3.5 Flashcards
(35 cards)
What is Derived Demand?
The demand for a good or service that results from the demand for a different, or related, good or service.
How is demand for labour derived demand?
As the demand for labour is dependant on the demand for the final goods and services the workers produce.
What are the factors influencing the demand of labour?
1- The level of consumer demand for the final product: For example if the demand for hand sanitiser increases then more workers would be required to produce it.
2- The productivity of labour: For example new robotic methods in farming mean that workers are more productive, so farmers may be prepared to pay there remaining workers more.
3- The price of the product: If there is an increase in the price of a product following an increase of demand then more workers are likely to be employed.
4- The cost of capital (a substitute of labour): firms may choose to replace labour with machinery (capital) if it is cheaper, more efficient or more reliable.
5- Wage rate relative to the price of capital: if the wage rate increases relative to the price of machinery then demand for workers is likely to fall.
What is Marginal revenue product?
It is the additional revenue generated by the extra output from employing one more worker.
What is the supply of labour?
The number of workers willing and able to work at any given wage.
What are the 7 factors influencing the supply of labour to a particular occupation?
1- The size of the population : This may be influenced by birth rates and levels of net migration.
2- The quality and content of education and training: For example many engineering firms face shortages of workers because too few people have been trained in the relevant skills.
3- Income tax and out-of-work benefits: if income tax rates are reduced then people of working age and the unemployed might have more incentive to take jobs. Similarly a reduction in out-of-work benefits would encourage the unemployed to take jobs,
4- The strength of trade unions: if trade unions are strong then they might be able to restrict the supply of workers into a particular occupation.
5- Government regulation: one way that the supply of labour may be restricted is through occupational licences that set regulations for training and entry standards. Only licenced workers are allowed to work in these occupations.
6- Opportunity cost of leisure (the next best alternative for workers)
7- Wage rates
What are the two forms of market failure in the labour market? With a brief explanation of each
1- Geographical immobility of labour: This occurs when workers are not willing or able to move to different places to seek and find work. This may be due to family ties, the cost of travel or the cost of accommodation.
2- Occupational immobility of labour: This occurs when workers find it difficult to move between jobs because they lack the appropriate skills or training.
What is the equilibrium wage?
The wage rate at which the quantity of labour supplied by workers matches the quantity of labour demanded by employers. It represents the point at which the supply of labour and the demand for labour intersect, leading to a stable and balanced labour market.
Illustrate the determination of the wage rate in a competitive market.
Wage on Y axis, Labour on X axis. Equilibrium where supply is equal to demand.
What is the impact on the supply and demand of labour if wages are too high?
Labour supply will be high, but labour demand will be low. There is excessive supply leading to unemployment. To clear the market, workers will have to accept lower ages or go without a job, meaning the wage rate will tend to fall to the market clearing wage rate.
What is the impact on the supply and demand of labour if wages are below equilibrium?
Labour demand will be high but supply will be low - there is excessive demand and therefore there will be a labour shortage. The deficit will not disappear until wages rise, and firms will have to pay workers more (demand contracts) to convince people to work (supply expands).
What are the current labour market issues?
1- Unemployment
2- Ageing Population: many countries are facing ageing populations with the result that their dependency ratios are increasing. This means the proportion of dependants is rising relative to the number of workers.
3- Gig Economy: In the gig economy workers earn all or part of their incomes from short term contracts under which they are paid for individual tasks, assignments or jobs. Examples include people working for companies such as Deliveroo or uber.
4- Zero hour contacts: Workers may have no stable income stable from week to week.
5- Low productivity
6- AI and robotic technology: the developments in AI and robotic technology have profound impacts on the labour market. With occupations appearing and disappearing.
7- Discrimination: Forms include gender, race, age and religion.
What are the reasons for wage differentials?
1-Formal education. On average, those with a degree earn more over their lifetime than those who gain just A Levels.
2- Skills, qualifications and training. Jobs which require more training and education offer higher wages. Training workers is expensive for firms, so they compensate for this by offering workers, who have already undergone
education and training, higher wages.
3- Pay gaps. The wage gap between skilled and unskilled workers has increased in the UK recently. This is due to technological change and globalisation,
which has shifted production abroad.
4- Wages and skills. Skilled workers produce higher outputs than unskilled workers because they are more productive, so the demand for their labour is higher. This means they can demand higher wages.
5- Gender. Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks
out higher paying jobs. Although a gap still exists, it is narrowing.
6- Discrimination. Workers might be discriminated against due to age, disabilities, gender and race.
What are the methods of government intervention in the labour market?
1- Minimum wages
2- Maximum wages
3- Public sector wage setting
4- Policies to tackle labour market immobility.
What is a minimum wage?
A wage set above the market equilibrium that firms must pay their workers.
Illustrate the impact of a national minimum wage
Supply and demand graph for wages and the quantity of labour. Initial wage at the wage equilibrium (where supply = Demand). Identify Minimum wage which is set above the equilibrium wage. (horizontal line)
What are the effects on supply and demand of a minimum wage?
The higher wage results in an extension of the supply of labour to Q1 but a contraction of demand to Q2. This leads to an excess supply of labour Q1-Q2, who will be unemployed.
What are the advantages of a national minimum wage?
1- Prevent exploitation of workers
2- Reduce poverty
3- Eliminate the unemployment trap where it is financially better not to go to work and to rely on state benefits.
What are the disadvantages of a national minimum wage?
1- Might cause unemployment
2- Might be inflationary if it leads to higher costs that are then passed on by firms in higher prices.
3- Might not effect regional differences in the cost of living.
What is maximum wage?
An upper limit or ceiling placed on how much a worker can earn in a given time period.
Illustrate a maximum wage?
Supply and demand graph for labour. Equilibrium wage at We and Qe. Max wage is set below. This lower wage will result in a contraction of the supply of labour to Q1 but an extension in demand to Q2. This leads to excess demand for labour of Q1-Q2.
What are the possible advantages of a maximum wage?
1- May reduce income inequality
2- Reduce the rate at which the top earners are racing away from the median income.
3- May allow higher wages to be earned by a wider group of the workers.
What are the disadvantages of a maximum wage?
1- May lead to a shortage of certain types of workers.
2- Can destroy incentives.
What is public wage setting?
Public sector wage setting is the process by which governments determine the salaries and benefits of employees in public institutions, often influenced by fiscal policy, collective bargaining, economic conditions, and legal frameworks.
