Theme 3 - Labour markets Flashcards
what is elasticity of labour supply
the responsiveness of labour supplied given a change in the wage rate
how does the nature of skills required in the job affect the elasticity supply of labour
- Jobs requiring highly specialized skills have a limited pool of qualified workers due to the advanced education, training, or experience needed
- The time and effort required to acquire these skills further restrict the number of workers who can enter the labor market quickly.
- The supply of labor for such jobs is inelastic because a change in wages does not easily attract more workers in the short term due to the barriers to acquiring the necessary skills
how does the length of training affect the elasticity of supply of labour
Jobs that require only a short training period allow workers to enter the labor market quickly and easily
- Many individuals can rapidly acquire the necessary skills, increasing the potential labor pool
- The supply of labor is highly responsive to changes in wages because workers can quickly start working or switch jobs if wages increase or decrease
- Longer Training → Higher Entry Barriers → More Inelastic Supply of Labour
If a profession requires years of education and specialised training (e.g., doctors, engineers, pilots), fewer workers can quickly enter the workforce.
This means that even if wages increase, the supply of labour cannot expand quickly due to the time required to complete qualifications.
As a result, the supply of labour is price inelastic (i.e., less responsive to wage changes).
- Shorter Training → Lower Entry Barriers → More Elastic Supply of Labour
If a job requires minimal training (e.g., retail workers, hospitality staff), more people can easily enter the workforce when wages increase.
This means the supply of labour is more responsive to wage changes because new workers can quickly upskill and fill vacancies.
As a result, the supply of labour is price elastic (i.e., more responsive to wage changes).
how does vocation affect the elasticity of supply of labour
- Jobs with a strong vocational aspect, such as teaching, nursing, or religious vocations, attract individuals driven by passion or a sense of duty rather than purely financial incentives
- Workers in vocational jobs often exhibit high levels of commitment and dedication, making them less responsive to wage changes
- The labor supply for vocational jobs is relatively inelastic because wage increases or decreases have less influence on the decision to enter or stay in the profession compared to non-vocational jobs
- Jobs with a weak vocational aspect are more likely to attract workers primarily motivated by financial incentives rather than passion or calling
- Workers in these jobs are more responsive to changes in wages, with significant shifts in labor supply as wages rise or fall.
- The labor supply for these jobs is elastic because workers can be easily attracted or deterred by wage changes
how does time affect the elasticity of labour supply
- In the short run, workers have limited ability to respond to changes in wages due to existing commitments and constraints, such as ongoing contracts, familial responsibilities, or current educational pursuits
- Workers might not be able to move to different locations or switch industries quickly due to the short time frame
- As a result, the labor supply is relatively inelastic in the short run because workers cannot easily adjust their work hours or change jobs in response to wage changes
- : Over the long run, workers have more time to adjust to wage changes. They can pursue additional education or training, relocate, and switch careers or industries
- With time, more individuals can enter the labor market or exit based on wage trends, increasing their responsiveness to wage changes.
- ## Therefore, the labor supply becomes more elastic in the long run as workers have the ability to make significant adjustments in response to changes in wages
characteristics of a perfectly competitive labour market
- there are many potential workers and employers
- labour is homogenous, there is no difference in skills and qualifications between workers
- there is perfect information for both workers and firms
- firms are wage takers, they have no control over wages that they can over to their workers
- there are no barriers to entry/exit
why do wage differentials exist
- labour is not homogenous
- workers are different and will therefore
have different MRPs - not every worker has the ability to take every job, as there are different supplies of labour
- discrimination
- workers are different and will therefore
- non monetary considerations
- eg - flexibility of working hours, potential for promotion, number of holidays
- labour is not perfectly mobile
- occupational, geographical immobility
- imperfect information
- the presence of trade unions who bargain for higher wages
- monopsonies and wage setting ability/power
another word for labour productivity
MRP
what is a monospony
a single dominant buyer of labour in a given profession
- they reduce wages and reduce quantity of labour
examples of monopsonies
- government is a monpsony of nursing, teaching
- supermarkets with farmers
features of monopsonies
- wage makers, they set wages
- ## will maximise revenue made from workers by hiring up to where MRP = MCl
why dont monopsonies employ more workers
- they would have to increase wages to do so
why does supply = AC on a monopsony diagram
- because it shows the wage rate necessary to attract each additional worker, which is the average cost of hiring labo
average cost of labour equation
total cost of labour/quantity of labour
what is a trade union
an organisation of workers who bargain for higher wages and better working conditions
- a monopoly of labour
advantages of trade unions
- increases wages of workers
- Unions often negotiate contracts protecting workers from unfair dismissal dismissal, providing greater job security.
