3.5 Labour Market

Question 1

Define wage rate

Answer 1

the wage rate represents the price of labour, which provides an income to households and represents a cost to firms

Question 2

Differentiate between a nominal wage and a real wage

Answer 2

nominal: express the value of a wage which is not adjusted to take into account inflation.​

real: the value of a wage, adjusted for inflation

Question 3

Define demand for labour

Answer 3

how many workers an employer is willing and able to hire at a given wage rate in a given time period

the higher the wage rate, the lower the demand

Question 4

Factors which determine a firm’s demand for labour

Answer 4

1) wage rate - movement along the curve
2) demand for the g/s
3) labour productivity
4) profitability of the firm
5) non-wage costs
6) substitutes for labour
7) number of buyers of labour

Question 5

Define supply of labour

Answer 5

The number of hours that new and existing workers are willing and able to supply at a given wage rate in a given time peiod

The higher the wage rate, the higher the QS. More individuals will be incentivised to join

Question 6

Factors which determine an individuals supply of labour

Answer 6

1) wage rate - movement along
2) wages in sub occupations
3) demographic factors - working pop
4) net migration (people coming in/leaving, if immigrants>emigrants = positive NM)
5) non-wage benefits of working - fringe benefits
6) improvements in mobility of labour
7) trade unions

Question 7

Work and labour trade off

Question 8

Explain the backwards bending S curve of Labour

Answer 8

As wage rates rise, at first a worker is prepared to work more.​
At very high wage rates, workers are prepared to spend LESS of their time at work because OF THE SUBSTITUTON AND INCOME EFFECTS.​

As the leisure time becomes more scarce, the substitution effect says that WE HAVE A CHOICE WHAT TO DO WITH OUR TIME – WE ARE WILLING TO GIVE UP OUR LEISURE TIME AT A PRICE. AS LEISURE TIME GETS MORE SCARCE, WE NEED A HIGHER WAGE RATE TO GIVE UP THE NEXT MARGINAL HOUR OF OUR LEISURE TIME. We will continue to substitute leisure time for work if THE WAGE RATE IS ATTRACTIVE ENOUGH.​

How does the graph work? Is only one effect in operation at any one time? Explain. INCOME AND SUBSTITUTION EFFECTS HAPPEN SIMULTANEOUSLY. WE HAVE A TARGE LEVEL OF INCOME THAT WILL PROVIDE US FOR THE LIFESTYLE WE WISH TO LIVE. WE WILL WORK ENOUGH TIME NEEDED TO DELIVER THAN INCOME TO DELIVER FOR US THAT LIFESTYLE. IF OUR WAGE RATE RISES, WE DON’T NEED TO WORK SO MUCH. THEREFORE AT HIGHER INCOME LEVELS, WE WILL WORK FEWER HOURS AND ENJOY MORE LIESURE TIME.​

Graduates may be on very high salaries due to the number of hours they work

How does the income effect explain early retirement? A TARGET AMOUNT OF INCOME HAS BEEN ACHIEVED AND SO EMPLOYEE DECIDES NOT TO WORK ANY LONGER. THE OPPORTUNITY COST OF LEISURE TIME IS TOO GREAT.​

In many jobs, there isn’t much flexibility of number of hours

Question 9

What are the suitability of labour and work effected by

Answer 9

age
direct taxes (higher income tax will decrease the S and increase utility of leisure)
dependency ratio: i.e having children
non-labour income: can come from assets like renting or can come prom pension

Question 10

Define unemployment, unemployment rate, underemployment, the participant rate

Answer 10

“Unemployment” refers to those who are not in work but who are willing, able and actively seeking work.​

“Unemployment rate” means the number of individuals not in work but willing and able (actively seeking) to work, divided by the total labour force. It is expressed as a percentage.​

“Participation rate” means the number of individuals in work, divided by the total labour force. It is expressed as a percentage.​

“Underemployment” refers to those individuals who could work a greater number of hours, if those hours were available, or to those who are employed in jobs which are beneath their skill level.

Question 11

Imperfectly competitive labour markets​

Answer 11

The firm is a dominant or monopoly buyer of labour and is therefore a monopsonist, but where there is a large number of workers.

Monopoly supplier of labour – ie trade union.​

Bilateral monopoly - The firm is a monopoly buyer of labour/monopsonist and there is a monopoly supplier of labour.

Question 12

Define Marginal Revenue Product

Answer 12

is the contribution that an additional employee makes to the revenue of the firm. EG if I make 8 units and the sale price per unit is £10, the MRP of my employment = £80. The MRP curve shows the price that a firm would be willing to pay for an extra unit of labour and therefore represents the demand for labour.​

Question 13

Define Law of Diminishing Marginal Returns

Answer 13

marginal output will eventually start to decline if increasing units of a variable factor (labour) are added to a fixed factor. For this reason, Marginal Revenue Product falls as output rises.​

Question 14

Define Marginal Cost of Labour

Answer 14

the cost to the firm of employing an additional worker.

