3.5 labour markets

Who demands labour in labour markets

Firms

Who supplies labour in labour markets

Individuals

demand for labour definition

the number of workers a firm is willing and able to employ at a given wage rate in a given time period

what is the type of demand for labour

derived demand

labour demand curve

why is the labour demand curve downward sloping

as wage increases, firms will substitute to capital

law of diminishing marginal returns applied to labour market

as extra workers are employed, the extra output from each one decreases

MPP_L

Marginal physical product of labour

define MPP_L

additional output produced by an extra worker employed

MRP_L

marginal revenue product of labour

define MRP_L

additional revenue produced by an extra worker employed

when will firms employ a worker

if MRP_L is greater than MPP_L

eval of MRP_L as a theory

can be hard to measure a workers productivity

efficiency wage theory

workers will be more productive if they are paid a higher wage as they are more loyal to their employer, have a better diet and lifestyle making them healthier, which would increase MRP_L

Factors that will shift MRPP_L / D_L curve

-change in labour productivity

-change in marginal revenue

-change in costs of labour

-change in technology changing labour productivity

-change in technology changing usefulness of labour

how would an increase in labour productivity shift MRPP_L / D_L curve

curve shifts right, as MPP and MRP would increase

how would an increase in marginal revenue shift MRPP_L / D_L curve

shift right

how would an increase in costs of labour shift MRPP_L / D_L curve

shift to MRP to the left

how would an increase in technology making workers more productive shift MRPP_L / D_L curve

shift to the right

how would an increase in technology making workers obsolete shift MRPP_L / D_L curve

shift to the left

factors influencing demand for labour

• confidence in economy

• substitutability of labour

• wages

• stage of economic cycle

• government intervention

• trade union power

• productivity

• profitability

• costs of other FoPs

• demand for the product

factors influencing supply of labour

• wealth level

• wages in other industries

• demographics

• immigration

• generosity of welfare payments

• working conditions

• population size

• geographical mobility

• occupational mobility

• non-wage considerations

• non-work commitments

• qualifications/ skills

• wages

WED

wage elasticity of demand for labour

define WED

measures the change in demand for labour when the wage rate chabges

equation for WED

% change in quantity of labour demanded/ % change in wage

factors affecting WED

• time

• substitutability

• labour costs as a proportion of total costs

• PED of product being made

• labour protections

how does time impact WED

in the short term, demand for labour will be more inelastic, as firms cant find alternatives to labour quickly

how does substitutability impact WED

the more substitutable the more wage elastic

how does labour costs as a proportion of total costs affect WED

if labour costs make up a larger proportion of a firms total costs, WED will be more elastic

how does PED of the product being made affect WED

if PED is inelastic, WED will be inelastic, as firms can pass on higher costs of labour to consumers

how does labour protections affect WED

more trade union power will make demand more WED inelastic as it is harder for firms to fire wages after wage changes

define individual labour supply

the total number of hours that a worker will supply at a given wage rate

define occupational labour supply

how many workers are willing to work in a given job at the given wage rate

causes of a movement along the S_L curve

real wage rate on offer in the industry plus extra pay

how can factors influencing labour supply be split up

into monetary and non monetary benefits

supply of labour curve for an industry

supply of labour curve for an individual

up to a certain wage, substitution effect is dominant, as the substitute from leisure to work is great

however, over a certain point, the income effect is dominant, as people can achieve the same income by working fewer hours

WES

wage elasticity of labour supply

WES defention

the responsiveness of the labour supply to change in response to a change in the wage rate

WES equation

% change in quantity of labour supplied/ % change in wage rate

determinant of elasticity of labour supply

• skills/qualifications

• time period

• satisfaction/vocation/purpose

• mobility of labour

how do skills/qualifications affect WES

lower skilled jobs are more wage elastic, as switching between jobs is easier as there are less barriers to entry

how does time period affect WES

the shorter the time period the less elastic, as people are bounded by contracts and commitments

how does satisfaction/vocation/purpose affect WES

if people find their job more purposeful WES will be less elastic, as people are not mainly in it for the wage

how does mobility of labour affect WES

if labour is more mobile, WES will be more elastic

what can cause market failure in labour markets

geographical and occupational immobility

geographical immobility

when workers are unable or unwilling to locate in the areas where the demand for labour is

causes of geographical immobility in the UK

• lack of high speed transport

• high housing costs

• family/ social ties

solutions to geographical immobility UK

• HS2

• government subsidies on housing

occupational immobility

when workers have difficulty changing jobs within or between industries as they lack the skills demanded by employers

causes of occupational immobility in the UK

lack of skills actually demanded by the work force

solutions to geographical immobility in the UK

improve apprenticeship options with the apprenticeship levy

policies to increase labour supply in the UK

• increase childcare provision

• reduce NHS waiting lists through weekend appointments

• decrease the level of unemployment benefits

• increase the state pension age

• increasing the availability of skilled work visas for immigrants

K for increased childcare provision

-currently costs around £7000 part time for for nursery under 2

-decreasing birth rate

-low availability of nursery places

AA for increased childcare provision

• increases the hours parents can work

• decreases percentage of income spent on childcare

• may incentivise a higher birth rate

eval for increased childcare provision

• opportunity cost/ higher taxes if government increases subsidy

• estimated cost of 5 billion

• may still be regional or disability disparities

k for reducing NHS waiting lists through more weekend appointments

• 6.24 million people on waiting lists, this is still rising

• this is expensive to keep up with

aa for reducing NHS waiting lists through more weekend appointments

decrease waiting lists

less people would miss work, which would decrease inactive population and increase productivity

eval for reducing NHS waiting lists through more weekend appointments

• could make working conditions for doctors worse, decinetivising training and retention of medical staff, worsening the issue

K of decrease the level of unemployment benefits

joint claimants over 25: around £620 per month

AA of decrease the level of unemployment benefits

• incentivises people to work to earn enough to survive, decreasing economic activity

• decreases proportion of tax revenue that is spent on benefits, can be invested elsewhere

eval of decrease the level of unemployment benefits

• might worsen the quality of life for people with disabilities or health issues preventing them from working

• could increase number of people in relative poverty, as many are on benefits as they cannot find work due to structural unemployment

K of increase the state pension age

• depends on national insurance record

• currently 66 years for men and women, but increases

• around £220 a week is full state pension

AA of increase the state pension age

• increases output as older workers stay in the economy for longer

• decreases government spending on pensions

• older workers may have more developed skill sets

eval of increase the state pension age

• may decrease productivity due to health and mobility issues

• older workers may not be able to keep up with innovations in technology

• might not increase time people spend in workforce, as state pension is insignificant to some in comparison to their private pensions, and older people tend to have greater wealth in property