- Unions advocate for improved workplace health and safety standards
- Unions negotiate for reasonable working hours, rest breaks, and family-friendly policies
- Unions often provide or advocate for access to training and professional development opportunities, helping workers to enhance their skills and career prospects.
- Unions give workers a collective voice, allowing them to participate in decision-making processes
- unions help reduce employee turnover,
disadvantages of trade unions
- unemployment
how do trade unions help in a monopsony market
- Unions can negotiate for wages that are closer to the competitive equilibrium level, reducing the wage suppression
- By securing better wages and working conditions, unions make the workplace more attractive, potentially increasing the labor supply available to the monopsonist
how does the strength of trade unions affect trade union power
- Higher Membership → Greater Bargaining Power → Stronger Ability to Demand Higher Wages & Better Conditions
A higher percentage of workers in a union increases collective bargaining power.
Employers face greater pressure to negotiate because a strike or protest would involve a larger portion of the workforce.
This leads to stronger wage negotiations, better job security, and improved working conditions for union members.
As a result, unions become more effective in representing workers’ interests.
- Legal Rights & Government Support → More Ability to Strike → Stronger Union Power
Favourable labour laws (e.g., low barriers to striking, legal recognition of unions) allow unions to organise industrial action more easily.
If the government restricts union activity (e.g., high strike thresholds, bans in essential services), unions lose leverage over employers.
A union with strong legal backing can apply pressure through strikes and slowdowns, forcing employers to concede to demands.
Without these rights, unions become weaker and less influential.
- Economic Conditions & Unemployment Rate → More or Less Worker Leverage → Varies Union Power
In low unemployment environments, workers are in high demand, so unions have more negotiating power as businesses struggle to replace striking staff.
In high unemployment, firms can easily hire replacements, reducing the union’s ability to demand higher wages or better conditions.
Economic downturns can also lead to job losses and wage freezes, making unions less effective in securing better terms for workers.
As a result, trade union power fluctuates with the economic cycle.
- Public & Employer Attitudes → Support or Resistance → Changes Union Influence
If the public supports unions (e.g., during cost-of-living crises), they gain political leverage and employers are pressured to meet worker demands.
If unions are seen as disruptive (e.g., causing major economic losses through strikes), they may lose public sympathy, reducing their ability to apply pressure.
Some employers voluntarily work with unions, while others discourage membership through legal loopholes, outsourcing, or offering individualised contracts.
This can either enhance or weaken union strength, depending on the broader economic and social climate.
what is trade union density
the proportion of the workforce in a given profession that are part of a given trade union
what is a union mark
the difference between the wages that people in a trade union are getting vs the ones who arent (in a similar profession). the bigger the difference, the bigger the success of the trade union
real world evidence that proves that the power of trade unions are limited
legislation from the 1970s:
- “closed shop” trade unions being banned, reduces power of individual trade unions
- for strikes, ballots have to be done in secret, and they can only take place if at least 70% of the union agree to strike
- you’re only allowed to strike against your own employer, this reduces the power of the strike
what are closed shop trade unions
- In a closed shop arrangement, employers agree to hire only union members, and employees must remain union members to continue working at the company.
- The union has significant control over the hiring process, as non-union members cannot be employed.
why has the union density in the UK decreased?
