Theme 3.5: Labour Market Flashcards
What is demand for labour?
Derived demand: derived from the demand for goods and services that the labour produces
List the four main factors influencing the demand for labour
- Labour productivity
- Price of other factor inputs
- Demand for the product
- Supplementary labour costs
How does labour productivity influence demand for labour?
Greater productivity means that each worker has become more valuable to a firm 🡪 greater demand
Alternatively, advances in technology may allow firms to produce more with fewer workers / higher productivity per worker 🡪 less demand
How does the price of other factor inputs influence demand for labour?
If the price of capital rises relative to the price of labour more labour is likely to be demanded, and vice versa
How does demand for the product influence demand for labour?
Demand for labour is derived from the demand for the good (higher demand for the good 🡪 more workers needed to produce it)
How do supplementary labour costs influence demand for labour?
If the non-wage costs of employing labour rise, then demand for labour will fall
e.g. employer national insurance contributions, laws obliging maternity pay, sick pay, laws making it difficult to make workers redundant
Describe the factors influencing the elasticity of demand for labour
(How responsive demand for labour is to a change in the wage rate)
* Substitutability: how easy it is to change between capital and labour
* Ratio of labour costs to total costs: more significant the costs of labour to a firm’s costs, the more elastic
* Elasticity of demand for the product: firms will be more able to absorb a wage rise if the demand for the good is price inelastic
* Time: always increases elasticity
How will individuals react to a rise in the wage rate?
Income effect: as wages rise, people feel better off and may not feel the need to work as many hours
Substitution effect: as wages rise, the opportunity cost of leisure rises (the cost of every extra hour taken in leisure rises) so more hours are worked.
List the four main factors influencing the supply of labour
- Wage
- Substitute profession
- Entry barriers
- Migration
How does wage influence the supply of labour?
Wage and bonuses of the job itself (movement along curve)
How do substitution professions influence the supply of labour?
Relative wages and work conditions in other jobs
How do entry barriers influence the supply of labour?
Higher qualification requirement would reduce supply
How does migration influence the supply of labour?
An inflow of workers increases the supply of labour (may not be evenly spread across all job types)
List the four main factors influencing the elasticity of supply of labour
- Occupational mobility
- Geographical mobility
- Extent of unemployment
- Time
How does occupational mobility influence the elasticity of supply of labour?
Quality of transferable skills held by workers
Ease of moving into new labour markets
How does geographical mobility influence the elasticity of supply of labour?
Willingness of individuals to move
Regional cost differences
Information about jobs in other regions
How does the extent of unemployment influence the elasticity of supply of labour?
Supply is more elastic when unemployment is high
How does time influence the elasticity of supply of labour?
A longer period of time allows greater response to employment trends
Explain the wage differentials due to demand side factors
Different value of labour: workers ‘worth’ more to their employers earn higher wages
Resources of employers: employers with greater resources can pay higher wages
Age differences: many jobs’ pay are related to amount of experience
Discrimination: undervaluing employees worth on basis of race, gender, etc.
Difficulty observing workers MRP: may be more difficult to observe the value a worker brings to the company e.g. easier in a sales job, but more difficult in a nursing job
Explain the wage differentials due to supply side factors
Compensation
* High reward for risk-taking, working in poor conditions or unsocial hours
* Higher wages may also reflect the opportunity cost of acquiring the more advanced skills e.g. tuition fees
* Higher wages may be compensation for living in an area with a high cost of living
Low skilled labour
* More workers are able to fulfil a working role in a lower-skilled job, so the supply is greater
Describe trade unions and their purpose
An organisation of workers that combine together to further their own interests (e.g. improving wages)
Individuals are generally in a weak bargaining position compared to the company, so being part of a trade union improves the bargaining position of workers
What is the impact of trade unions on the market?
If successful, they enforce a minimum price for the supply of labour
The impact on employment levels depends on the type of industry they are operating in: in a competitive market, the trade union raises wages but lowers employment levels
Trade unions raise wages but lower employment levels in competitive labour markets, trade unions raise wages and raise employment levels in a monopsony labour market
Describe a bilateral monopoly
When there is a monopoly supplier of labour and a monopsonist buyer of labour, it is referred to as a bilateral monopoly. The strong bargaining power of each party balances the other out
e.g. trade union and the government
What elements affect the power of trade unions
Trade union membership and militancy: The greater proportion of workers in an industry that are members, the more powerful the trade union
Elasticity of demand: If demand for labour is inelastic, a rise in wages will have less impact upon employment
Profitability of the employer: A trade union is more likely to be successful if the employer has the resources to give wage increases
Describe labour immobility
Barriers to labour being able to move between jobs
Can be considered a form of market failure, especially if it leads to unemployment
Describe geographical immobility of labour and give the reasons for it
When workers find it difficult to move jobs from one region to another
Reasons:
* Poor transport infrastructure
* High price of housing/cost of living in other areas
* Lack of knowledge of jobs in other areas
* Limited flexibility if in council housing
* Family/community ties in existing area
* Language barriers (e.g. within EU)
Describe occupational immobility of labour and give the reasons for it
When workers find it difficult to move from one occupation to another
Reasons:
* Skills may not match jobs that are available
* Barriers to entry in some professions – e.g. professional bodies/qualification
* High cost of retraining
* Long period of time to train towards a new profession
List the four main policies to tackle geographical immobility of labour
- Housing based solutions
- Transport based solutions
- Regional solutions
- Information solutions
Explain housing based solutions to tackle geographical immobility of labour
- Providing relocation subsidies to workers who have to move house to get a job
- Reforms to the housing market designed to improve the supply and reduce the price of rented properties and to increase the supply of affordable properties
Explain transport based solutions to tackle geographical immobility of labour
- Improving quality of transport infrastructure, e.g. HS2
- Subsidise public transport to make it more affordable, so more workers have access to a wider range of jobs
Explain regional solutions to tackle geographical immobility of labour
Subsidies & financial incentives for job types in regions with shortages of specific types of labour
Explain information solutions to tackle geographical immobility of labour
Provision of information of available jobs in other regions, e.g. job centres
Explain the skills based solutions to tackle occupational immobility of labour
Improving education
* Improving the types of skills taught so that the skills are more flexible between jobs
* Should lead to greater transferabilit of skills between careers in the longer term
Provide specific training
* Targeted training at skills shortages in the economy, e.g. STEM, nurses etc.
