1.6 The labour market

Question 1

labour

Answer 1

human input into production

Question 2

wages

Answer 2

the reward for labour

Question 3

law of diminishing returns

Answer 3

where increasing amounts of a variable factor are added to a fixed factor and the amount added to the total product by each unit of the variable factor eventually decreases

Question 4

Derived demand

Answer 4

demand for a good or factor of production, not wanted for its own sake, which is a consequence of the demand for something else

Question 5

marginal physical product of labour (MPP)

Answer 5

The extra output from an additional worker.

Question 6

Labour productivity

Answer 6

output per unit of labour

Question 7

Marginal revenue product of labour (MRP)

Answer 7

The Marginal Revenue Product of Labour (MRPL) measures the additional revenue a firm earns from employing one more worker

a profit maxing firm should employ workers up to a point where MRPL = MCL ( marginal cost of employing extra labour

Question 8

wage elasticity of demand for labour

Answer 8

proportionate change in demand for labour following a change in the wage rate

Question 9

Marginal revenue product of labour formula

Answer 9

marginal physical product x marginal revenue

Question 10

wage elasticity of demand for labour formula

Answer 10

Question 11

The wage elasticity of demand will be more inelastic if… (4)

Answer 11

• wages form a relatively small proportion of the total cost of production
• demand for the good produced by the workers is inelastic
• it is difficult to substitute the workers for other factors of production
• the period of time is in the short-run, since this means the firm cannot vary the quantity of all their factors of production

Question 12

Substitution effect

Answer 12

The substitution effect describes how workers (labour suppliers) respond to changes in wage rates by substituting between work and leisure. When wages rise:

Work becomes more attractive (higher opportunity cost of leisure).

Workers may choose to work more hours (substituting leisure for labour).

Question 13

Wage elasticity of supply of labour

Answer 13

proportionate change in the supply of labour following a change in the wage rate

Question 14

Wage elasticity of supply of labour formula

Answer 14

(%change in labour supply)/(%change in the wage rate)

Question 15

The wage elasticity of supply of labour will be more inelastic if… (4)

Answer 15

• workers have special skills that are hard to maintain
• workers are tied to their local area (lack geographical mobility)
• there is low unemployment in the whole economy
• period of time is in the short-run as opposed to the long-run

Question 16

Perfectly competitive labour market

Answer 16

a labour market that displays the six conditions of perfect competition

Question 17

conditions of a perfectly competitive labour market (6)

Answer 17

1) there are a large number of firms and workers
2) every firm and worker possesses perfect information (workers are aware of available jobs, wages, and working conditions)
3) every firm is able to hire as many workers and each worker sell as much labour as they wish at the market wage
4) any single firm or worker is unable to influence the ruling market wage
5) All workers are uniform in terms of productivity (homogenous)
6) there are no barriers to entry or exit in the long-run (no geographical immobility, government restrictions, trade unions, or professional bodies)

Question 18

Profit maximising rule

Answer 18

marginal revenue product of labour = marginal cost of labour

Question 19

total cost of labour

Answer 19

the total wage bill employing a quantity of workers

Question 20

Marginal cost of labour

Answer 20

the change in total amount by which the wage bill rises when employing one more worker

Question 21

Average cost of labour

Answer 21

the total amount of the wage bill divided by the number of workers employed

Question 22

wage differential

Answer 22

the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or localities

Question 23

Equilibrium wage

Answer 23

a wage where the quantity of labour demanded equals the quantity of supplied labour. At this wage there is no shortage or surplus, and there is no tendency for the market wage to change

Question 24

human capital

Answer 24

the accumulated stock of skills and knowledge, relevant to work, embodied in human beings

Question 25

frictional unemployment

Answer 25

unemployment that is usually short term and occurs when a worker switches between jobs

Question 26

geographical immobility

Answer 26

when workers are unwilling or unable to move from one area to another in search of work