Question 15

What is a monopsonist

Answer 15

A monopsonist is a single buyer of labour, and is the wage maker. It will use its power to reduce the wages and is also likely to reduce employment level

Question 16

Draw + explain a wage rates graph (theme 3)

Answer 16

mc of labour and ac of labour
DL = MRP
A monopsonist will employ people where MRP=AC, profit maximising at Q1,W1

The monopsony power allows them to pay extremely low wages at W3 Q2 where MC=MRP

Wage paid by monopsony W3, b, Q2, 0
Wages lost for underpayment by employer W2, a, b, W3

Not paying W2 leads to exploitation of workers

Question 17

Define trade union

Answer 17

A trade union is an organisation of workers who combine together to further their interests. Trade unions use collective bargaining with employers to protect their members

Question 18

Trade union key roles

Answer 18

1) protecting/improving living standards and wages
2) protecting workers from unfair dismissal
3) promoting improvements in working conditions, work life balance and health and safety issues

Question 19

Show the effect of trade unions on wages

Answer 19

[minimum price graph]
[collective bargaining makes wages artificially high and reduces the quantity]
trade unions may bid for employers to pay higher wages, this leads to a contraction in demand to Q2.
W2,a, b, W1 - higher income from collective union
Q1, Q2, b, c - lost wage income from contraction unemployment (some suffer - a to d)

Question 20

Trade Union - kinked supply curve

Answer 20

Employment will fall from Q1 to Q2 as a result of the higher wage rate. If the business wishes to employ more staff above Q3 it will need to pay a higher wage rate than W2

Question 21

What will the impact of trade unions depend on

Answer 21

• elasticity of demand (the more inelastic, the more success trade unions will have)
• proportion of workers in the union (they are more influential when they represent a higher %)
• pay bargaining outcomes: worker wages may rise if unions and employees agree a pay deal based on success

Question 22

Why did trade union memberships decline

Answer 22

“loss of good quality jobs”
rise of gig economy: 0 hours contract, no employment rights
osterity: proportion of people working in the public sector declined

4 million employed in the public sector in 2020
24% are in trade unions

Question 23

BOOKLET FOR LABOUR MARKETS 3

Question 24

Define National Minimum Wage

Answer 24

The lowest that firms are legally allowed to pay employees

Question 25

Define National Living Wage

Answer 25

for anyone aged 21+ £11.44

Question 26

How would you show a national minimum wage graphically

Answer 26

A price cap (above the equilibrium wage)
There is an excess supply of labour of QS-QD

Question 27

What do the NLW and NMW do

Answer 27

They prevent the market from clearing
In a recession a firm may experience a fall in demand for its product so the deceived demand will also fall
But this legislation prevents the market from clearing

Question 28

Rise in NMW and NLW depends on

Answer 28

elasticity
difference between equilibrium and set
PED for the firms’ products
Trade cycle

Question 29

Elasticities and NMW/NLW

Answer 29

inelastic - higher MW will cause a less than prop contraction in demand for labour. unemployment will be lower than previously

elastic - a higher MW will result in more than prop contraction in demand more unemployment

Question 30

Arguments for higher MW

Question 31

Arguments against higher MW

Question 33

What are the two types of immobility that cause market failure

Answer 33

Geographical and Occupational

Question 34

Define geographical immobility of labour

Answer 34

When workers find it difficult to move from one geographical area to another

Question 35

Why may geographical immobility of labour occur

Answer 35

When workers may:

• not be aware of the jobs available in another place;​
• not be able to afford to travel to different places to find work;​
• be tied to a particular location due to friends/family;​
• have cultural roots in a particular place;​
• have social housing which is not easily transferable to a different location;​
• finding private accommodation in another region too expensive. ​

Question 36

Define market failure caused by occupational immobility of labour

Answer 36

Refers to the ability of workers to transfer from one occupation to another

Question 37

When does occupational immobility of labour occur

Answer 37

Where a high degree of education, skill and training is required in a particular profession, the greater the occupational immobility of labour.​

In the short term, it is difficult from workers to transfer from a skilled occupation to another.​

In the longer term, this is possible as the worker commits to a programme of training.

Question 38

Immobility and elasticity of labour supply

Answer 38

In low skilled occupations, supply is elastic as there is a greater availability of workers

In jobs that require higher skill and qualifications, supply is inelastic as it is difficult to increase the supply of labour in a short period of time following an increase in demand for workers. ​

The immobility of labour makes supply of labour more inelastic.

Question 39

What are the issues caused by labour immobility

Answer 39

Immobile workers become unemployed, while employers in other sectors are reporting a shortage of workers.​

Immobile workers who wish to work full time find themselves in temporary or part-time employment (therefore underemployed), or accept zero-hour contracts in order to earn an income.​

Immobile workers perform unskilled work and therefore fail to maximise use of their skills and talents (another EG of underemployment).

Question 40

policies to reduce geographical labour immobility

Answer 40

(1) Reforms to the housing market designed to improve the supply to increase the supply of affordable properties in affluent areas. Difficult to do, because of limited space in places like the South East and London. It would also require huge house-building programmes to bring prices down.
Help 2 Buy, schemes for Housing Association tenants and Council Tenants to purchase their rented properties, Rent to Buy scheme.​
(2) Improve infrastructure so that connections between cities in the North are much better than at present, Eg HS2:​
(3) Subsidies to encourage firms to move to depressed areas. Areas like West Wales and the Isles of Scilly received significant funding.
(4) Funding for individuals to move into disadvantaged areas – teacher training requires trainees to move to “opportunity areas” in Blackpool, Derby, etc.​
(5) Provision of job centers - Increase knowledge of job opportunities, assistance with application forms.

Question 41

policies to reduce occupational labour immobility

Answer 41

(1) Provision of education and training:​
increase functional flexibility of workers so that they may move more freely between industries. ​

(2) Subsidise firms providing vocational training schemes. This helps to overcome government failure, as the firm is likely to have better knowledge of the skills that industry really needs. The government still needs to evaluate which industries and firms will offer good training schemes to support.​

(3) Tax firms that do not offer apprenticeships – see the “apprenticeship levy”.

(4) Subsidies to firms who employ unemployed individuals from groups in the labour market who have above average unemployment rates, EG young workers or those with disabilities.​

(5) Reductions in income tax or raising the tax free allowance - disposable income rises subject to the rate of inflation.​

(6) Raise the minimum wage/NLW – takes place annually in April and causes disposable income to increase, subject to the rate of inflation.​