PM P2: The Labour Market

What is the Labour Market?

Market where households sell labour hours and firms buy labour hours. Price = wages, quantity = hours worked/employed.

What is Labour Demand?

Derived demand -> firms demand labour based on demand for final goods/services.

What are Determinants of Labour Demand? (Factors affecting Labour Demand)

Wage rate, demand for final goods/services, price of final goods/services, productivity of labour, supply of alternative factors of production, changes in technology/method of production.

What is Labour Supply?

Households supply labour based on decisions on time and effort allocation.

What are Determinants of Labour Supply? (Factors affecting Labour Supply)

Wage rate, immigration, educational attainment/job qualifications, non-wage benefits of jobs, alternative employment opportunities.

What is Wage Determination?

Wages determined by market forces of demand and supply in the labour market, adjusting to eliminate surpluses/shortages.

What are Wage Differentials? (Reasons for Wage Differentials)

Differences in skills/abilities (productivity), job attractiveness (risk, progression), PEDL, PESL, government intervention (minimum wage), labour market imperfections (trade unions, monopsonies), non-economic factors (discrimination).

What is Minimum Wage Policy in Labour Market?

Minimum wage (a price floor for wages) set above the free market equilibrium wage.

What is the Effect of Minimum Wage?

Creates unemployment (labour surplus).

What factors affect the size of Unemployment from Minimum Wage? (Factors affecting Unemployment)

Level of minimum wage ↑ -> greater unemployment. PEDL/PESL ↑ -> greater unemployment. Demand for labour ↓ / Supply of labour ↑ -> unemployment increases.

What are Labour Market Imperfections?

Trade unions (workers have market power), Monopsonies (firms have dominant buyer power).

What are Non-Economic Factors in Wage Differentials?

Discrimination (gender, race, age, religion, disability) leading to wage differences.