biggg labour market

Factors of Production

• The four factors of production are land, labour, capital, and enterprise.
• All businesses require one or more of these factors to produce goods or services.

Goods and Services Market vs. Factor Market

• Goods and services market: A market where consumers purchase goods and services for their own use or consumption
• Factor market: A market for any of the four factors of production (land, labour, capital, and enterprise).
• Factor markets arise due to demand for factors of production.
  • For example, timber (land) is demanded because it can be used to make furniture.
  • This is called derived demand.

Land

• Land, as a factor of production, includes anything provided by nature that helps in the production of output.

Economic Characteristics of Land

• Fixed in supply: The amount of land available is limited and cannot be easily increased.
• Non-specific factor of production: Land is not confined to one specific use and can be used for various purposes (e.g., farmland can be used for housing).
• Price does not affect quantity available: Unlike labour, an increase in price (e.g., rent) does not increase the supply of land.
• Lack of mobility: Land cannot be moved from one location to another.
  • Its geographical mobility is virtually nil.
• Demand for land is derived demand: The demand for land is derived from the demand for the goods or services it helps to produce.
  • Land itself is not demanded for its own sake.

Capital

• Capital is anything man-made that assists in the production of wealth.
  • Examples include machinery, equipment, and tools.

Types of Capital

• Social capital: Assets/wealth owned by the community or society in general (e.g., hospitals, parks, roads).
• Working capital: Includes finished goods, work-in-progress goods, and stocks of raw materials.
• Fixed capital: The stock of fixed assets, such as plant, equipment, and tools.
• Private capital: Assets owned by individuals (e.g., computers, cars).

Interest as Payment for Capital

• The rate of interest is the payment for capital.
• Those who sacrifice consumption (savers) need to be rewarded for not spending.
  • The reward for saving is the rate of interest received.
• Example: A business owner wants to buy a machine that costs €500,000. They borrow from a bank that sources the funds from savers.

Marginal Efficiency of Capital (MEC)

• Marginal efficiency of capital (MEC) is the extra profit earned as a result of employing one extra unit of capital.
• An entrepreneur will invest in projects where the MEC is highest.
• The higher the rate of interest, the lower the demand for capital.

Enterprise

• Enterprise is the factor of production that organizes other factors of production to produce a good or service.

How Enterprise Differs from Other Factors

• Can earn a loss: Enterprise is the only factor of production that can incur losses.
• Returns can vary: Returns to enterprise can range from supernormal profits to losses.
  • If raw material costs fall and sales rise, enterprise can earn a high profit.
• Return is residual: Enterprise only receives its return (profit) after all other factors have been paid.

Labour

• Labour is the human activity directed towards the production of wealth.
• The payment for labour is the wage.
• Economic rent is the excess amount earned above the supply price.
• The supply price is the price required to bring a factor of production into use.

Factors Influencing the Demand for Labour

• Wage rate: The lower the wage rate, the higher the firm’s demand for labour. If the wage rate increases, the demand for labor decreases, all else equal.
• Demand for a firm’s output: If demand for a firm's output is high, the firm will require more labour to produce more.
• Price of other factors of production: Firms compare the cost of additional labour with that of other factors before employing more labour.
• Government incentives: Governments may offer incentives to firms to increase employment, such as reducing employers' PRSI (Pay Related Social Insurance).
• Availability of new technology: New technology can sometimes lead to a fall in the demand for labour that it replaces.
• Taxation levels: A competitive corporate tax rate can attract foreign multinationals.
  • Increases in PRSI on labour increase costs for employers and may decrease demand.
• State subsidies: Subsidies on hiring extra staff may make it more attractive for a company to hire more.
• Entrepreneur’s expectations: Positive expectations about the future may lead entrepreneurs to invest in new projects and expand their existing operations, increasing labour demand.

Marginal Revenue Productivity (MRP)

• The marginal revenue productivity (MRP) of a factor is the extra revenue earned when an additional unit of that factor is employed.

• The MRP is used by a firm to determine the wage rate it will pay employees.

  • Example: A business employs five workers, and total revenue is €455. If an extra worker is employed, total revenue increases to €470.
    • The marginal revenue productivity is €15 (€470 - €455).
  • If the wage rate is €15 per hour, then six workers will be employed.

• The company maximizes profit when the wage rate equals the marginal revenue productivity of labour.