- Growth of Flexible and Gig Economy Work → Harder to Unionise → Lower Union Membership
The UK labour market has seen a rise in zero-hour contracts, gig work, and self-employment.
Workers in these roles often have unstable hours and multiple employers, making it harder to organise collective bargaining.
Many gig workers are classified as self-employed, meaning they do not have the legal right to union representation.
As a result, union membership has fallen, particularly in low-paid service sectors.
- Shift from Manufacturing to Services → Less Unionised Workplaces → Falling Density
Historically, unions were strong in heavy industries like coal, steel, and car manufacturing, which required large, organised workforces.
However, the UK economy has shifted towards services (e.g., finance, retail, hospitality), where union membership is traditionally lower.
Many service jobs are customer-facing and individualised, reducing the need for collective action.
This structural change has led to a decline in overall union density.
- Stricter Union Laws → Harder to Strike → Less Union Power → Membership Decline
The UK government has introduced laws that restrict union power, such as:
1980s anti-strike laws under Thatcher, which required secret ballots before industrial action.
2016 Trade Union Act, which increased the minimum turnout required for legal strikes.
With unions facing more legal barriers to collective action, workers may see less benefit in joining a union.
This has contributed to fewer strikes and declining membership.
- Rising Individual Bargaining Power → Less Need for Unions → Membership Drops
Increased education levels and stronger workplace rights (e.g., minimum wage, holiday pay) have made workers less reliant on unions.
Many high-skilled professionals can negotiate their own wages and benefits, making union protection less necessary.
As workplace conditions improve due to government regulations, some workers may feel unions offer little additional benefit.
This has led to lower union membership in professional and white-collar jobs.
- Employer Resistance & Outsourcing → Unionisation Discouraged → Density Falls
Many employers actively discourage union membership, offering individual contracts and direct negotiations instead.
Some businesses outsource work or rely on agency staff, reducing the number of directly employed workers who can unionise.
In the public sector, where union membership is higher, government cuts and privatisation have reduced the number of unionised jobs.
These factors have eroded union influence and contributed to a long-term decline in union density.
why do men get paid more than women
- Childbearing Impact: Women often take time off during pregnancy and early child-rearing, leading to a pause in skill development. This can reduce their Marginal Revenue Product (MRP), impacting future promotion and earning potential.
- Career Timing: Many women have children in their late 20s or early 30s, a critical period for career growth and advancement. Extended leave at this stage may slow their progression and limit future wage growth.
- In some developing countries, girls have fewer educational opportunities than boys, which can restrict their access to higher-paid jobs and limit lifetime earnings.
- Women are more likely to work in lower-paid, low-demand roles, particularly in the service sector, where skills requirements are lower, affecting earning potential.
- Women are often underrepresented in trade unions, meaning they miss out on collective bargaining power for better wages and working conditions.
- Despite anti-discrimination laws, some employers may still favor male employees, limiting women’s access to higher-paying roles and progression opportunities.
why do footballers get paid more than teachers
High MRP of Footballers: Professional footballers generate large revenues from ticket sales, merchandise, and broadcasting rights, leading to high wages.
Demand and Supply Dynamics: Footballers with elite skills are in limited supply but high global demand, driving up wages, whereas teachers are in abundant supply relative to demand.
Inelastic Supply of Football Talent: Skilled footballers are difficult to replace, so wage increases don’t easily draw in additional talent.
Teaching as a Monopsony: Teaching is often a monopsonistic market where the government, the primary employer, sets wages lower to manage inflationary effects.
Competitive Clubs vs. Monopsony: Football lacks a single dominant wage-setting employer, allowing players’ salaries to rise based on club competition.
Negative Wage Differential in Teaching: Teaching’s vocational appeal, holidays, and pensions add non-wage benefits but often result in lower wages.
Trade Union Impact: Many teachers are hesitant to strike due to student impact, limiting wage-bargaining power.
Unique Skill Sets in Football: Footballers bring unique skills and branding value, with clubs willing to pay high premiums for these differences.
