3.5 - Labour market

Factors that influence demand for labour

• Productivity of labour

  • Productivity increases → output/worker increases → does not need that much worker → demand for labour decreases

• Economic activity/state

  • If recession → demand for good decreases → demand for labour decreases

• Price of g/s

  • Price increases & demand for good stay the same → profit increase → want to expand production → labour demand increases

• Cost & availability of substitution (machineries)

  • Cheap capital → replace more worker → demand for labour decreases

• Technology good → demand for labour decreases

• Government regulation

  • Regulation increases → Cost for firm increases → demand for labour decreases

Demand for labour is a derived demand

Ie. If increased demand for cars → increased demand for auto workers

Factors that influence supply of labour to a particular occupation

Supply of labour shift out

• Net inward migration ( of qualified workers)

  • Migration increases → labour pool increases → supply of labour increase

• Decrease in relative pay in substitute occupation

  • People would want to come and work in another similar job as they have better pay → labour supply increase

• Decrease in entry barriers

• Demographic factors which causes an increase in the active labour supply

  • These factors are ie. Age, gender, race, education

Supply of labour shift in

• opposite to the above

• Decrease in non-monetary rewards advocated with jobs

  • Ie. Promotion

• Brain Drain effect = lose skilled workers to oversea countries due to them searching for better opportunities / better working conditions

Market failure in labour markets (COMMON as 3 markers + mcq)

There are 2 forms of market failure

Geographical immobility of labour

(Question: Which one is most likely to increase the geographical mobility of labour - 1mcq+3marker)

• Definition of geographical mobility of labour = the ability of labour to move from 1 region to another to take available work

• A decrease in regional house price (common reason)= more people can afford to buy houses in different areas they move to

• ie. workers from countryside can move to towns & cities

• Definition of geographical mobility

• One major obstacle of geo mobility is asymmetric info (hence the answer from above: increased government provision of info on job vacancies in different areas of the UK)

• one way is to increase funding of job centres so can provide this info
  

(Question: Which one is most likely to decrease the geographical mobility of labour - 1mcq+3marker)

• Definition of geographical mobility

• a shortage of affordable housing = harder for labour to move into a region with higher average house prices

• as it become more expensive to buy them

Occupational immobility of labour

(Question: Which one is most likely to increase the geographical mobility of labour - 1mcq+3marker)

• Definition of occupational mobility of labour = the ability of labour to change occupations to take available work

• Sometimes can add in a response, occupational mobility may be quite low, if there is a possibility of occupational immobility

• some unemployed may lack skills to take available work

• so training programmes can increase skills for unemployed to gain work in different occupations

Diagrammatic analysis of labour market equilibrium (Demand)

Diagrammatic analysis of labour market equilibrium (Supply)

Understanding of current labour market issues

• COVID 19 causing unemployment

  • businesses going bankrupt after the pandemic → recovery takes time → unemployment

• Zero-hour contracts

  • have permanent contracts but not guaranteed a set number of hours each week → no stable income

• AI

  • causes unemployment

Government intervention in the labour market: minimum & maximum wages

minimum wage = lowest possible wage a firm is allowed to pay their workers

• increase in minimum wage ➜ increase in excess supply ➜ decrease in quantity demand for labour ➜ decrease in employment

• Reason for implementing national minimum wage:

  • reduce poverty

  • as it will help poor people who are in low paid job ➜ maintaining their incentive to work

• How an increase in national minimum wage result in government failure:

  • Employers may pay below NMW due to immigrants / young unskilled works ➜ less tax revenue to the government

Government intervention in the labour market: public sector wage setting

• sets the wages received by the workers in public sector

Government intervention in the labour market: policies to tackle labour market immobility

Measures to reduce geographical immobility of labour:

• provision of affordable housing

• subsidy

• improvements in transport

Measures to reduce occupational immobility of labour:

• Training schemes

• Apprenticeships

• Reduce educational requirements/regulations

The significance of the elasticity of demand for labour

Definition: Change in QD/Change in W

• the responsiveness of quantity of labour demanded to changes in wage rate

Factors of elasticity of labour demand

• Labour costs as a percentage of total costs

  • If labour costs (wages) are a high percentage of total costs: wages increases → total production cost increases by a lot → demand for labour decreases by a lot → elastic

• East & cost of factor substitution (ie. machineries)

  • If easy & cheap to replace labour with machinery → demand for labour decrease by a lot → elastic

• PED for final output produced by a business

  • if PED for the final product is elastic → PED for labour elastic

• Time period

  • Time period increases → more elastic

The significance of the elasticity of supply of labour

Definition: Change in QS/Change in W

• the responsiveness of quantity of labour supplied to changes in wage rate

Factors of elasticity of labour supply

• Level of skill/educational qualifications required for an occupation

  • low-skilled → elastic (lots of supply available)

  • high-skilled → inelastic (long period of training is required)

• Ease of migration

  • easy → elastic

  • not easy → inelastic

• Degree of mobility of labour

  • if both geographically & occupationally mobile → supply of labour elastic

• Time period

  • short run → inelastic

  • long run → elastic

A question asking about demand (of anything) COMMON

• include the fact that: demand for labour is a derived demand = its demand is derived from the demand for the product it makes

What is marginal revenue product of labour

An additional increase in revenue per one more unit of labour