MRP Curve

• The MRP curve is the demand curve for labour.
• It is downward sloping and shows the quantity of workers that will be employed at each wage rate.
• The MRP of labour is the additional revenue earned from the employment of one additional worker.

Labour Hoarding

• Sometimes a firm may continue to employ labour even though it is unprofitable to do so.
• Management may feel that demand is likely to improve, so more workers will be required in the future.
• Retaining existing workers is easier than retraining inexperienced new staff.

Slope of MRP Curve

• The MRP curve slopes downwards from left to right due to:
  • Law of diminishing returns: As more labour is applied to the production process, the return from each additional worker will begin to decrease.
  • Law of demand: According to this law, in order to sell a larger amount, a company will have to reduce the price of its product

Factors Influencing MRP

• The productivity of the factor: The more productive each additional factor employed is, the higher the MRP that factor will earn.
• Selling price of the output: If the price obtained on the market is rising or constant, then MRP will be higher.

Elasticity of Demand and MRP

• If the firm has an elastic demand curve, then in order for more to be sold, the price must be reduced, and this affects MRP.

Difficulty in Calculating MRP

• MRP can be difficult to measure, especially in service industries that don’t produce physical output.
• It can be hard to determine the contribution made by capital vs labour.

Marginal Physical Product (MPP)

• Marginal physical product (MPP) is the extra output produced when an additional unit of a factor of production is employed.
• Labour productivity measures the output that is produced by a worker per period of time.
  • As we can see the contribution of four workers is 90 units, but the fourth worker only produced 15 units of output

Factors Influencing MPP

• Quality/specialized nature of the factors: If the quality of the factors used improves, then they become more efficient and additional output will be higher.
• Training/education provided for staff: If the factors are trained, they become more skilled, resulting in increased efficiency and more output.
• Expertise of entrepreneur: the entrepreneur is good at organizing the production unit, then each factor will be more productive and MPP will be higher.
• The productivity of the factor: The more productive each additional factor employed is, the more MRP that factor will earn.

Factors Influencing the Supply of Labour

• The supply of labour in the economy is the total number of hours worked in the economy during a specific period of time.

• Size of population: The larger a county’s population, the greater the labour force available for employment.

• Wage levels in the economy: Higher wage levels act as an incentive for more people to supply their labour.

• Labour Force Participation rate: This is the percentage of the active population in the labour force.

• Social attitudes: Social attitudes, which include age of retirement and normal school-leaving age.

• Homemakers: The more people that want to stay home and care for their children will lower the supply of labour.

• State of the economy: When the economy is growing, employment is easier to find.

• Welfare benefits: If welfare benefits are too generous, then recipients may be less likely to seek employment.

• Level of income tax: If income tax rates (PAYE) fall, it may encourage people to join the workforce.

• Number of hours worked: The more people who are willing to work full time rather than part time, the greater the supply of labour.

• Labour mobility: The workforce in Ireland has become occupationally mobile, i.e. few barriers are in place preventing the workforce from moving from one job to the next.

• Immigration levels: If the net migration is positive (more migrants coming into Ireland than emigrants leaving) then the supply of labour increases.

Labour supply curve

• The supply of labour is usually upward sloping, from bottom left to top right.
• However, in some instances there may be a decline in labour supply as wage rates increase. This is the backward bending supply curve

The equilibrium wage rate

• When the demand and supply curves of labour are brought together, we can find the equilibrium wage rate.
• The curves intersect at We

Minimum wage legislation

• Governments enforce minimum wage legislation to tackle low pay and allow workers who would otherwise be exploited to earn a decent wage.
• If the government imposes a minimum wage this forces the wage rate up to Wm and less labour would be demanded.
• While more workers would seek work increasing from Qe to Qc. The result is unemployment which is the gap between Qa and Qc
• A minimum wage may also prevent the market from adjusting to changes in economic conditions.

Advantages of increasing the minimum wage

• Higher standard of living: Workers now receive a higher income, enabling the purchase of more goods and services and consequently improving living standards.
• Increased aggregate demand: Increased incomes will raise spending. Total demand for goods and services should increase, leading to increased economic activity.
• Encourage employment: The higher rate of pay may attract workers into the workplace, as the differential between social welfare payments and wages increases.
• Wage rates may increase: As the minimum wage rates of pay increases, general rates of pay may also rise if all rates are being performed.

