Labour markets

What does the demand for labour show

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

MRP =

MP x Price

Draw the MRP curve

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Why does the MRP graph fall

The law of diminishing marginal utility : the constrains of fixed fop affect individual productivity decreases so MRP falls

What condition will firms employ up to

MRP=MC

Draw the Labour Demand Curve (Market and Firm)

Why is there an inverse relationship between wage and Quantity of workers demanded

SR - Law of diminishing returns

LR - Substitutibility of labour and capital

Criticisms of MRP

* How to measure productivity
* Teamwork makes it difficult to measure individual productivity
* Self employed are not payed by measure of their MRP
* Imperfect labour market - trade unions

Why does the labour demand curve shift (non-wage factors)

1 - A change in the final price of the product labour is making affects MRP

2 - A change in the demand for the product, demand for labour is derived from demand for goods and services

3 - A change in the labour productivity affects MR and therefore MRP

4 - A change in the price of capital

What does elasticity of the Labour Demand curve measure

Measures the responsiveness of labour demanded given a change in the wage rate

Factors affecting the elasticity of the demand curve

* Substitutibility of Capital for labour
* PED the product
* Cost of labour as a proportion of total costs
* SR v LR

What is the substitution effect

As wages rise, the opportunity cost of leisure time increases providing an incentive to work (always +)

Draw the Individual Labour Supply Curve (Backward Bending Labour Supply Curve) with the effects

second chunk approaching target income income effect is becoming negative

What is the income effect

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

Why is the supply of industry markets upwards sloping

The high wage attracts the economically inactive and qualified workers in other industries

Draw the industry supply curve

Draw the supply curves of firms in perfect competition and Monopsony

Explain the MC & AC relationship in a monopsony

As the monopsony has wage setting power it can set the wage higher but the wage must be raised for all workers not just one, so MC increases faster

What are the non wage determinants of shifts in the supply of labour curves

* Wage on offer in substitute occupations
* Barriers to entry
* Non-monetary characteristics
* Improvements in occupational mobility
* Potential for overtime
* Size of the working population e.g. immigration
* Value of leisure time

What does the Elasticity of the Labour Supply Curve measure

Measures the responsiveness of labour supplied given a change in the wage rate

Factors affecting the Elasticity of the Labour Supply Curve

* The nature of skills required in the job
* Length of the training period
* Vocational element
* SR v LR - notice periods, expectations of a return to the original wage rate

Characteristics of a Perfectly Competitive Labour Market

* Many workers and employers
* Labour is homogeneous & perfectly mobile
* There is perfect information
* Firms are wage takers
* There are no barriers to entry or exit

Draw the industry/market and firm diagram for a perfectly competitive labour market

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What do firms looking to maximise revenue from workers hire workers up until

MRP = W = MC of labour

Labour market imperfections causing a wage differential

1 : Labour is not homogeneous :

workers have different MRP’s and therefore wages

Some jobs where not all workers are suitable for jobs - different supplies of labour

Discrimination

2 : Non-monetary considerations : Compensating wage differentials

e.g. pensions, potential for overtime, holidays, working hours, company cars, potential for promotion

workers will consider these alongside the wage not just the wage itself

3 : Labour is not perfectly mobile

Occupational mobility

Geographical immobility

Lack of perfect knowledge

4 : Trade Unions and supply restrictions

5 : Monopolies and wage setting ability

What is a monpsony labour market + characteristics + graph

A monopsony is the sole employer of labour in a given profession e.g. teachers, nurses

* wage maker
* will maximise revenue from workers by hiring up to where MRP-MC

What is the impact of monpsony labour markets on employment and wages

Employment decreases and wages also decrease

How to measure monopsony power

Compare MRP to wages

What do trade unions do

Lobby firms to negotiate better pay and working conditions

Trade union labour market graph

Benefits vs limitations of TU

\+ Greater income - Success is determined by the union markup

\+ TU in a monopsony

\- Depends on TU density

\- Government legislation : 75% anonymous + more than 1 TU in each industry

\- Employment