Labour markets

What does the labour demand curve show?

The inverse relationship between employment and the wage rate - where the wage rate is higher, the demand for labour by firms is lower

Why is the demand for labour considered derived demand?

Labour demand is derived from the demand for goods and services - workers are needed in order to supply those goods and services

How does consumer demand affect demand for labour?

Higher consumer demand causes an outward shift of the labour demand curve

How does a change in price affect labour demand?

Higher prices reduce consumer demand so labour demand reduces - however, this is dependant on elasticity

How does productivity affect labour demand?

Higher productivity of labour may mean that they are more cost-effective than capital, therefore, labour demand shifts outward

How does a subsidy affect labour demand?

Subsidies reduce the cost of production causing labour demand to shift outward

Marginal revenue product of labour

The additional revenue generated when an additional worker is empoyed

How is marginal revenue product of labour calculated?

MRPL = marginal product of labour x marginal revenue

What are the limitations of the MRPL theory?

• Measuring labour efficiency in some areas are difficult - i.e. education and consultancy

• Self-employed and director set their own pay

When is labour demand wage elastic?

• When labour expenses are high

• Easy and cheap to substitute

• Elasticity for the final product

• Long-run means factor inputs are easier to change

What does the labour supply curve show?

The direct relationship between wage and supply - a higher wage = expansion in labour supply

What factors affect the labour supply?

• Extra pay

• Wages in substitute occupations

• Barriers to entry

• Improvements in occupational mobility of labour

• Non-monetary factors

• Net inward migration

Non-monetary factors that affect labour supply

• Job risk

• Anti-social hours

• Pension schemes

When is labour supply elastic?

• In lower-skilled jobs where there is a larger labour pool available

• When mobility of labour is higher

• In the long-run

When is labour supply inelastic?

• Where jobs require higher skills and training

• Short run

• When labour is immobile

What are the causes of occupational immobility?

• Skill gaps

• Training gaps

• Experience gaps

What are the causes of geographical immobility?

• Cost of living

• Family and social ties

• Visa restrictions

How are wages determined in a competitive labour market?

Firms will hire where MRP= Wage (MCL) in order to maximise their revenue

What is a monopsony?

The sole employer in a labour market

How are wages determined in a monopsony?

Monopsonies have wage-setting power so will often exploit their workers

How does a monopsony contribute to labour market failure?

• Lower wages = reduced disposable income

• Reduced employment

• Diminished job quality

• Economic inequality

How can trade unions affect the wage rate?

• Can increase the wage rate due to collective bargaining

• Leads to excess supply

• Results in unemployment

Evaluation of trade union power

• Effective in a monopsony

• Strength dependant on union density

• Real world evidence shows limited power

  • legislation

  • competitive pressures on firms

What is National Minimum Wage?

The minimum wage that firms can legally give to workers

Advantages of National Minimum Wage

• Poverty reduction

• Boosting consumer spending

• Reducing reliance on state welfare

• Encouraging workforce participation

• Efficiency wages

What are the disadvantages of National Minimum Wage?

• Job losses

• Higher prices

• Small business struggles

• Fall in investment

Analysis of National Minimum Wage

• Wage put above equilibrium

• Results in an excess supply of labour

• Results in real wage unemployment

Analysis of Minimum Wage in a Monopsony

• Monopsony wage is below competitive wage rate

• Price floor increases from monopsony wage rate to the competitive wage rate

• This also results in an expansion of employment

Employment where D and S are inelastic where there is minimum wage

Employment is less compared to the standard model

Employment where D and S are elastic where there is minimum wage

Unemployment is higher compared to the standard model

Labour market discrimination

When employers make decisions on wages and employment based on prejudices

What may employers discriminate against?

• Race

• Gender

• Religion

• Age

• Social Class

• Disability