Global Revenue Sources for Football: Football is a global industry; broadcasting rights and advertising revenue boost players’ earnings significantly.
Localized Service in Teaching: Teaching services are local, with funding and demand mostly limited to specific regions and school systems, without contributions from a global market.
why do Londoners get paid more than northerners
- Higher Cost of Living → Higher Wages Needed to Attract Workers → Wage Premium
London has higher housing, transport, and living costs than northern regions.
Employers must offer higher wages to compensate workers for the higher expenses.
If wages were not higher, many workers would struggle to afford living in London, causing labour shortages.
As a result, firms competing for talent must increase salaries, leading to a London wage premium.
- Stronger Demand for High-Skilled Labour → More High-Paying Jobs → Higher Average Wages
London has a higher concentration of high-skilled jobs, particularly in finance, law, tech, and media.
These sectors require specialist skills, meaning employers must pay more to attract talent.
High wages in these industries pull up the average salary, making Londoners appear to earn more overall.
In contrast, northern economies are more reliant on lower-wage industries, like manufacturing and retail.
- Higher Labour Productivity → Firms Can Afford to Pay More → Wages Rise
Workers in London tend to be more productive due to access to better technology, infrastructure, and networks.
Many London jobs involve knowledge-based work, which generates higher value per worker.
When productivity is high, firms can afford to pay higher wages without reducing profits.
In northern regions, productivity is often lower due to less investment in technology and infrastructure, keeping wages lower.
- Agglomeration Economies → More Business Activity → Higher Wages
London benefits from agglomeration economies, meaning businesses cluster together to share knowledge, resources, and suppliers.
This creates a dense job market, with firms competing for the best workers by offering higher wages.
The clustering of industries (e.g., finance in Canary Wharf, tech in Shoreditch) creates more high-paying opportunities.
In the North, fewer industries cluster together, leading to less competitive wage offers.
- Greater Foreign Investment and Global Influence → More Capital-Intensive Jobs → Higher Wages
London attracts more foreign investment, particularly in banking, fintech, and international trade.
Many multinational firms set up headquarters in London, offering global-level salaries.
Capital-intensive businesses (like investment banks) can afford to pay higher wages due to greater revenue generation.
The North sees less foreign investment, meaning firms operate on lower profit margins and offer lower wages.
why do some ethnic groups get paid less than others
- some ethnic minorities face obstacles in accessing high quality education, leading to lower educational attainment
- lower qualifications reduce their MRP, limiting access to higher paying roles
- non native speakers may struggle with language proficiency, which can affect task performance, effective communication
- language limitations restrict access to jobs needing strong communication, often keeping these workers in lower paying roles
- ethnic minorities are often concentrated i low paid sectors like hospitality and manual labour, with limited career growth
- structural barriers restrict movement into higher paid sectors, reinforcing lower average earnings
- minorities frequently reside in poorer areas with fewer job opportunities, lower quality schools, and limited career support opportunities
- jobs in these areas often pay less, leading to lower wages
- bias in hiring may limit minorities from obtaining higher paying roles, favouring majority groups
- even in similar roles, minority workers may face wage discrimination and fewer advancement opportunities, keeping them in lower paid positions
microeconomic advantages of trade unions
- higher wages :
- Trade unions negotiate higher wages for their members through collective bargaining.
- This leads to increased earnings for members in the union
- Higher wages improve workers’ standard of living and increase their spending power.
- Increased consumer spending can boost demand in the economy, potentially driving business growth. - Increased efficiency:
- Trade unions advocate for better working conditions, such as safety standards and reasonable working hours.
- A healthier, more satisfied workforce tends to be more productive and efficient
- Increased productivity can lower production costs for businesses and improve overall efficiency. - Job security:
- Trade unions negotiate contracts that often include job security provisions.