Question 27

Occupational immobility

Answer 27

when workers are unwilling or unable to move from one type of job to another, for example because different skills are needed

Question 28

Monopsony

Answer 28

there is only one buyer in a market the lower the wages are compared to mrp the greater the monopsony power that exists in the market

Question 29

imperfectly competitive labour market

Answer 29

a labour market that does not display the six conditions of perfect competition (usually characterised by firms having monopsony power)

Question 30

Monopsony power

Answer 30

market power to set prices or wages below competitive levels. the lower the wages are compared to mrp the greater the monopsony power that exists in the market

Question 31

Workers' surplus

Answer 31

a measure of the economic welfare enjoyed by workers: the difference between the wage a worker is paid and the minimum wage they world be prepared to work for

Question 32

Employers' surplus

Answer 32

a measure of the economic welfare enjoyed by employers: the difference between the wage an employer succeeds in paying and the maximum wage they would be prepared to pay

Question 33

Lost wages from underpayment

Answer 33

the difference between the wage an employer pays and the value of the marginal revenue product of the workers

Question 34

How does monopsony power lead to labour market failure?

Answer 34

- it redistributes welfare away from workers to their employers. Workers are exploited as their pay is below the value of their marginal product - it contributes to relative poverty and weakening of work incentives - in terms of economic efficiency, it reduces the total welfare enjoyed by both groups taken together, as the employer's net gain is smaller than the loss inflicted on workers

Question 35

trade union

Answer 35

a group of workers who join together to maintain and improve their condition of employment, including their pay

Question 36

individual bargaining

Answer 36

a process by which wage rates and other conditions of work are negotiated and agreed upon by an individual worker with an employer

Question 37

collective bargaining

Answer 37

a process by which wage rates and other conditions of work are negotiated and agreed upon by a union or unions with an employer or employers

Question 38

trade union mark up

Answer 38

the amount by which a collectively-bargained wage is higher than what would've been earned in a competitive labour market

Question 39

industrial action

Answer 39

action taken by employees in order to force or enforce an agreement, such as striking or working to rule

Question 40

closed shop

Answer 40

a form of trade union agreement under which the employer agrees to hire union members only, and employees must remain members of the union at all times in order to remain employed

Question 41

Scab

Answer 41

a worker who refuses to join a trade union or who takes the place of a striking worker, or a union member who refuses to strike or returns to work before a strike has ended

Question 42

Employment act 1990

Answer 42

a piece of industrial of relations legislation of the United Kingdom which banned closed shop arrangements

Question 43

Recognition agreement

Answer 43

names the union (or unions) who have the right to negotiate on behalf of employees in that workplace, as part of a collective bargaining process

Question 44

Trades Union Congress (TUC)

Answer 44

a federation representing the majority of trade unions in England and Wales, with a role to support trade unions to grow and thrive

Question 45

Forms of industrial action (6)

Answer 45

- strike - picket - work-to-rule - overtime ban - employee sabotage - secondary action

Question 46

How do trade unions reduce labour market failure caused by monopsony power? (3)

Answer 46

- They redistribute welfare away from firms to workers. The degree that workers are exploited is reduced as their pay is closer to the value of their marginal revenue product. - They help to relieve poverty and strengthen work incentives. - in terms of economic efficiency, they increase the total welfare enjoyed by both groups taken together, as the employers' net loss is smaller than the workers’ gain. The amount of deadweight loss is reduced.

Question 47

Impact of closed shop policy on a previously competitive labour market

Answer 47

- The union negotiates a closed shop policy which forbids the employer from hiring non-union members. This shifts the supply of labour curve to the left. - There isn’t a pool of workers available who would be willing to work for a lower wage who could replace these unionised workers. This makes the supply of labour more wage inelastic.

