Econ 3.5 - Labour markets

A set of vocabulary flashcards covering key definitions, market structures, immobility issues, and government interventions in Theme 3.5 Labour Markets.

Demand for labour

The quantity of labour that employers would wish to hire at each possible wage rate.

How is demand for labour determined

Marginal revenue product, the extra revenue generated by an indiviual worker. The higher the MRP, the higher the demand for workers

The law of diminishing marginal productivity

Increasing the numer of workers whilst all other units are fixed, is likely to increase the MRP at first but then it will decline

Demand for labour curve is downwards sloping because

in the long run wage rates vary so high wage rates will incentivise businesses to use machinery instead of human capital

in the short run firms have limited capital so diminishing marginal productivity means adding extra workers givers a lower returnso to employ these workers the wage rate has to fall

Derived demand

Demand for a factor of production, such as labour, that occurs as a result of the demand for the product that the labour produces. Businesses only want workers as long as people are willing and able o buy their products

Factors influencing demand for labour

Demand for the product - labour is derived demand - Increased demand for the produc increases the demand for labour

Change in technology - Labour is a substitute for captial, if new tech becomes available it can lead to a fall in demand for labour

Price of other inputs - if price of inputs such as raw materials increase, hen COP increases, might reduce demand for labour

Productivity - If productivity increases, then this will make the firm more profitable so increase in demand for labour

Increases in NMW - if it is easier to fire workers then DOL would increase

Wage rate - fall n wage rates would increase DOL

Price elasticity of demand for labour

The responsiveness of the quantity demanded of labour to changes in the wage rate.

Factors influencing PED of labour

Substitutes - if there is many subs like machines then dol will be elastic

Elasticity of product - rise in wages - rise in price - elastic good will fall in demand - businesses fire workers

Cost of labour as a proportion of total COP - if wages are a huge proportion of costs then an increases in wages will effect costs massively so then there will be a fall in demand for labour

Time - in the long run it is more elastic because machinery can be developed

Supply of labour

Number of peolpe that are willing and bale to supply working hours at a given wage rate/time

Financial factors affecting SOL

wage rate

pension schemes

opportunity to work over time

possibility of bonuses

Non financial factors effecting SOL

qualifications/skills

pleasantness

status

flexibility of location

job security

frigne benefits

possession of a rare skill - increased skills - increased MRP

Backward bending supply curve

An individual worker's supply curve where an increase in wages leads to an increase in hours worked at first, but beyond a certain point leads to a decrease in hours worked.

Income effect

Positive income effect - we work more as wages go up

Negative income effect - target income is met so workers will work less

Substitution effect

higher wages incentivise people to work longer as the opportunity cost of staying home has increase

Factors influencing the elasticity of supply of labour

Nature of skills required - eg length of training

Nature of job - Teaching - vocational element, passion

Time - jobs have notice periods so SR - Inelastic

Occupational immobility

A form of labour market failure where workers find it difficult to move from one job to another due to a lack of transferable skills.

Causes of occupational immobility

Deindustrialisation

Insufficient education and training

Policies for occupational immobility

Training schemes

Increasing provision of frther education - vocational coaurses so school leavers are more employable

Increasing provision of higher education

Geographical immobility

A form of labour market failure where workers find it difficult to move from one place to another due to factors such as moving costs, family ties, and housing price differences.

Causes of geographical immobility

House prices

Family and social ties

High percentage of home ownership

Policies for geographical immobility

Improving transport links

Relaxation of planning laws - increases the supply of homes - decrease price of homes

increasing the construction of social housing

housing subsidies for key workers where house prices are high

improving the operation of job centres

Right to buy scheme

Elasticity of supply of labour

The responsiveness of the supply of labour to a change in wage rates.