- Greater job security reduces the risk of sudden layoffs for workers
- Reduced uncertainty about employment can increase worker morale and long-term commitment to the company
- This stability can foster better long-term relationships between workers and employers, potentially improving business performance.
microeconomic disadvantages of trade unions
- wage increases can increase labour costs for firms (fixed cost)
- higher labour costs may lead to firms laying off workers or substituting labour for capital. this can increase supply of inactive workers
- with increased wage costs, firms may allocate less budget towards innovation
- lower supernormal profits
- this may reduce productivity growth and might reduce the firms dynamic efficiency,
- increased wages can increase COL , may be passed onto consumers and reduce the firms competitiveness in the market
- union rules often limit layoffs and mandate specific hiring practices, reducing firms’ ability to quickly adjust labour to demand fluctuations
- this inflexibility can lead to inefficiencies in labour allocation,increasing operational costs and slowing response times to market changes
- higher wages are not always matched by productivity increases, leading to a wage-productivity imbalance
- the gap can reduce profit margins and inhibit reinvestment,hindering long term growth and efficiency
evaluation points for microeconomic effects of trade unions
- The impact of higher wages depends on the elasticity of demand for labor. If the demand for labor is inelastic, firms may absorb the higher wage costs. However, if demand is elastic, firms may reduce hiring or invest in automation, limiting the benefit to workers.
- Whether higher wages lead to job losses depends on the elasticity of demand for the firm’s product. If demand for the product is price inelastic, the firm may pass on higher labor costs to consumers, minimizing job losses. However, in highly competitive markets, firms may cut jobs to stay competitive.
- depends on whether there is a monopsony in the market
macro disadvantages of trade unions
cost push inflation - Unions negotiate higher wages for workers, raising COL
- Firms pass on these higher costs to consumers in the form of higher prices.
- Increased prices can contribute to overall inflation in the economy.
- Persistent inflation can erode purchasing power and slow down economic growth.
- Unemployment:
- Higher wages increase labor costs for firms, reducing their demand for labor.
- Firms may lay off workers or reduce hiring to cut costs.
- This can increase unemployment, particularly among low-skilled workers.
- Higher unemployment may reduce aggregate demand, leading to slower economic growth.
- Decreased Labor Market Flexibility:
- Union contracts often include rigid rules on working hours, wages, and hiring practices.
- This reduces the flexibility of businesses to adjust to changes in the market (e.g., economic downturns).
- Lack of flexibility can make it harder for firms to cut costs or innovate.
- Reduced flexibility can lead to slower economic growth and lower adaptability in the global economy.
macro advantages of trade unions
Increased Aggregate Demand:
- higher wages for workers, increases their disposable income.
- With more income, workers spend more on goods and services.
- Increased consumer spending boosts aggregate demand in the economy.
- Higher demand can lead to economic growth, increased production, and job creation.
Reduced Income Inequality:
- Unions help raise wages for lower- and middle-income workers.
- This reduces wage disparities between high- and low-income earners.
- Less income inequality can foster social stability and reduce poverty.
- A more equitable income distribution may increase overall economic welfare.
Increased Productivity:
- By advocating for better working conditions, unions help improve worker health and safety.
- Healthier workers are more productive and motivated.
- Increased productivity contributes to economic growth without requiring more inputs.
- This can lead to a more competitive economy
evaluation points for macroeconomic trade union impacts
- higher wages and aggregate demand depends on the state of the economy. If the economy is near full employment, increased demand could lead to inflation rather than growth. In a recession, higher demand may have a stronger positive impact.
- Increased Productivity: depends on whether the higher wages and better conditions lead to increased motivation or result in complacency. Additionally, the industry type matters: some industries might benefit more from improved working conditions than others.
- Wage-Push Inflation:
depends on the elasticity of demand for the firm’s product. If demand is inelastic, firms may pass costs on to consumers. If demand is elastic, firms may absorb the costs, limiting the inflationary impact. - Unemployment:
Depends on: The elasticity of demand for labor. If demand for labor is inelastic, higher wages may not significantly reduce employment. However, in industries where labor demand is elastic, job losses could be more significant.
why might a trade union not work in a monopsonic market
Union-Set Wage May Be Below Competitive Wage:
In a monopsony, wages are typically set below the competitive equilibrium because the firm has power over wage-setting. While the trade union can negotiate higher wages, they may not reach the market equilibrium wage, which is where supply and demand for labor would naturally meet in a competitive market.
