Labour Market - Economics Study Notes

Labour Demand

  • Labour is essential for firms to produce goods and services.

  • The demand for labor is a derived demand, driven by the demand for the goods or services it produces.

  • Marginal Productivity Theory: Demand for any factor of production depends on its marginal revenue product (MRP).

  • Marginal Revenue Product of Labour (MRPₗ): Extra revenue gained by employing one more worker.

    • MRPl=MPPl×MRMRPₗ = MPPₗ × MR

    • MPPₗ is the marginal physical product of labor, and MR is the marginal revenue.

  • Firms hire workers if MRP>MCMRP > MC (marginal cost).

  • Marginal Cost of Labour (MC): The cost of hiring one additional worker.

  • In a perfectly competitive labour market, MC=WMC = W (wage).

  • Optimal number of workers: When MRPl=MCMRPₗ = MC

  • The MRPₗ curve is the same shape as the MPPₗ curve because MRPl=MPPl×MRMRPₗ = MPPₗ × MR

  • The MPPₗ curve is downward sloping because of the law of diminishing returns.

Factors Affecting Labour Demand

  • A firm's demand for labor is affected by wages and productivity.

  • Unit Labour Costs: Labor costs per unit of output.

  • MRPₗ curve is also the Demand Curve for Labor.

  • Change in Price of goods sold (MR):

    • Demand (and price) falls, decreasing firm's demand for labor.

    • MRP curve shifts left.

    • Factors affecting Labor productivity:

    • New technology/training increases productivity.

    • Increases labor demand and shifts MRP curve to the right.

    • Increases in Costs of Labour:

    • Increases labor costs, decreasing labor demand, shifting MRP curve to the left.

Elasticity of Demand for Labour

  • Elasticity of demand for labour measures the change in quantity of labour demanded relative to a change in wage level.

  • Influencing Factors:

    • Time Horizon: More elastic in the long run; more inelastic in the short run.

    • Substitutability: If labour can be easily substituted by capital, demand is elastic.

    • Wage Proportion of Total Costs: Small proportion means demand is more inelastic; large proportion means demand is more elastic.

    • Price Elasticity of Demand (PED) of the product being made: More price elastic product demand leads to more elastic labour demand.

Labour Supply

  • Labour supply refers to an individual or an occupation.

  • As wage rate rises, the quantity of labour supplied increases.

Backward Bending Supply Curve

  • At higher wage rates workers generally choose to work fewer hours when the wage rate rises.

Job Satisfaction

  • In the long run, labor supply is determined by pecuniary (monetary) and non-pecuniary (non-monetary) factors.

  • These determine the welfare gained by working, known as net advantage.

  • Firms offering non-pecuniary benefits can encourage workers to supply more labor at a given wage rate, shifting the labour supply curve.

Factors Affecting Labour Supply to Particular Jobs/Industries

  • Factors that affect the supply of labor include:

    • Size of the working population.

    • The competitiveness of wages.

    • The publicizing of job opportunities.

Elasticity of Labour Supply

  • The level of skills and qualifications needed for a job is the main determinant of the elasticity of labour supply.

Low-skilled jobs

  • Supply of labor tends to be elastic.

Skilled jobs

  • The supply curves tend to be inelastic, particularly in the short run.

Mobility of Labour

  • Occupationally mobile: workers can move from one occupation to another quickly, then labor supply will be more elastic.

  • Geographically mobile: If workers can move locations to where the jobs are, then labor supply will also be more elastic.

Net Migration of Labour

  • Can increase the supply of labor and help alleviate shortages of skilled workers.

Wages

  • Wage differentials are the differences in wages between different groups of workers, or between workers in the same occupation.

  • Workers that are highly skilled are paid more.

  • Wages will probably be higher if demand is high and inelastic, and supply is low and inelastic.

Lawyers

  • Lawyers are paid high wages because they have a high MRP (marginal revenue product).

Office Cleaners

  • Office cleaners are paid fairly low wages.

Nominal Wages

  • The amount of money that people are paid.

Real Wages

  • Take inflation into account and represent the actual purchasing power of people's wages.

Transfer Earnings

  • The minimum payment that's required to keep labour in its current occupation.

Economic Rent

  • The excess above transfer earnings.

Perfectly Competitive Labour Market

  • Firms are price takers.

Monopsony Labour Market

  • Means there's only one buyer in a market. In a monopsony labour market there's a single employer, so workers have only one choice of employer to work for.\n

Trade Unions

  • Formed when workers come together and try to get a better deal from their employers.

Bargaining Power

  • Members of a trade union have increased bargaining power compared to individual workers.

Collective Bargaining

  • When a trade union negotiates with an employer this is called collective bargaining.

Productivity Bargains

  • Unions agree to changes that'll increase productivity in return for higher wages or other benefits.

Trade Union Wage Negotiations

  • Trade Unions can cause labour market failure by forcing wages up to a level higher than the market equilibrium wage.

Discrimination

Wage Discrimination

  • Takes place when employers with monopsony power pay different wage rates based on different workers' willingness to supply labour.

Labour Market Discrimination

  • When a specific group of workers is treated differently to other workers in the same job.

Impact of Discrimination

  • Workers suffering from discrimination tend to earn less.

Labour Market Imperfections

Economic Inactivity

  • People are classed as economically inactive if they're not working and also not looking for work.

Imperfect Information

  • Another source of labour market failure.

Skill Shortages

  • Increase the Costs of Production for firms.

Unemployment

  • Exists when labour Supply is Greater Than labour Demand.

Geographical Immobility

  • When workers aren't able to move to different locations to find the best jobs for themselves.

Occupational Immobility

  • When workers aren't able to move from one occupation to another with ease.

Labour Market Characteristics

Barriers to Entry and Exit

  • Create Segmented Labor Markets.

Demographic Changes

  • Can be a Major Concern for Governments.

Incentives

  • Can be given to either Workers or Firms.

Informal Market

  • A Significant Proportion of many economies.

Minimum, Maximum and Living Wages

  • NMW sets a legal minimum hourly rate of pay for different age groups.

  • A government can set a maximum wage which limits a worker's wage rate.

Labour Force Flexibility

  • Flexible labour and wages are useful for an economy because flexibility makes it easier for an economy to respond to changes.

Pensions and Participation Rates

  • Aging populations make paying out pensions very expensive, so governments have to make changes to try to make the system more sustainable.

Taxes, Benefits and Legislation