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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