Limited Bargaining Power:
The trade union may not have enough bargaining power to push wages up to the full market equilibrium, particularly if there are concerns about job losses or the firm’s ability to continue operating profitably. As a result, wages may remain below the optimal level.
Monopsonist Still Controls
Employment Levels:
Even if the wage increases, the monopsonist still retains control over hiring. If wages are raised too much, the firm may choose to hire fewer workers, limiting the union’s ability to increase both wages and employment to the full market level.
Wage Compression:
The union’s negotiation might create a uniform wage structure that benefits lower-wage workers more than others, but this doesn’t fully address the underpayment across all labor categories compared to what the market equilibrium would dictate.
labour market failure
- Labour Immobility (Geographical & Occupational) → Misallocation of Labour → Structural Unemployment
Workers may struggle to move to areas where jobs are available due to high housing costs, family ties, or lack of infrastructure (geographical immobility).
Workers may also lack the necessary skills for available jobs (occupational immobility), leading to skills shortages in some sectors and high unemployment in others.
This results in a misallocation of labour, with excess labour supply in some areas and shortages elsewhere.
Structural unemployment rises, reducing overall labour market efficiency and causing wage disparities.
Example: Tech jobs in London have a shortage of skilled workers, while ex-industrial areas in the North have high unemployment due to declining manufacturing jobs.
- Inequality → Barriers to Entry → Reduced Social Mobility & Underutilisation of Labour
Individuals from low-income backgrounds may lack access to quality education and training, creating barriers to higher-paying jobs.
This results in persistent income inequality, as wealthier individuals can afford better education and networking opportunities.
Lower social mobility means talent is underutilised, as skilled individuals are unable to reach their full potential, harming productivity.
Over time, inequality can also reduce labour market participation, as those in poverty face disincentives to work (e.g., high childcare costs, lack of transport, or low wages compared to benefits).
Example: Children from lower-income families struggle to access STEM education, limiting their ability to enter high-paying industries like tech or finance.
- Disincentives to Be Economically Active → Reduced Labour Supply → Labour Shortages
High marginal tax rates and welfare benefits can create disincentives to work, especially for low-income households where the extra earnings are offset by benefit losses.
A lack of affordable childcare can discourage parents (especially women) from participating in the workforce.
Early retirement schemes or low wages relative to living costs may encourage some to drop out of the workforce.
This reduces the size of the active labour force, creating labour shortages and lower economic output.
Example: In some economies, generous unemployment benefits may discourage some workers from taking lower-paid jobs.
- Labour Market Discrimination → Wage Inequality → Lower Productivity
Employers may discriminate based on gender, race, age, or disability, leading to unequal pay and job opportunities for certain groups.
This results in wage gaps, as workers are not always paid based on productivity but rather due to biases in hiring and promotion.
The underutilisation of talent reduces overall labour productivity and economic efficiency.
Discrimination can also discourage skilled workers from certain industries, worsening labour shortages.
Example: Gender pay gaps persist in many industries, with women earning less than men for the same work, discouraging participation in certain fields.
- Monopsony Power of Employers → Suppressed Wages → Labour Exploitation & Inefficiency
A monopsony exists when a single or dominant employer has significant market power, allowing them to pay lower wages and restrict hiring.
Workers lack bargaining power, as few alternative jobs are available, forcing them to accept lower wages than their productivity justifies.
This leads to labour market inefficiency, as workers may leave the industry, exacerbating shortages in key sectors.
It can also result in higher profits for firms, but at the cost of lower economic welfare for workers.
Example: Large supermarket chains often act as monopsonies in rural areas, paying low wages to workers who have few alternative job opportunities.
