Theme 3.5 :The Labour Market Flashcards
What is meant by the supply of labour?
Measures the hours that people are willing and able to supply at a given wage rate
What does the supply of labour theory suggest?
-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
Factors affecting labour supply
-Real wage rate
-Wages on substitute occupations
-Barriers to entry
-Occupational mobility of labour
-Non-monetary characteristics
-Net inward migration
-Income tax and benefits
How does net inward migration affect the supply of labour?
Expands the available labour supply in an occupation such as NHS E.g. foreign nurses come to UK and increase NHS workforce
How do barriers to entry affect supply of labour?
Artificial limits to an industry’s labour supply (e.g. minimum qualifications) can restrict supply and increase wages
How do the Improvements in the occupational mobility of labour affect the supply of labour
Due to a result in expansion of apprenticeships and other types of work experience - increases numbers who can work in each job
What factors cause a shift in labour demand in an industry
-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
Definition of Marginal revenue product of labour
The extra revenue generated when an additional worker is employed
What does elasticity of demand for labour measure?
Measures how responsive demand for labour is when there is a change in wages
What are the 3 factors affecting elasticity of labour?
- substitutes
- % of total costs
- Time period
How do substitutes affect elasticity of labour?
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.
How does time affect elasticity of supply?
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
How does % of total cost affect elasticity of labour supply?
Wages are small % -> wage increase has small impact -> unresponsive -> inelastic
Wages are large % -> wage increase has large impact -> responsive -> elastic demand
Define equilibrium wage
Refers to the wage rate at which quantity of labour supplied by workers and labour demanded by employers is equal
Conditions for a competitive labour market
-Lots of employers and workers in the market
-Homogeneous workers
-Perfect information
-Mobility of labour
-No monopsony power
Main causes of wage differentials
- Productivity of workers
- Compensatory wage differentials
- Trade unions
- Barriers to labour supply
- Employer discrimination
Assumptions regarding trade unions
-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
Trade union evaluation points
-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
Definition of a monopsony
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
Definition of occupational immobility
Workers can’t move between jobs because they lack the skills needed for that job which is a labour market failure
Explain how a monopsony can reduce the wages it pays its workers (3)
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
How does a national minimum wage work
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
How does a national maximum wage work
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
Define geographical immobility
When workers struggle to move between areas, meaning they can’t move to fill new job opportunities it is a labour market failure
How can the government intervene to reduce geographical immobility?
-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
How can the government intervene to reduce occupational immobility
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
Derived demand
Derived demand is demand for a factor of production (like labour) that is derived from the demand of another good/service.
E.g. demand for builders is derived from demand for houses
How does productivity of workers affect the labour market?
+EVALUATION
If workers become more productive, then firms may demand more labour as the labour is now more productive. Each worker now has a higher Marginal revenue product, generating the firm more revenue and in turn more profits. This increases wages as demand for labour has increased, so workers will be able to demand higher wages.
HOWEVER…
If workers become more productive, firms may actually reduce demand for the workers because firms dont need as many workers to satisfy the demand for their goods/services. This is because the workers are more productive, so less of them are needed, reducing the wage costs for a firm, increasing profits as their fixed costs have decreased. This reduces the demand for labour in the labour market.
What will happen to our labour market diagram for supermarket till workers, if the cost of capital decreases?
Demand will decrease to the left
How does the cost of capital affect the labour market?
Capital and labour are substitutes.
If capital machinery becomes cheaper than labour, then a firm will demand less labour which saves them money, increasing their profits due to lower costs
How does migration impact the labour market?
Outward migration reduces supply of labour in one country but inward migration increases the supply of labour
E.g. 20% of NHS nurses are immigrants into the UK
In 2016, 330,000 people emigrated from Romania, reducing the supply of labour in Romania. However, many of these workers were skilled doctors who came to the UK and increases supply of doctors in the UK
In 2016, the Conservatives announced they wanted to cut benefits by £6000 a year…how will this affect our labour market diagram for unskilled workers?
Supply will increase to the right
What would happen to our labour market diagram for unskilled workers if the government decided to increase benefits?
Supply of labour decreases to the right
Explain the effect on supply of labour if the government decide to increase benefits
If benefits increases, unemployed workers will have more income as the incentive to not work is higher.
This may incentivise workers currently in employment to collect benefits instead of working, decreasing the supply of labour
In 1974, the income tax rate for those in the top bracket increased to 83%.
How would this 83% tax affect our labour market diagram for high income, highly skilled workers? (2 KAA + 2 EV marks)
Supply of highly skilled workers may decrease because a higher tax reduces the income they keep for working. This reduces the incentive to work, decreasing the supply of labour.
However, some workers need to earn a certain amount of income (e.g. to pay off their mortgage each month). The higher tax means they will now have to work more hours to earn the same income (after the tax), so labour supply could actually increase!
And on the flip side, when the tax rate came back down to 60% in 1979 - how would this tax cut affect our labour market diagram for high income, highly skilled workers? (2 KAA + 2 EV marks)
Supply of highly skilled workers may increase because a lower tax increase the income they keep for working. This increase the incentive to work, increasing the supply of labour.
However, some workers just need to earn a certain amount of income (e.g. to pay off their mortgage each month). The lower tax means they will now be able to work fewer hours to earn the same income (after the tax), so labour supply could actually decrease!
How will an increase in non-monetary benefits affect our labour market diagram?
Supply will increase to the right and decrease wages
