - Labour markets Flashcards
what does MRP tell workers and firms
tells firms how many people to employ at a given wage rate
- tells workers whether their pay is good enough if their MRP is at least
limitations of MRPL
- its hard to measure productivity
- teamwork makes it difficult to measure individual productive
- the self employed
- we assume that we are working in a perfectly competitive market, may be the presence of monopsonies or trade unions
what is the elasticity of labour demanded
measures the responsiveness of labour demanded given a change in the wage rate
how does a change in the final price of the product shift the labour demand curve
- if the price of the final product goes up, the MRP of the worker will also go up
- Firms experience increased revenue and profit margins when the final product price rises.
- Higher profitability encourages firms to expand production to maximize profits
- To support higher production levels, firms demand more labor, shifting the labor demand curve to the right.
how does the substitutability of capital for labour affect the elasticity of labour demanded
- When capital can easily replace labor, firms are highly sensitive to changes in labor costs.
- A rise in wages significantly increases labor costs.
- Firms respond by substituting labor with more cost-effective capital (e.g., machinery, automation
- This substitution results in a substantial decrease in the quantity of labor demanded, making labor demand more elastic (high responsiveness to wage changes).
how does the cost of labour affect the elasticity of labour demanded
- When labor costs are high, firms face significant pressure to manage expenses to maintain profitability.
- High labor costs incentivize firms to find alternative means of production, such as automation or outsourcing, to reduce reliance on expensive labor
- The ability to substitute labor with capital or other inputs means that a small increase in wages leads to a large decrease in the quantity of labor demanded, making labor demand more elastic
how does the time period affect the elasticity of labour demanded
- In the short run, firms have limited ability to make significant changes to their production processes or workforce
- Many factors of production, such as capital and contracts, are fixed and cannot be easily altered
- Due to these constraints, the quantity of labor demanded is relatively unresponsive to changes in wages, resulting in inelastic labor demand
LONG RUN:
- Over the long run, firms have more flexibility to adjust their production processes, invest in new technologies, and change their workforce size
- Firms can substitute labor with capital (e.g., automation) and implement more efficient production techniques
- These adjustments make the quantity of labor demanded more responsive to changes in wages, leading to more elastic labor demand
where is wage set (industry)(perfect competition)
where demand of labour = supply of labour
revenue maximisation on an MRP/ACl diagram
where MRP = MCl (marginal cost labour) or when MRP = wage
what is the occupational mobility of labour
the ability of labour to move from one occupation or job to another job
what is geographical mobility of labour
the ability of labour to move from one location to another in taking
micro advantages of an increase in nmw
Increased Worker Income
- Higher wages boost the disposable income of low-paid workers, improving their standard of living and reducing income inequality.
- Can stimulate consumption in the economy, benefiting local businesses and industries reliant on consumer spending.
Reduced In-Work Poverty
- An increased NMW lifts many low-income workers above the poverty line, reducing reliance on welfare benefits.
- Reduces government expenditure on welfare and improves worker morale and productivity.
Improved Worker Retention
- Higher wages can reduce staff turnover and increase job satisfaction, lowering recruitment and training costs for firms.
- Enhances labour market stability and firm productivity.
Promotes Fairness in the Labour Market
- Prevents the exploitation of workers by setting a wage floor, ensuring a minimum standard of compensation for labour.
- Encourages greater equity in income distribution and fosters social cohesion
Counterbalance to Monopsony Power
- In markets where employers have significant monopsony power, a higher NMW prevents exploitation and ensures fairer wages.
- Encourages a more competitive and equitable labor market, improving overall economic efficiency
micro disadvantages of an increase in nmw
Increased Costs for Businesses
- Higher wage bills raise production costs, particularly for labor-intensive firms. Small businesses or those with narrow profit margins may struggle to absorb these costs.
- Firms may pass on higher costs to consumers through increased prices, or may reduce output to cut costs
Potential Job Losses
- Firms may respond to increased wage costs by cutting jobs, reducing hours, or automating tasks to maintain profitability.
- Could lead to higher unemployment, especially among low-skilled or entry-level workers, as firms seek to optimize labour efficiency
Compression of Wage Differentials
- Raising the NMW can lead to a smaller gap between low-wage and higher-wage workers, potentially demotivating skilled workers or those seeking promotions.
- Can reduce productivity as workers feel their efforts are not appropriately rewarded.
Reduced Demand for Low-Skilled Workers
- Firms may prioritize hiring fewer but more productive workers to justify higher wages, side-lining low-skilled workers.
- Increases structural unemployment as displaced workers struggle to find roles suited to their skills.
Potential Reduction in Training Opportunities
- Firms facing higher wage costs may cut back on investment in employee training or development programs to save costs.(r&d)
- Could harm long-term productivity growth and workers’ skill development.
macro advantages of an increase in national min wage
Boost to Aggregate Demand (AD)
- Higher wages increase disposable income for low-income households, who have a high marginal propensity to consume (MPC).
- Leads to increased consumer spending, stimulating economic growth and potentially reducing unemployment in the short term due to higher demand for goods and services
Reduction in Income Inequality
- Raising the NMW narrows the wage gap between low-income earners and higher-income individuals.
- Promotes social equity and reduces relative poverty, contributing to a more inclusive and cohesive society.
Increased Tax Revenues
- Higher wages lead to increased income tax revenues and National Insurance contributions for the government due to fiscal drag.
- Provides additional fiscal resources that can be used for public spending on infrastructure, education, or healthcare
Reduced Government Spending on Benefits
- With higher wages, fewer workers rely on welfare programs like housing benefits or tax credits.
- Alleviates pressure on public finances, allowing resources to be reallocated to other areas of the economy.
macro disadvantages of nmw
Reduced International Competitiveness
- Higher labor costs may make domestic goods and services less competitive compared to those from countries with lower wage levels.
- Could reduce exports, widen trade deficits, and discourage foreign direct investment (FDI).
Cost-Push Inflation
- Higher wages increase firms’ labour costs, leading to higher prices for goods and services to maintain profit margins.
- Could reduce the purchasing power of consumers and lead to inflationary pressures, particularly if wage increases are widespread across sectors
Risk of Higher Unemployment
- Firms may reduce hiring or lay off workers to manage increased wage costs, particularly in industries with tight profit margins.
- Could lead to higher structural or frictional unemployment, particularly for low-skilled or young workers who are more vulnerable in the labour market
Limited Effectiveness in Reducing Poverty
- Many low-income households may not benefit directly if the NMW increase leads to job losses or reduced hours.
- May fail to significantly reduce overall poverty levels, especially if inflation erodes real wages.
Reduced Investment by Firms
- Higher wage costs may leave firms with less capital to reinvest in research, development, or capital improvements.
- Could hinder long-term productivity growth and innovation, reducing potential GDP growth
