3.5 labour markets

Derived demand

The demand for products and services that is derived from, the demand for consumer products and services.

Labour is derived demand as the demand is derived from the demand for the goods that the labour would produce.

Demand for labour

How many workers an employer is willing and able to hire at a given wage rate in a given time period.

Reason for Labour Demand curve being downwards sloping.

If the wage rate is high then it's costly for a business to hire extra employees.

Shifts in the labour demand curve (5)

A rise in final consumer demand meaning that businesses need to take on more workers.

A change in the market price of the output the labour is making.

An increase in the productivity of labour which makes labour more cost efficient than capital.

A government employment subsidy which allows a business to employ more workers.

A change in the cost of capital equipment.

Elasticity of Labour Demand

The responsiveness of demand when there is a change in the wage rate.

Changes in the elasticity of labour demand. (4)

Labour costs as a proportion of total costs.

Ease and cost of factor substitution.

Price elasticity of demand for the final product.

Price elasticity of demand for the final product.

Labour Supply.

The number of hours people are willing and able to supply at a given wage rate.

Reason for Labour Supply Curve being upwards sloping.

As wages rise, other workers enter the industry attracted by the incentive of higher pay.

Outward shift in the labour supply curve. (4)

Net inward migration of suitable/qualified workers.

Fall in relative pay/earnings in substitute occupations.

Lower entry barriers to this particular job such as minimum professional qualifications.

Demographic factors causing a rise in the active labour supply

Inward shift in the labour supply curve. (3)

Brain drain effects - skilled workers go overseas

Decline in non-monetary rewards associated with the job e.g. job dissatisfaction/stress

Fall in relative pay in this occupation compared to other jobs/rise in minimum qualifications.

Key factors affecting labour supply to a job/occupation (8)

Real wage rate on offer in the industry itself plus extra pay - e.g. overtime payment, productivity pay, share option

Wages on offer in substitute occupations

Barriers to entry - Artificial limits to an industry's labour supply can restrict supply and increase wages

Improvements in the occupational mobility of labour and stock of human capital

Non-monetary characteristics of specific jobs - job risk, anti-social hours, working conditions...

Net migration of labour

Demographic factors affecting the overall size of the working population

People's preferences between work/leisure and desire for work flexibility.

Elasticity of labour supply

The extent to which labour supply responds to a change in the wage rate in a given time period.

Factors that affect elasticity of labour supply. (3)

Nature of skills/qualifications required to work in the industry.

Long Run/Short Run

How vocational the job is i.e. In nursing people are less sensitive to changes to wages when deciding whether to work or not.

Occupational immobility of labour

Occurs when workers are unwilling/unable to switch occupations due to lack of training, qualifications or experience.

Geographical immobility of labour

Occurs when workers are unwilling/unable to move locations for work.

Reasons for Geographical immobility of labour. (4)

Family and social ties.

Financial Costs

Migrations controls

Cultural/Language barriers

Causes of Earnings Differentials. (6)

Compensating wage differentials - A reward for high risk jobs, bad working conditions or anti-social hours

Differences in skill levels

Differences in labour productivity

Trade Unions

Artificial barriers to entry e.g. Professional exams

Employer Discrimination

Causes of labour market failure (3)

Labour immobility

Disincentives to find work e.g. Benefits give more money

Discrimination by employers

Policies to improve mobility of labour and incentives to work

Better funding for workplace training

rise in house-building for cheaper property prices

Relocation subsidies

Higher minimum wages

Reduction in income tax

Welfare reforms.

Arguments for minimum wage (3)

Poverty Reduction

Encourages firms to train up their workers

Provides incentive to find work instead of staying on benefits

Arguments agains minimum wage (4)

Higher minimum wage makes it more expensive to hire workers and may lead to unemployment

Small businesses may find it harder to stay in business

Might make UK less competitive

Higher labour costs may cause inflation causing households to have a lower real income

arguments for a wage celling for executives ?

Ratio of pay between CEOs and workers is unacceptable

Links between performance and pay is hard to discern

Bonus culture promotes short term decisions instead of planning for the long term

Huge executive pay contributes towards the massive income inequality

Arguments against executive pay ceilings (4)

May cause talented executives to leave the UK for a foreign firm. (Or talented executives from abroad not coming to UK)

May cause firms to move overseas to places with lower top-rate tax

May lead to firms rewarding executives in other ways e.g. Complex share options

Higher tax on the highest bracket is a better option