The Labour Market

Who demands labour?

Firms

Who supplies labour?

Individuals

What does the demand for labour curve for labour show?

How many workers will be hired at any given wage rate over a given period of time

What will firms base their demand for labour on?

Marginal revenue product (MRP) - the extra revenue a firm earns from hiring one more unit of labour (one more worker)

What is marginal revenue product?

The additional revenue generated by an additional worker

Marginal revenue product (MRP) - the extra revenue a firm earns from hiring one more unit of labour (one more worker)

The MRP tells the firm how much revenue an extra worker brings in.

What is the equation for MRP?

MRP = Marginal Product of Labour (MPL) × Marginal Revenue (MR)

• Marginal Product of Labour (MPL): how much extra output one more worker produces.

• Marginal Revenue (MR): how much extra revenue the firm gets from selling one more unit of output.

What does the MRP curve look like?

What does MRP show?

The demand for labour

When will firms hire workers up to?

Up to where MRP = Wage

What is the labour market demand curve for a firm?

What is the labour market demand curve for an industry?

What are 4 criticisms for MRP?

-Productivity is difficult to measure

-Teamwork is difficult to measure productivity

-Self employed

-Imperfect labour markets (trade unions)

What can be used to remember shifts in the labour demand curve?

PDPC

What can cause a shift in the labour demand curve?

-Price that the product labour is making changes

-Demand for the product labour is making changes

-Productivity of labour changes

-Capital price increases or decreases

What does the elasticity of demand for labour mean?

The extent to which demand for labour changes in response to a change in the wage rate

What word to remember factors affecting elasticity of labour demand?

SECT

What are the factors affecting elasticity of labour demand?

-Substitution ability for labour with capital

-Elasticity of demand for the product

-Cost for labour as a % of total cost

-Time

What is the key choice individuals have when choosing whether to supply labour?

Choice between work and leisure

What is the positive income effect?

As wages go up incomes will rise at the same time

What is the negative income effect?

As wages go up incomes will fall

Why does the negative income effect occur?

As workers have achieved their target income

What is the substitution effect?

As wages rise the opportunity cost of leisure also rises increasing the incentive to work

What does the individual labour supply curve look like?

Why does the individual labour supply curve bend backwards?

As we assume they have reached their target income and they are not willing to work more and sacrifice leisure

What does the supply curve of labour for an industry look like?

What does the supply of labour look like in perfectly competitive labour market?

What does the supply of labour look like in monopsony labour market?

What can be used to remember factors that shift the supply of labour?

WON BIVS

What are 7 factors that can shift the supply of labour?

-Wages in substitute occupations

-Barriers to entry

-Non monetary benefits

-Improvements in occupational mobility

-Overtime

-Size of the working population

-Value of leisure

What does the elasticity of supply for labour mean?

The extent to which supply for labour changes in response to a change in the wage rate

What word to remember factors affecting elasticity of labour supply?

TLVN

What are the factors affecting elasticity of labour supply?

-Time

-Length of the training period

-Vocation

-Nature of the skills required

What are 5 characteristics of a perfectly competitive labour market?

-Large number of potential workers and employers

-Labour is homogenous

-There is perfect information

-Firms are wage takers

-There are no barriers to entry/exit

What does the graph look like for wage determination in a perfectly competitive market?

What are wage differentials?

Differences in wages between different occupations and employees in the same occupations

What are 5 reasons behind wage differentials?

-Labour is not homogenous

-Non-monetary considerations

-Labour is not perfectly mobile

-Trade unions and supply restrictions

-Monopsonies and wage setting abilities

What are 3 reasons why labour is not homogenous?

-Workers have different MRP's

-Different supplies of labour

-Discrimination

What are 3 reasons why labour is not perfectly mobile?

-Occupational immobility

-Geographical immobility

-Lack of perfect knowledge

What is a monopsony in terms of labour?

The sole employer of labour in a given profession

What are 4 characteristics of a monopsony labour market?

-Wage maker

-Will maximise their revenue to where MRP = MC of labour

-Employment will be lower

-Wages will be lower

What is the graph showing a monopsony labour market?

What is a trade union?

An organisation of workers of which uses collective bargaining in order to achieve higher wages and or better working conditions

What does the trade union act like?

The monopoly supplier of labour

What is the graph for trade unions increasing the wage rate?

What happens to employment due to trade unions in competitive labour markets?

Employment decreases as firms demand less labour at a higher price leading to an excess supply of labour and unemployment

What does the monopsony with trade union diagram look like?

What happens to employment due to trade unions in monopsony labour markets?

Employment increases

What are 3 reasons why women may be paid less than men?

-Lack of skills development due to childbearing

-Tend to enter part time/public sector work

-Discrimination

What are 3 reasons for the North South wage differential?

-Restructuring of the UK economy

-Negative multiplier effect

-Migration of higher skilled workers

What are 3 reasons why ethnic minorities could be paid less?