Labour market Chapter 5

What are some factors that influence the shifts of the labour demand curve?

PDPC- change in the final price of the product labour is making, change in demand for the final product, change in labour productivity, change in the price of capital

What is the formula for labour productivity?

Output per period/Number of workers

What does the wage elasticity of demand for labour measure?

The responsiveness of demand for labour to change in wage rate.

What does the elasticity of labour demand depend on?

SECT - Substitutability of capital for labour, elasticity of demand for the product, cost of labour as a percentage of total cost, time period

What does the marginal productivity theory suggest?

The labour demand curve will be downwards sloping since each worker produces less additional output than the previous worker

What is the Marginal revenue product?

Extra revenue generated by the last worker hired

What are factors that influence the supply of labour?

wage on offer in substitute occupations, barriers to entry, non monetary characteristics of the job, overtime, size of the working pop, value of leisure time

What can the wage elasticity of supply of labour depend on?

The nature of skills required in this job, length of the training period, time period under consideration

What is economic rent?

The difference between the minimum wage rate someone is willing to work and what they are actually paid.

What are transfer earnings?

The minimum reward required to keep a factor of production in its present use.

When will a firm hire workers until?

MRP=Wage rate(MC)

On the MRP graph why is the demand curve downward sloping

First few workers benefit from excess FOP but the next workers after that have a constraint with the FOP and have less productivity

What are some things that could prevent labour markets from reaching equilibrium?

Geographical immobility, Occupational immobility, Sticky wages, the effects of wage bargaining/trade unions

What are some policies that the government have used to try and improve flexibility in the market?

Regulating trade unions, providing an online job search tool, subsidising training in important areas.

What is the formula for Marginal Revenue product

Marginal physical product×Marginal revenue of good

What is the formula for Unit Labour Costs?

Total production costs in period/Total output in period

What is the marginal revenue product theory?

helps firms to decide whether to employ workers by comparing the revenue gains by hiring that additional workers and the marginal cost

What is wage determination?

Where demand for labour and the supply of labour meet

In the long run, why is there an inverse relationship between wage and quantity of workers?

Workers can be substituted with capital as wages increase

In the individual labour supply curve what is the income effect

The rise in income as wages rise but with the potential of individuals reaching a target income

In the individual labour supply curve what is the substitution effect?

As wages rise, the opportunity cost of leisure time increases providing an incentive to work.

Why is the industry and firm labour supply curve upward sloping?

Economically inactive workers may see the wage rate increase and come back into the proffession and those who left the market to enter a different industry may also come back.

Characteristics of a competitive labour market

There are many potential workers and employers, labour is homogenous, there is perfect information, firms are wage takers, there are no barriers to entry/exit

What are some labour market imperfections(wage differentials)

Labour is not homogenous( different MRPs, discrimination), non monetary considerations, labour i not perfectly mobile(occupational+ geographical mobility), trade unions, monopsony and wage setting ability

Positives of wage differentials

incentives to work, tricke down effect( tax,jobs,spending), encourages work not welfare

negatives of wage differentials

income inequaliy, trickle down effect may not occur, government solutions may be limitedif they are the monopsonist employer

What is a bilateral monopoly

when there is both a monopoly and monopsony so both parties will try to use their bargaining power to negotiate, the monopsony will want low wage rates and the monopoly would want high wage rates.

What is a monopsony in the labour market?

Occurs when there is one dominant employer in a labour market

Characteristics of a monopsony in the labour market

Single or dominant buyer of labour, wage setting power, upward sloping supply curve of labour( To attract more workers, the firm must raise wages — but it knows it can still set wages below what a competitive market would pay.), Marginal cost of labour is greater than the wage rate ( if a firm wants to hire one extra worker, it has to raise wages not jus for the worker but for all workers)

What is the impact of trade unions on the labour market?

Higher wages for union members( collective bargaining), risk of unemployment- some firms may cut jobs due to higher labour costs- this creates an excess supply of labour(more people want jobs at the higher wage but fewer jobs are available, unions can create wage differentials

Trade unions in a monopsony

There will be higher wages and increased employment-

• Unions push for a higher wage floor (a minimum wage above the monopsony level).

• If the union sets a wage equal to the worker's MRP, the firm will hire more workers because now the wage rate becomes fixed — meaning the marginal cost of labour (MCL) = wage rate.

• As a result, the firm’s incentive to under-hire workers disappears — employment actually increases along the labour demand curve.