Explain the work incentives solutions to tackle occupational immobility of labour
Subsidising employers who take on unemployed workers: incentive for employers who might not otherwise take on certain workers
Reform the tax and benefit system: raise minimum wages or reduce the level of unemployment benefits
Explain the purpose of minimum wages
Equity: Every job should offer a fair rate of pay for the skills and experience of an employee
Labour market incentives: The NMW is designed to improve incentives for people to start looking for work – thereby boosting the economy’s labour supply
Labour market discrimination: NMW is a tool designed to offset some of the effects of persistent discrimination of many low-paid female workers and younger employees
Explain the impact of minimum wages on consumers
Rise in prices: rise in production costs might be passed on to consumers
BUT many goods and services are likely to be unaffected: firms which don’t employ low wage workers will be unaffected, goods with elastic PED won’t pass on much increase in price
Explain the impact of minimum wages on workers
Higher wages: Positive impact on spending power and living standards
BUT potential job losses from a rise: The greater costs to businesses causes less demand for workers, however, if raised gradually, impact on jobs might be minimal (employers have more time to adjust)
Explain the impact of minimum wages on producers
Rise in labour costs: fall in profits (P = R - C), particularly relevant to firms where labour costs are a significant proportion of total costs - e.g. hospitality, retail
BUT greater spending in the economy could create extra demand, e.g. a restaurant may have more customers as a result of lower paid workers earning more
Explain the impact of minimum wages on the economy
Fall in SRAS, rise in AD
Growth: Fall in SRAS 🡪 lower real output, but rise in AD could counter this
Inflation: Fall in SRAS 🡪 cost push inflation, rise in AD 🡪 demand pull inflation
Unemployment: Loss of jobs could increase unemployment, rise in AD could counter this
Current account: Higher costs worsen competitiveness which is bad for exports, rise in AD could lead to more spending on imports, increased work incentive could raise LRAS 🡪 increasing competitiveness
Increased work incentive could raise LRAS 🡪 increased competitiveness
Explain the impact of minimum wages on inequality
Reduction in inequality: rise in pay of lowest paid in the economy, closes the gap between the low pay and average wages
BUT bigger employment gap: those out of work may fall further behind, e.g. those on unemployment, disability or pension benefits
Explain the purpose of minimum wages
A wage ceiling above which wages cannot be set
Helps to narrow the gap between the pay of the richest and the pay of the poorest in the company
Typically seen as a maximum ration gap between the highest and lowest paid in a company, e.g. 1:20 maximum wage ration means the CEO of a company would earn no more than 20x the pay of the lowest paid within the company
Explain the impact of maximum wages on workers
Rise in wages: A maximum wage ratio would limit the ability of CEOs to raise their own wages without raising the wage of their lowest paid employees. A company paying the NLW in the UK of £11.44 would have a maximum CEO salary of around £475,000. For CEOs wanting to earn more than this, it creates an incentive to pay their lowest paid workers more
BUT companies might just outsource low paid work, worsening job security and conditions
Explain the impact of maximum wages on the incentive to work
Reduced incentinve for higher paid workers to work: they could earn more in other countries / industries. Potential brain drain effect
BUT greater incentive to take up lower paid work: bigger gap between unemployment benefits and lowest paid jobs = bigger incentive for unemployed people to take up work. Increase in pay for the lowest earners would increase this incentive
Explain the impact of maximum wages on inequality
Reduction in the gap between the richest and poorest workers: maximum wage ratio prevents the difference between rich and poor workers going beyond a set level. Impact is particularly relevant to multinational companies where CEO has increased at a rapid rate in recent decades
BUT richest could find loopholes to ensure higher pay without counting towards a wage ratio, e.g. payment through shares, expenses etc.
How many jobs in the UK are public sector jobs?
1 in 6
How many people does the NHS employ?
1.5 million
