Theme 3 - Labour markets

Question 1

what is elasticity of labour supply

Answer 1

the responsiveness of labour supplied given a change in the wage rate

Question 2

how does the nature of skills required in the job affect the elasticity supply of labour

Answer 2

• 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

Question 3

how does the length of training affect the elasticity of supply of labour

Answer 3

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

Question 4

how does vocation affect the elasticity of supply of labour

Answer 4

• 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

Question 5

how does time affect the elasticity of labour supply

Answer 5

• 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

Question 6

characteristics of a perfectly competitive labour market

Answer 6

• 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

Question 7

why do wage differentials exist

Answer 7

• 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
• 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

Question 8

another word for labour productivity

Answer 8

MRP

Question 9

what is a monospony

Answer 9

a single dominant buyer of labour in a given profession
- they reduce wages and reduce quantity of labour

Question 10

examples of monopsonies

Answer 10

• government is a monpsony of nursing, teaching
• supermarkets with farmers

Question 11

features of monopsonies

Answer 11

• wage makers, they set wages
• ## will maximise revenue made from workers by hiring up to where MRP = MCl

Question 12

why dont monopsonies employ more workers

Answer 12

• they would have to increase wages to do so

Question 13

why does supply = AC on a monopsony diagram

Answer 13

• because it shows the wage rate necessary to attract each additional worker, which is the average cost of hiring labo

Question 14

average cost of labour equation

Answer 14

total cost of labour/quantity of labour

Question 15

what is a trade union

Answer 15

an organisation of workers who bargain for higher wages and better working conditions
- a monopoly of labour

Question 16

advantages of trade unions

Answer 16

• 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,

Question 17

disadvantages of trade unions

Answer 17

• unemployment

Question 18

how do trade unions help in a monopsony market

Answer 18

• 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

Question 19

how does the strength of trade unions affect trade union power

Answer 19

A union with a large number of members has greater bargaining power because it represents a significant portion of the workforce. This makes it more difficult for employers to ignore the union’s demands.

• : A larger membership base enhances the union’s ability to organize collective actions such as strikes or protests, which can pressure employers to meet union demands.

Question 20

what is trade union density

Answer 20

the proportion of the workforce in a given profession that are part of a given trade union

Question 21

what is a union mark

Answer 21

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

Question 22

real world evidence that proves that the power of trade unions are limited

Answer 22

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

Question 23

what are closed shop trade unions

Answer 23

• 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.

Question 24

why has the union density in the UK decreased?

Answer 24

• the structure of the UK economy has been restructured, moved from manufacturing/heavy industry jobs to service sector jobs. and in service sector industries, there are many employers, people will work for different employers, so organising union events may be hard
• part time work in the UK has become more prevalent,

Question 25

why do men get paid more than women

Answer 25

1. 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.
2. 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.
3. In some developing countries, girls have fewer educational opportunities than boys, which can restrict their access to higher-paid jobs and limit lifetime earnings.
4. 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.
5. Women are often underrepresented in trade unions, meaning they miss out on collective bargaining power for better wages and working conditions.
6. Despite anti-discrimination laws, some employers may still favor male employees, limiting women’s access to higher-paying roles and progression opportunities.

Question 26

why do footballers get paid more than teachers

Answer 26

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.

Question 27

why do Londoners get paid more than northerners

Answer 27

• Restructuring of the UK economy from the 1970s - moved away from manufacturing jobs to more service jobs like finance, and a lot of financial service jobs are based in london, whilst the heavy industry jobs are based in the North, so MRPs of workers in the north may be lower as demand is lower
• negative multiplier effect - all the workers who may be unemployed in the north, who have previously worked heavy manufacturing jobs, may not have the wage potential to spend a large proportion in their regional economies, therefore the industries that are dependent on their spending, may see a fall in demand for their products. and since labour is a derived demand, workers in that industry may become redundant
• negative accelerator effect - firms may not be willing to invest if they see that the growth rate of that regional economy is falling. this reduces wage growth potential, dynamic efficiency
• occupational and geographical immobility - workers in the north dont have the skills or qualifications to join occupations in the south, and they may not be able to afford to move to London, where cost of living is very high
• The cost of living in London is significantly higher than in Northern regions. This includes housing, transportation, food, and other daily expenses. To compensate for these higher costs, employers in London often offer higher wages
• London is a global financial and business hub, home to many multinational corporations, financial institutions, and high-tech industries. The demand for skilled professionals in sectors such as finance, law, technology, and consulting is higher in London, driving up wages.
• Workers in London tend to be more productive due to better infrastructure, access to advanced technology, and higher levels of human capital. Higher productivity often translates into higher wages.
• London’s economy contributes a significant portion of the UK’s GDP, reflecting its high level of economic activity and output, which supports higher wages.
• Employers in London face intense competition for top talent, leading them to offer higher salaries to attract and retain skilled workers.

Question 28

why do some ethnic groups get paid less than others

Answer 28

• 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

Question 29

microeconomic advantages of trade unions

Answer 29

1. 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.
2. 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.
3. 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.

Question 30

microeconomic disadvantages of trade unions

Answer 30

• wage increases can increase labour costs for firms
• 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
• 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

Question 31

evaluation points for microeconomic effects of trade unions

Answer 31

• 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

Question 32

macro disadvantages of trade unions

Answer 32

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.

Question 33

macro advantages of trade unions

Answer 33

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

Question 34

evaluation points for macroeconomic trade union impacts

Answer 34

• 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.

Question 35

why might a trade union not work in a monopsonic market

Answer 35

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.