Theme 3.5 :The Labour Market

Question 1

What is meant by the supply of labour?

Answer 1

Measures the hours that people are willing and able to supply at a given wage rate

Question 2

What does the supply of labour theory suggest?

Answer 2

-Higher wage rate leads to expansion in supply of labour
-New workers enter the market due to attraction of higher wages
-Extent to which a raise in salaries will increase supply of labour depends on elasticity of supply

Question 3

Factors affecting labour supply

Answer 3

-Real wage rate
-Wages on substitute occupations
-Barriers to entry
-Improvements in the occupational mobility of labour
-Non-monetary characteristics
-Net inward migration

Question 4

How does net inward migration affect the supply of labour?

Answer 4

Expands the available labour supply in an occupation such as NHS E.g. foreign nurses come to UK and increase NHS workforce

Question 5

How do barriers to entry affect supply of labour?

Answer 5

Artificial limits to an industry’s labour supply (e.g. minimum qualifications) can restrict supply and increase wages

Question 6

How do the Improvements in the occupational mobility of labour affect the supply of labour

Answer 6

Due to a result in expansion of apprenticeships and other types of work experience - increases numbers who can work in each job

Question 7

What factors cause a shift in labour demand in an industry

Answer 7

-Change in price of a product. Could change demand of labour depending on whether firm needs more/less workers

-Increase in productivity of labour which makes labour more cost efficient than capital (machinery)

-Change in the cost of capital equipment

Question 8

Definition of Marginal revenue product of labour

Answer 8

The extra revenue generated when an additional worker is employed

Question 9

What does elasticity of demand for labour measure?

Answer 9

Measures how responsive demand for labour is when there is a change in wages

Question 10

What are the 3 factors affecting elasticity of labour?

Answer 10

• substitutes
• % of total costs
• Time period

Question 11

How do substitutes affect elasticity of labour?

Answer 11

Lots of substitutes = Elastic demand
Few substitutes = Inelastic demand

Determines how easy it is to replace workers when their wages go up
e.g. Mcdonals workers are easily replaceable so demand is elastic. Not skilled or unique.

Question 12

How does time affect elasticity of supply?

Answer 12

In short run, if wages increase then demand will be inelastic as firms don’t have enough time to replace staff.
In long run, if wages increase then demand will be elastic as firms have enough time to replace staff.

Short run - no time for substitutes - unresponsive - inelastic

Long run - enough time for substitutes - responsive - elastic

Question 13

How does % of total cost affect elasticity of labour supply?

Answer 13

Wages are small % -> wage increase has small impact -> unresponsive -> inelastic

Wages are large % -> wage increase has large impact -> responsive -> elastic demand

Question 14

Define equilibrium wage

Answer 14

Refers to the wage rate at which quantity of labour supplied by workers and labour demanded by employers is equal

Question 15

Conditions for a competitive labour market

Answer 15

-Lots of employers and workers in the marker
-Homogeneous workers
-Perfect information
-Mobility of labour
-No monopsony power

Question 16

Main causes of wage differentials

Answer 16

• Productivity of workers
• Compensatory wage differentials
• Trade unions
• Barriers to labour supply
• Employer discrimination

Question 17

Assumptions regarding trade unions

Answer 17

-Trade union is a closed shop trade union - meaning all workers, in a given profession are part of one trade union and other trade unions don’t exist
In this case, they become a monopoly supplier of labour - they will control the labour supply at a given wage rate

Question 18

Trade union evaluation points

Answer 18

-Economic changes - in the UK there has been a shift from manufacturing to a service-based economy which has led to a decline in traditionally unionised industries
-Legal changes - The UK has imposed various labour laws and reforms over the years that made it more difficult for unions to recruit and maintain members
-Changing workforce demographics - E.g. introduction of part-time jobs and 0-hour contracts

Question 19

Definition of a monopsony

Answer 19

A monopsony is when there is only one buyer in the market so they can pay whatever wages they want as they are the only place where people can work within that industry
E.g. NHS can pay their junior doctors as low a wage as they want as these junior doctors have nowhere else to work

Question 20

Definition of occupational immobility

Answer 20

Workers can’t move between jobs because they lack the skills needed for that job which is a labour market failure

Question 21

Explain how a monopsony can reduce the wages it pays its workers (3)

Answer 21

A monopsony is when there is only one buyer in the market (e.g the NHS is the only buyer of doctors in the UK)
A monopsony can reduce the wages it pays its workers and the workers will have to accept because they have nowhere else to work

Question 22

How does a national minimum wage work

Answer 22

If the minimum wage is above the equilibrium wage it causes the lowest possible firms can pay workers to increase so wages increase but so does unemployment

Question 23

How does a national maximum wage work

Answer 23

If the maximum wage is below the equilibrium wage it causes the highest possible wage that firms can pay workers to decrease. This improves equality. Wages decrease and so does employment

Question 24

Define geographical immobility

Answer 24

When workers struggle to move between areas, meaning they can’t move to fill new job opportunities it is a labour market failure

Question 25

How can the government intervene to reduce geographical immobility?

Answer 25

-Improve transport e.g. HS2 makes it possible to travel from London to Leeds in just over an hour meaning workers can travel up and down the country more freely

-Relocation subsidies - The government can give people, who are moving for work, money to cover costs, this helps workers take up jobs in new areas

Question 26

How can the government intervene to reduce occupational immobility

Answer 26

Provide training programmes to help people transfer between jobs so they can work

Apprenticeships for younger people which incentivises them to work in a certain field