How are individual firms price takers

They have to accepts the wage rate set by the market that workers are being paid in the industry

Why do age rates differ within an occupation

age

educaion

training

work experience

skill

demand elasticity

Current labour market issues

Skills gap and labour shortages

Rising operational costs

Increased unemployment and economic activity

Brexit and visa changes

long term sickness

employer confidence declining

National living wage

Transport connectivity

Labour market issues stats

Skills shortage - In December 2021, over 50% of firms found difficulty in finding skilled workers. Meaning firms have to increase wage rates to attract labour

April 2022 - Unemployment for 26-24 year olds was at 10.8% compared to general unemployment at 3.8% - Firms tend to hire workers with more experience/ Education and skills gap

More pensioners - Retirement age switched from 60 - 68

School leaving age states that students cannot leave education until they are 16

In 2022, 1 million workers were on zero hour contracts. This is beneficial to employers but not workers

Increase in flexible working/ Temporary working

Government intervention in the labour market

By imposing a NMW, this creates an excess supply of labour = unemployment.

Advantages of gov intervention

Provides incentive to work

Increases productivity

Reduces poverty and inequality

Increases MPC with positive multiplier effect

Disavantages of gov intervention

Increase in umemployment

Firms will have to increase their prices which will lead to a fall in profit

Wage spiral -

Reduced working hours

Long run decrease in employment as it decreases job creation

Factors affecting the effect the NMW on firms

Proportion of total costs taken up by those being paid below the NMW

Proportion of total costs taken up by labour costs - depends if firm is more labour/capital intensive

PED of product - whether firms can pass on extra costs to consumers

Maximum wages

Leads to an excess demand for labour

creates labour shortage

increases unemployment

The Uk may suffer from brain drain which will lead to a decrease in quality of goods and serivces

Advantages of maximum wage

• Helps decrease inflation rates

• limits inequality

• reduces labour costs for firms

• decreases unemployment

Disadvantages of maximum wage

Brain drain - leaving country with overall reduced skill set

reduction in productivity

Public sector wage setting

Since trade unions in he UK are weak, in the short run, the government can make whatever wage decisions they want to improve the budget

Perfect conditions

wages are purely determined by demand and supply

all workers are paid the same

all workers are similarly skilled

if one area pays more that another then workers are allowed to move o that place

then supply of labour in the weak paying area will decrease which will incentivise employers to increase wages

Monopsony in the labour market

A type of market structure dominated by one main buyer of labour or product

Problems with monopsonies

Wage setting power

Exploitation

Poor working conditions

restricts job availability

Trade union

An organisation of workers or employees that protects the rights and pay of its members through collective bargaining.

Trade Union Act 2016

UK legislation that introduced restrictions on trade unions, including a clause requiring a minimum of 50% voting turnout in strike action ballots.

Benefits to the trade union act in the labour market

• increase in wages

• increase in standard of working conditions

• encourages training and development

• counters monopoly power (bilateral monopoly)

• 
  

disadvantages of the trade union act

Inflation rose to 25%

Unemployment rose and got close to 15%

firms are forced to be wage takers which increases COP

Wage increase is not in line with MRP

decreased productivity due to strikes

How was trade union power reduced

Trade union membership fell

Government policies limited the legal powers of trade unions

It was made illegal to enforce a closed shop trade union

made illegal to dismiss any workers participating in strikes

structure of economy altered in ways that restricted unions being able to determine wages

Bilateral monopoly

A labour market structure characterized by the presence of both a monopsony buyer of labour and a monopoly seller of labour (a trade union).

Zero-hour contracts

Employment contracts under which employees receive little notice of when they will be required to work and have no guarantee of weekly earnings.

Gig economy

An economic segment where individuals are self-employed and undertake short-term contracts for businesses such as Uber and Deliveroo.

National Minimum Wage

A legal wage floor introduced in the UK in April 1999 to prevent worker exploitation and set minimum standards in the workplace.

Unemployment trap

A situation where state welfare benefits are higher than the wages an individual would receive from working, disincentivising employment.

Wage spiral

A scenario where a rise in the minimum wage prompts higher-paid employees to demand pay increases to maintain existing wage differentials.

Maximum wage

A legal ceiling placed on worker earnings, used by governments in public sectors or proposed as pay ratios for chief executives to reduce inequality.