Labour Markets

Marginal Physical Product of labour (MPP_L)

Output produced by each extra worker

Marginal Revenue Product (MRP) + Formula

• Extra revenue a labourer will bring into the firm

• MRP = MPP_L x MR

Factors of the elasticity of labour demanded (FoEL)

• Substitutes

• % of total costs

• Time

Substitutes (FoEL)

• Lots of subs makes demand elastic - very responsive to a change in wage rates

% of total costs

If wages = large% of total costs demand will be elastic

• small change in wage rates will lead to a significant change in the quantity of labour demanded.

Time (FoEL)

SR: if wages increase demand is inelastic as there is not enough time to find substitutes. Firms continue to demand labour at higher wages

LR: If wages increase demand is elastic as there is time to find subs so demand is very responsive and will cut if wages increase

Factors affecting elasticity of labour supply

• Skills and qualifications

• Unemployment levels

• Time

Skills and Qualifications (FoS)

If many skills are required to do the job then it is harder to find people with those specific skill set - Supply is inelastic

Unemployment levels (FoS)

Large quantity of people unemployed = competition for jobs increases, making labour supply more elastic as more workers are willing to accept lower wages.

Time (FoS)

Less time to apply/train for a specific job role = supply is inelastic

MRP theory

• The MRP curve is the demand curve for labour.

• This is because a firm should only pay a worker a wage that is greater than or equal to that worker’s MRP

Criticisms of the MRP theory

• No definitive way to measure productivity in certain industries - too theoretical - would break down IRL

• Teamwork makes it difficult to measure individual productivity

• Critics argue that the MRP theory is overly simplistic as it assumes workers can be perfectly measured and valued based on output.

• Self employed don’t pay themselves according to their MRP - distorts the theory

• Imperfect labour markets - not all labour markets are perfect - trade unions can bargain for higher wages + firms end up paying above the MRP - Distorts the theory that suggests that workers are paid according to their MRP

Factors affecting the shifts in demand for labour

• Change in final price of the product that labour is making

• Change in demand for the final product

• Change in labour productivity

• Change in price of capital

Income effect

As wages increase income increases - can be positive or negative

• As wages increase some may choose to work more to gain more money (+ve effect)

• As wages increase some may choose to work less as they approach their target income

Substitution effect

• Always positive

• As wages increase the opportunity cost of leisure also increases providing a greater incentive to work