Week 10 - Labour Markets Flashcards
What does the labour market model
Models how you distribute available time between income and leisure.
An indifference map and budget line can be used to determine how much time you should spend on income and leisure given the available time you have.
How to find optimal distribution of free time between income and free time.
Gradient of budget line = gradient of indifference curve
How does income and substitution effects impact labour market
Substitution effect is always positively related to income change whereas income effect can be positively or negatively related to income change.
How does high wages affect labour supply
At high wages, people can reduce their working hours because they can afford to work less and have more free time.
The income effect dominates the substitution effect at leading to a backward bending labour supply curve.
How does overtime affect labour supply
If higher wages are promised for working overtime, this can result in more workers working overtime and therefore longer hours.
Introduces an upward turn in the budget line which workers want to go past, increasing labour supply.
How does income tax affect labour supply
Charging income tax creates a downward turn in the budget line which workers want to avoid going past, reducing labour supply.
Marginal product of labour (MPL)
The additional output a firm gets by employing one additional unit of labour.
Also known as marginal physical product.
Marginal value product of labour (MVPL)
The monetary value of the additional output a firm gets by employing one additional unit of labour.
MVPL = MPL * output price.
Perfectly competitive labour market
Output price is given.
Wage is the marginal cost of labour (MPL) and is treated as given.
At what point will firms stop employing workers
The perfectly competitive, profit maximising firm will employ workers until wage=MVPL
What does MVPL represent in a perfectly competitive labour market
MPVL represents a workers attractiveness to an employer based on the units they produce, price of the good and wage rate.
Therefore MVPL is the labour demand curve of a perfectly competitive profit maximising firm.
Firms with monopoly power
Labour demand curve is derived by doing MPL * Marginal revenue (MR) to get marginal revenue product of labour (MRPL). (instead of MPL * output price = MVPL).
The firm is still in perfect competition in the labour market so the wage and MCL are still given.
Firms with monopsony power
MCL will be upward sloping.
Has MRPL instead of MVPL, like monopoly.
Profit maximisation occurs where MCL=MRPL.
Wage is determined by the average cost of labour (= labour supply).
Firms gain monopsony power when workers are not constantly searching for alternative employment.
What happens when minimum wage is higher than market equilibrium wage
Labour demand decreases because of higher wages to pay but labour supply increases because people get paid more.
This results in a labour surplus and therefore unemployment.
How does minimum wage effect a firm with monopsony power
For a firm with monopsony power, if minimum wage is above market equilibrium wage, labour demand increases instead of decreasing meaning increased employment.
What are some reasons for the difference in earnings between people
Human capital theory
Trade unions
Compensating wage differential
Discrimination by employers
Winner-take-all markets
Why does human capital theory cause difference in earning
Human capital theory states that every human has a human capital which is proportional to the worker’s wage. People have different human capital leading to difference in earnings.
Human capital is an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness and initiative that affect the value of a worker’s marginal product.
Why does trade unions cause difference in earning
Trade union are a group of workers who bargain collectively with employers for better wages and working conditions.
If one worker is part of a trade union and the other isn’t, the first worker is likely to earn more.
Why does compensating wage differential cause difference in earning
The attractiveness of a job’s working conditions can positively or negatively affect the wage of that job.
A job with less attractive conditions is likely to pay more than a job with more attractive conditions.
Why does discrimination cause difference in earning
Discrimination by employers is when an employers preference of one group of workers over another can affect wages.
Discrimination by customers is when customers are prepared to pay more for an equal product if it is produced by member of a favoured group.
If you are in the preferred/favoured group, you are likely to have higher wages.
Why does winner-take-all markets cause difference in earning
Often in competitive sports, the winner of a competition will earn more money than the non-winning competitors.
What are the trends in inequality in the US
In the US, the top 1% are making up more and more of the national income compared to the bottom 50%. After 1996 the top 1% hold more of a share of national income than the bottom 50%.
What are the trends in inequality in Western Europe
In Western Europe the bottom 50% still hold more of the nation income than the top 1% however this gap is slowly narrowing.
How can distribution of income/wealth be measured.
Gini coefficient is measured by taking what would be a perfect distribution between population and wealth, and the Lorenz curve which shows the actual distribution between population and wealth.
The Gini coefficient is measured by finding the area between perfect and actual distribution and dividing it by the total area beneath the perfect distribution.
