Unit 2 - Business Economics: Chapter 23: The Impact of Changes in the Demand and Supply of Labour

Learning Objectives

  • Understand the effects of shifts in the demand and supply of labour.

  • Understand trade union involvement in the labour market, including their impact on working conditions and wages.

Getting Started

  • Wages are determined by the supply and demand for labour in a labour market.

  • Changes in the supply or demand for labour impact wage rates and the quantity of labour employed.

Changes in the Supply of Labour

  • Rising immigration recently has increased the labour supply of cleaners.

  • Factors that could increase the supply of labour in a country:-

    • Global population growth

    • Raising the retirement age

Changes in the Demand for Labour

  • The demand for labour is not constant and is a derived demand.

  • A fall in demand for a product leads to a fall in demand for workers involved in its production.

  • In China, demand for factory workers in manufacturing has increased due to rising manufacturing output and exports.

  • Figure 23.2 shows the shift in the demand curve for labor to the right (DL₁ to DL₂).

  • The effect of the demand shift is to raise wage rates from W₁ to W₂.

  • The number of people employed increases from QL₁ to QL₂.

  • Figure 23.3 shows rising wages in Chinese manufacturing. Average yearly earnings have increased from CNY 20,884 to CNY 55,324.

  • Global population growth is a driving force behind the growth in the supply of labor. In 2016, the world's population was 7400 million, in 2002 it was 6280 million, and by 2050 it is expected to be 9700 million.

  • Raising the retirement age increases the supply of labor (SL₁ to SL₂ in Figure 23.4).

  • Wage rates fall from W₁ to W₂, and the number of people employed rises from QL₁ to QL₂.

The Power of Trade Unions

  • Trade unions are organisations that protect the interests of workers.

  • Main aims of trade unions:-

    • Negotiate pay and working conditions with employers.

    • Provide legal protection for members.

    • Put pressure on the government to pass legislation that improves workers' rights.

    • Provide financial benefits, such as strike pay.

  • In the 1960s and 1970s, many trade unions in the UK were involved in disputes with employers.

  • In the 1980s, the government passed legislation to limit the power of trade unions, including:-

    • Requiring secret ballots before a strike.

    • Allowing businesses to sue for compensation if trade unions did not obey the law.

    • Banning secondary picketing.

    • Making closed shops illegal.

  • As a result, trade unions became weaker in the UK, and membership fell. In 1980, around 10 million workers belonged to trade unions in the UK. By 2015, this had fallen to about 6.5 million.

  • Figure 23.6 shows the decline in trade union membership in Australia since 1990.

  • A strong trade union may be able to force wages up in some labour markets.

  • Figure 23.7 illustrates the effect on wages and employment of trade union interference in the labour market.

  • The equilibrium wage without trade union interference is W₁, where the supply, SL₁, and demand, DL₁, for labour is equal.

  • If a trade union becomes involved, it will force wages up to W₂.

  • A new supply curve for labour, SL₂, emerges with a horizontal section, which is perfectly elastic.

  • The employer must pay W₂ for all workers employed up to QL₂. If the firm needs to hire more workers beyond QL₂, wages will rise further.

  • One effect of trade union interference is that the higher wage of W₂ has resulted in fewer workers being employed. Employment has dropped from QL₁ to QL₂.

  • Job losses might be avoided:-

    • If labour productivity rises at the same time.

    • If employers can pass on wage increases to customers in the form of price rises.

    • If profit margins are reduced.

Vocabulary

  • Disputes: Serious disagreement between two groups of people, especially between workers and their employers.

  • Secret ballot: A way of voting in which people write their choices on a piece of paper in secret.

  • Closed shop: A company or factory where all the workers must belong to a particular trade union.

  • Secondary picketing: Workers in one workplace or company strike in a group at a particular