Wage Rates For Labour

Question 1

What’s The Labour Market

Answer 1

The Labour Market is a factor market (FoP), but works fundamentally the same way as any other market

Question 2

What does the demand for labour depend on? (3)

Answer 2

• Demand for the final product (labour is derived demand)
• Productivity of labour: more productive -> adds more output -> more revenue -> firm can pay a higher wage (wage = marginal revenue product)
• Price of other FoPs, especially capital which could be a substitute for labour

Question 3

What does the supply of labour depend on? (7)

Answer 3

• Size of the labour force (people willing/able to work)
• The wage rate. Working has an opportunity cost - people want to be compensated for the lost leisure time
• Skills or qualifications required
• Nature of the work (conditions, time, respect…)
• Ease of claiming welfare benefits/tax credits
• The rate of income tax/national insurance - reduce the take home wage
• Mobility of labour: geographical - are workers willing to move, and occupational - are they willing to change profession

Question 4

Define The National Minimum Wage

Answer 4

NMW is the lowest amount it is legal to pay an employee

Question 5

Why do governments introduce a NMW? (5)

Answer 5

• To reduce unfair pay/poverty/exploitation of workers/inequality
• In wage negotiations firms have more power than an employee, so they can effectively force a wage below the market wage (monopsony). A NMW may be simply increasing wages to the market rate
• To reduce voluntary unemployment - by increasing the gap between income from working and benefits, it discourages people not to work
• May increase government tax revenues (might be cancelled out by less people working)
• May increase total (aggregate) demand for goods in the economy. (YED)

Question 6

How much will unemployment rise after a NMW? (3)

Answer 6

Depends on:

• How far above the market wage is the NMW
• PED & PES of labour. If they are inelastic, it will be small. PED of labour depends on how easy it is to substitute capital for labour. PES of labour depends on how long it takes to train/gain skills required
• It may cause an increase in the informal market (people working with no contract, cash-in-hand and at a wage below the NMW)