The Labour Market

Economics

Derived Demand for Labour

Labour is demanded for its own sake but for the goods/services it produces

MRP Formula

MRP = MPP x MR. The extra revenue generated by employing one additional unit of labour.

Shape of MRP Curve

Downward sloping due to the Law of Diminishing Returns as more workers are added to fixed capital.

WED (Wage Elasticity of Demand)

Responsiveness of quantity demanded of labour to a change in the wage rate. % Change in Qd / % Change in Wage.

Determinants of WED (SPLT)

Substitutes (capital), Product elasticity (PED), Labour costs as % of total, and Time.

Backward Bending Supply Curve

Occurs when the Income Effect (preferring leisure) outweighs the Substitution Effect (cost of leisure) at high wages.

Monopsony Definition

A market with a single dominant buyer (employer) of labour who acts as a wage-maker

MC and AC in Monopsony

MC > AC because to hire one more worker, the firm must raise the wage for all existing employees.

Monopsony Equilibrium

Firms hire where MRP = MC. Results in lower employment (Qm) and lower wages (Wm) than perfect competition.

Trade Union Role

Organisations that use collective bargaining to protect workers' interests and push wages above equilibrium.

Real Wage Unemployment

Caused when unions or NMW force wages above the market-clearing level, creating a surplus of labour.

Bilateral Monopoly

A market with one dominant buyer (Monopsony) and one dominant seller (Trade Union). Outcome depends on bargaining power.

NMW Pros

Reduces poverty, increases work incentives (Efficiency Wage Theory), and can counteract monopsony exploitation.

NMW Cons

Can cause real-wage unemployment, increases costs for firms (cost-push inflation), and ignores regional differences.

Occupational Immobility

Barriers preventing workers from switching jobs due to lack of transferable skills. Causes structural unemployment.

Geographical Immobility

Barriers preventing workers from moving areas for work (e.g., house prices, family ties).

Labour Market Discrimination

Treating groups differently (wages/hiring) despite equal productivity.

Efficiency Wage Theory

The idea that higher wages increase productivity by reducing shirking and labour turnover.

Compensating Wage Differentials

Higher wages paid to compensate for "bad" job aspects like danger, night shifts, or high stress.

Elasticity of Labour Supply

Responsiveness of quantity supplied of labour to a change in the wage rate. Depends on skill level and training time.

Transfer Earnings

The minimum reward required to keep a factor of production (labour) in its current occupation.

Economic Rent

Any surplus earnings over and above transfer earnings. (Total Wage - Transfer Earnings).

Perfect Labour Competition

Many buyers/sellers, homogeneous labour, perfect information, firms are wage takers (AC=MC=Supply).