Question 48

National Minimum Wage (NMW)

Answer 48

a minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage

Question 49

National minimum wage act 1998

Answer 49

a piece of employment law legislation which set a minimum wage across the UK

Question 50

National living wage

Answer 50

an adult wage rate, set by the UK government, which all employers must pay from 2016 onward, and which has replaced the adult national minimum wage rate

Question 51

Inflation

Answer 51

a persistent or continuing rise in the average price level

Question 52

Real wage

Answer 52

the purchasing power of the nominal (or money wage) for example, real wages fall when inflation is higher than the rise in the nominal wage rate and real wages rise when the nominal wage rate increases more rapidly than inflation

Question 53

Pros of the national minimum wage (7)

Answer 53

- increases income of low-paid workers, reducing poverty - increases labour productivity as workers are more motivated - firms have more incentive to invest in labour productivity - can offset impact of monopsony employers - increases incentive for people to enter labour market and accept jobs - improvement in public finances due to increased income tax revenue + reduced welfare benefits - knock-on effect on wages slightly above the NMW

Question 54

Cons of national minimum wage (5)

Answer 54

- can cause unemployment in competitive markets - could encourage use of black markets - increase in cost of production, cost-push inflation, some firms cannot afford - could lead to higher prices for consumers - regional imbalances in wages and costs of living reduce the effectiveness

Question 55

Wage discrimination

Answer 55

paying different workers different wage rates for doing the same job

Question 56

Conditions required to wage discriminate (4)

Answer 56

- It must be possible to identify and separate different groups of workers supplying the same type of labour. This can happen because of differing knowledge or differing ability to choose jobs. - Workers must not be able to offer their time at a relatively high wage and re-sell it themselves for a lower wage - There must be a lack of legal protection against discrimination, or there must be imperfect information on the part of the government. - Firms must have wage-setting ability.

Question 57

Equalities act 2010

Answer 57

a piece of anti-discrimination legislation which protects people against discrimination, harassment, or victimisation in employment and as users of private and public services based on nine protected characteristics

Question 58

third-degree wage discrimination

Answer 58

where a firm divides workers into different groups and pays a different wage to workers in different groups, but the same wage to all the workers within a group

Question 59

First-degree wage discrimination

Answer 59

where a firm pays each worker the minimum amount they would be willing to work for

Question 60

Impacts of wage discrimination (6)

Answer 60

* As employers' wage costs are reduced, wage discrimination can increase demand for labour, providing more jobs * Reduces the costs of labour, which can lead to higher profit * Workers may organise and strike if they know about the differences in wages * Vulnerable workers (such as young workers, women and immigrants) are going to be exploited, as they are forced to accept a lower wage * Can lead to increased inequality throughout the economy, leading to relative poverty * Waste of scarce resources

Question 61

Assembly line

Answer 61

production organised into a series of processes by which a succession of identical goods become progressively assembled

Question 62

Moving assembly line

Answer 62

an assembly line where completed and semi-completed goods are mechanically moved between the assembly processes, forcing labour to work at the speed that the goods are moving

Question 63

Standardisation

Answer 63

using interchangeable resources and processes to produce a uniform output

Question 64

dynamic efficiency

Answer 64

occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency

Question 65

automation

Answer 65

the use of capital equipment with automatic control where machines operate other machines and so capable of completely replacing labour in the production process

Question 66

capital intensive production

Answer 66

production that makes more use of capital relative to labour

Question 67

labour intensive production

Answer 67

production that makes more use of labour relative to capital

Question 68

How can improvements in technology either increase or decrease demand for labour? (3)

Answer 68

* Improvements in technology can make labour more productive, in which case the demand for labour increases. -Improvements in technology can increase the productivity of capital and may cause firms to want to adopt automated production methods. In which case the demand for labour decreases * -Improvements in technology can cause the demand for certain types of labour to decrease (e.g. the decline in the canal systems), while causing the demand for other types of labour to increase (e.g. the development of the railway system).

Question 69

pros of monopsony

Answer 69

Question 70

cons of monopsony

Answer 70