5 LABOUR MARKETS MERGED

What is the key choice in supply of labour?

Individuals making the key choice of how they spend their time- work or leasure- one is opportunity cost of the other

What determines shape of individual labour supply curve/ backwards bending supply curve?

Income effect- the rise in income as wages rise but with the potential of individuals reaching a target income +ve ( work more to increase income as wages rise) or -ve ( work less as wages rise to only get to target income)
Substitution effect- as wages rise OPP cost of leisure time increases providing incentive to work- always +ve
EVA

UATION FOR PERFECTLY ELASTIC SUPPLY CURVE

How is shape of individual labour supply curve determined?

Called backward bending individual labour supply curve
Split in 3
Bottom section: wages increasing at very slow rates- individuals respond by working more +ve substitution and income effect- collect higher income- +ve overall wage effect- greater numb of hours work- WORKERS SUB FREE TIME TO WORK
Middle section: real wages increasing more- +ve substitution effect- -ve income effect but not enough to outweigh substitution effect- hours worked still rising- overall +vs wage effect- ENJOYING INCOME AS MUCH AS THEY ARE WORKING
Top section: curve going back on itself as wages get very high- +ve substitution effect as high incomes increase OPP cost- -ve income effect as individuals can reach target income by working less- overall wage effect negative - numb hours worked decreases

What is elasticity of labour supply curve?

Responsiveness of labour supply given change in wage rate
Elastic- proportion of change in labour supply greater than change in wage rate
Inelastic- proportion of change in labour supply less than change in wage rate

What are determinants of elasticity of labour supply?

If wage rate goes up will there be increase in supply wolf workers?
-Nature of skills required- greater skills the harder it is for those not in profession to take jobs
-Length of time of training period- longer means less likely people join
-vocation- if people dont do job for sake of money like teaching then decreased responsiveness to change in wage
-time period- in sr takes time to adapt so less responsive so inelastic in sr more elastic in lr

What non wage determinants shift supply of labour?

• wage in substitutive occupancy
• barriers to entry e.g. qualifications
• non- monetary characteristics of job e.g. health benefits
• improvements in occupational mobility of labour e.g. more skilled workforce
• overtime- possibility shifts right
• size of working population
• value of leisure time
• immigration could expand domestic supply of labour
• size of unemployment benefits

Market failure- geographical immobility of labour

• barriers which stop people moving from one area to another to find work
• family and social ties
• financial cost involved in moving home including cost of selling house and removal expenses
• huge regional variations in house prices leading to shortage of affordable housing
• diff in cost of living in diff regions/ countries
• migration controls- e.g. cap on inward migration
  —> excess supply of labour in one area and excess demand in another

Market failure- occupational immobility of labour

• occurs when there are barriers to mobility of factors of production between different sectors of the economy— so factors are unemployed or used inefficiently
• may have specific skills that are not needed in growing industries- cause mismatch in skills on offer from unemployed and those required by employers
• structural unemployment

What is the key choice in supply of labour?

Individuals making the key choice of how they spend their time- work or leasure- one is opportunity cost of the other

What determines shape of individual labour supply curve/ backwards bending supply curve?

Income effect- the rise in income as wages rise but with the potential of individuals reaching a target income +ve ( work more to increase income as wages rise) or -ve ( work less as wages rise to only get to target income)
Substitution effect- as wages rise OPP cost of leisure time increases providing incentive to work- always +ve
EVA

UATION FOR PERFECTLY ELASTIC SUPPLY CURVE

How is shape of individual labour supply curve determined?

Called backward bending individual labour supply curve
Split in 3
Bottom section: wages increasing at very slow rates- individuals respond by working more +ve substitution and income effect- collect higher income- +ve overall wage effect- greater numb of hours work- WORKERS SUB FREE TIME TO WORK
Middle section: real wages increasing more- +ve substitution effect- -ve income effect but not enough to outweigh substitution effect- hours worked still rising- overall +vs wage effect- ENJOYING INCOME AS MUCH AS THEY ARE WORKING
Top section: curve going back on itself as wages get very high- +ve substitution effect as high incomes increase OPP cost- -ve income effect as individuals can reach target income by working less- overall wage effect negative - numb hours worked decreases

What is elasticity of labour supply curve?

Responsiveness of labour supply given change in wage rate
Elastic- proportion of change in labour supply greater than change in wage rate
Inelastic- proportion of change in labour supply less than change in wage rate

What are determinants of elasticity of labour supply?

If wage rate goes up will there be increase in supply wolf workers?
-Nature of skills required- greater skills the harder it is for those not in profession to take jobs
-Length of time of training period- longer means less likely people join
-vocation- if people dont do job for sake of money like teaching then decreased responsiveness to change in wage
-time period- in sr takes time to adapt so less responsive so inelastic in sr more elastic in lr

What non wage determinants shift supply of labour?

• wage in substitutive occupancy
• barriers to entry e.g. qualifications
• non- monetary characteristics of job e.g. health benefits
• improvements in occupational mobility of labour e.g. more skilled workforce
• overtime- possibility shifts right
• size of working population
• value of leisure time
• immigration could expand domestic supply of labour
• size of unemployment benefits

Market failure- geographical immobility of labour

• barriers which stop people moving from one area to another to find work
• family and social ties
• financial cost involved in moving home including cost of selling house and removal expenses
• huge regional variations in house prices leading to shortage of affordable housing
• diff in cost of living in diff regions/ countries
• migration controls- e.g. cap on inward migration
  —> excess supply of labour in one area and excess demand in another

Market failure- occupational immobility of labour

• occurs when there are barriers to mobility of factors of production between different sectors of the economy— so factors are unemployed or used inefficiently
• may have specific skills that are not needed in growing industries- cause mismatch in skills on offer from unemployed and those required by employers
• structural unemployment

Who demands labour?

firms/employers

What does demand curve for labour for individual firm show?

How many workers will be hired at any given wage rate over period of time.

What type of demand is the demand for labour?

derived demand
Need for them to produce goods and services

What is marginal revenue product?

The extra revenue generated when an additional worker is hired
What firms base demand decisions for labour on

What is the MRP calculation?

MRP= Marginal physical product (MPP) x Marginal revenue (MR)

What is MRP curve?

-equal to the demand curve for labour

• increases to a point(specialisation

What is the wage rate equal to?

marginal cost of labour

• both constant

What do firms do to hire efficiently and max rev bought in by workers

Firms keep hiring workers until MRP= Wage/ marginal cost of labour

Why is there an inverse relationship between wage and Qof workers in demand curve for labour?

SR- law of diminishing returns
LR- substitutability of labour and capitalwh

What are shape of labour demand curve for firm and industry/market?

Both: downward sloping due to MRP
Firm: increases to point of diminishing returns then decease
Industry: straight downward sloping

What happens when wages go up/ down in industry?

Up- contraction of labour demand- fall in QofW
Down- extension of labour demand- increase QofW

What is elasticities of labour demand?

Measures responsiveness of labour demanded given a change in the wage rate
Wage elastic demand market- proportionate change in labour demand is greater than change in wage
Wage inelastic- proportionate change in labour demanded is less than change in wage

What are the factors that determine elasticities labour demand curve?

SECT
Substitutability of capital for labour
Elasticity of demand for the product
Cost of labour as a percentage of total cost
Time period- difficult to increase land in sr etc.

What are the non wage factors that can shift labour demand?

PDPC

• change in final Price of product
• change in Demand for final product
• change in Productivity
• change in price of Capital