Disadvantages of increasing the minimum wage

• Higher labour costs: A higher wage rate will increase costs of production, which may lead to some business closures
• Loss of jobs: The higher wage rate may cause a fall in demand for workers and/or cause workers to experience reduced working hours.
• Higher selling prices: Increasing production costs may lead to higher consumer prices and reduced competition for products
• Increased risk of relocation: Increased rates of pay may lead to some firms to consider relocating to countries with lower wage levels

Wage drift and Ratchet economy

• Wage drift occurs when wage levels rise above the negotiated levels. This occurs when demand for labour exceeds supply.

• A ratchet economy is an economy that experiences wage and price increases, usually due to increased government expenditure.

Horizontal labour supply curve

• A horizontal supply curve might exist in a small community where a single firm is the main employer.

Impact of higher taxes on labour (PRSI increases)

• When a government implements higher taxes on labour this significantly impacts the labour market
• When the tax is imposed supply curve shifts up and there is a new equilibrium quantity and wage at Qt *
• However, workers don’t receive Wp because of the tax, they receive Wr and the difference between the two wages is known as the tax wedge *
• The burden of the tax is equally shared between the employee and employer
• As a result, we can conclude that taxes have a negative impact of the economy because it leads to a reduction in employment and an increase in the price of labour.

Restricting entry into the profession

• Some professions may curtail the admission of newly qualified staff by increasing standards of entrance.

Trade unions and wage rates

• Trade unions negotiate a wage rate for their members and they usually ensure that there is not any supply of labour below this negotiated wage rate.
• The negotiated wage rate from the trade unions is at Wt, there will not be any labour supplied below this negotiated wage rate
• Mobility of labour
  Mobility of labour is the ease with which workers can move from one region to another and/or move from one job to another.

Geographical mobility

• Geographical mobility is the ability/ease of a worker to move from one area to another
• Existing social connections in the area where a family lives
• The disruption that could be caused to children’s education due to the move
• The cost of selling and buying a house elsewhere
• A general fear or reluctance to consider a major change in one’s life

Other factors that impact geographical mobility

• Housing: If there is more affordable housing in the area it might encourage people to move
• Educational facilities: If there are schools, colleges and universities nearby it might help parents move their families to an area
• Social infrastructure: If there are many shops, parks, leisure facilities and good transport links this might encourage people to move. *
• Government supports *
• Government supports: If financial aid was available from the government to help with the costs of moving this might encourage people to relocate to a new area

Economic policies to increase geographic mobility

• Increased housing: Increase investment in the availability of housing to boost supply in areas where shortages exist
• Educational facilities: Improve the availability of educational facilities to ease parents’ concerns
• Social infrastructure: Improve the social amenities to make areas more appealing for families
• Government supports: Provide financial support to entice people to move
• Updated information: Provide up-to-date and adequate information on the possibilities of moving to different locations

Occupational mobility

• Occupational mobility is the ease/ability of a worker to move from one job to another.
• If a worker has a high degree of skill and specific training, then they will not find it as easy to source alternative employment
• High costs associated with retraining, for example costs of going to college or enrolling into an evening course
• Some professions present barriers to entry in the form of a very high standard of exams

Economic policies to increase occupational mobility

• Education courses: Provide courses for further educational opportunities and at accessible costs
• Training: Provide opportunities for training/retraining at suitable times and at reasonable costs
• Government policies: Change regulations on work permits and entry into government training schemes and college courses, to improve occupational mobility

Factors Affecting Productivity/Efficiency of Labour

• Amount of training: The quality of training available to the worker may improve the workers skills
• Management expertise: Good mangers organize the workplace, ensure that standards and deadlines are met and can get the best from their staff
• Level of education: The level and quality of education attained by the worker can improve efficiency
• Innate talent: Some people may possess innate talents making them highly efficient
• Quantity/quality of other factors available: Worker’s efficiency will improve if they have a sufficient quantity and quality of other factors of production available
• Living conditions of the workforce: If workers are healthy, well nourished and can get restful sleep in good accommodation, then they will be more productive

Why Ireland Has High Labour Productivity

• Highly skilled workforce: The quality of the education and training system in Ireland means workers are highly skilled in their job.
• Presence of MNC’s: Multinational corporations are major employers in Ireland.
  • Many offer high salaries, high rewards, job mobility and state of the art equipment.
• High prices: Prices across the economy in Ireland are high.
  • When the selling prices of output is high marginal revenue productivity will also be high.
• Inflated GDP figures
  • Using GDP as a measurement of economic and productivity growth in Ireland is an incomplete measure because it is impacted by MNC’s activities

Impact of Rising Productivity on the Economy

• Increased incomes: As workers become more productive incomes rise as pay rates rise with output.
• Increased economic growth: Rising productivity helps increase GDP which improves incomes
• Lower inflation: As productivity increases inflation is lowered this is because increased productivity reduces unit costs of output.

