3.5 - Labour market

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13 Terms

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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 Economic activity

  • Technology good → demand for labour decreases

  • Government regulation

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

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Demand for labour is a derived demand

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

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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 worker 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

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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

  • some unemployed may lack skills to take available work

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

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Diagrammatic analysis of labour market equilibrium (Demand)

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Diagrammatic analysis of labour market equilibrium (Supply)

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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

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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

<p>minimum wage = lowest possible wage a firm is allowed to pay their workers</p><ul><li><p>increase in minimum wage ➜ increase in excess supply ➜  decrease in quantity demand for labour ➜  decrease in employment</p></li></ul><p></p>
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Government intervention in the labour market: public sector wage setting

  • sets the wages received by the workers in public sector

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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

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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

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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

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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