Why Workers Receive Different Wages

• Different skills: The skills attached to different jobs vary and pay is commensurate with the level of skill involved, e.g. a surgeon earns more than a labourer
• Length of training: Workers who undergo longer periods of training will receive higher pay levels
• Educational qualifications: Generally, wage levels recognize the educational qualifications achieved by the workers
• Nature and conditions of the job: Certain jobs are dangerous, involve working unsociable hours or are temporary
• Possession of innate talent: Some people may be born with an innate talent or develop skills during their lives that allow them to earn more
• Training/regulation attached to the job: It has been possible for those in self-governing professions, i.e. those in the legal or accountancy professions to control entry to the profession and therefore maintain high wage/fee levels

Labour Shortages

• Full employment is a situation where everyone who wants a job can find a job at existing wage rates
• Economic growth: Economic growth that leads to full employment creates labour shortages which can cause some problems
• Some employers may have to recruit lower skilled applicants with poor qualifications; this reduces productivity for the firms
• Some job vacancies maybe left unfilled resulting in a lower quality service supplied by the firm
• Employers can be forced to offer higher wages to attract workers and retain existing employees, thereby adding to inflationary pressures

How Government Can Address Labour Shortages

• Visa’s to workers: Visa’s to workers from non-EU countries will ease the pressure on employers trying to fill job vacancies
• Increase the minimum wage: When wage rates go up the supply of labour increases as the reward from working has increased
• Encourage emigrants to return home: The HSE ran a bring them ‘Home Scheme’ from abroad
• Reduce direct taxes: Irish citizens working in Dubai pay no tax on their income this has meant a shortage in the Irish labour force because workers have went to work in Dubai

Skill Shortages

• A skill shortage is when demand for a particular skill exceeds the available supply.
  • Skill shortages can mean it is difficult for employers to recruit staff with the appropriate skills

Government Actions to Solve Skill Shortages

• Increase STEM education: Investment in science, technology, engineering and math’s education at all levels will provide opportunities for skills development
• Improve apprenticeships programs: Enhance apprenticeship programs that align with industry needs and partner with private sector businesses
• Open immigration policies: Develop policies to attract highly skilled immigrants from abroad to fill skill shortages

Benefits of a Skilled Labour Force

• Drives innovation: Skilled labour brings fresh ideas, new perspectives and specialised knowledge that enable businesses to thrive
• Reduce recruitment costs: In a labour market with a sufficient supply of skilled labour firms don’t have to use up scarce resources trying to recruit staff
• Improved business growth: Access to skilled labour means employees are better equipped to deal with complex tasks and deliver high quality services

Labour Market Case Study – Gender Pay Gap

• Gender pay gap is the difference in the average gross earnings of female and male employees.
• The gap emerges due to inequalities that exist in the workplace such as:
  • The over representation of women in low-paying jobs and the over representation of men in high-paying jobs
  • The so called ‘glass ceiling’ – leadership positions in many firms and many areas of society is dominated by men
  • Women are more often likely than men to take career breaks or to job share for a number of years
• The high cost of childcare often means women are forced to leave the workforce and cater for their children

Solutions to the Gender Pay Gap

• Gender quotas: A certain percentage of jobs could be reserved for women
• Free or subsidized childcare: This could enable females can stay in the workforce without having to leave to care for family
• Family friendly working conditions: This could involve allowing flexibility around working hours and involving incentives such as working from home
• Mandatory gender pay gap reporting: This is already in place in the UK for organizations with over 250 employees

Challenges in the Irish Labour Market

• The Irish labour market is expanding and has become more robust overtime.
• However, challenges remain which include:
  • Housing affordability: High housing costs places a strain on family budgets and makes it difficult to relocate in order to secure new employment
  • Youth unemployment: Despite low national unemployment levels, youth unemployment remains relatively high as many young people are leaving education
  • Underemployment: Many workers are employed in part-time jobs and jobs that do not fully utilize their skills and this contributes to economic inefficiency