3.5 Labour market

Question 1

What is the UK employment and unemployment rate?

Answer 1

Employment - 76%

Unemployment - 3.9%

Question 2

What are some features of the labour market

Answer 2

• Slow growth in real wages
• More flexible working hours
• Public sector jobs have longer holidays, shorter working weeks, more security and better pensions
• trade union membership fallen dramatically
• NMW rise in real terms
• Overall GDP growth was 1.4%

Question 3

How do you illustrate the demand for labour curve?

Answer 3

The Marginal Product of labour is the additional revenue received by a firm as it increases output by using an additional unit of labour. It is a downward sloping demand curve which is concave - as wage rate falls, more labour will be demanded

Question 4

What is the profit maximising quantity of labour?

Answer 4

Where the MRPL is equal to the marginal cost of labour. The wage rate is regarded as the marginal cost - perfectly elastic if all workers paid the same wave.

-If MRPL is higher than MC firms will hire more workers to increase profits but if MRPL is lower than the MCL then the firms are hiring too much labour

Thus it hires more labour up to where MRPL is equal to MCL

Beyond the max point, each additional worker decreases profit as they make less than they are paid. Before the max point, each additional worker increases profit and so are paid less than they deserve.

Question 5

What factors affect the position of the demand for labour curve?

Answer 5

• Productivity increases lead to outwards shift in demand for labour
• The revenue that a firm receives from selling the output will affect demand for labour e.g. demand for labour falls if price of goods fall.
• Rise in consumer demand means businesses need to take more workers
• Change in price of the product that labour is making which affects revenues for employer
• Increase in productivity makes labour more cost efficient
• Employment subsidy or tax which cuts cost and allows businesses to employ more
• Changes in price of new capital e.g. AI

Question 6

What is derived demand for labour?

Answer 6

Derived demand is demand for a factor of production used to produce another good - when the economy is growing many businesses are looking to hire more workers to supply increased output - recession is opposite.

Question 7

What causes a movement along the labour demand?

Answer 7

Changes in wage rate cause movement along the demand curve - lower wages expands demand, higher wages contracts demand

• Inverse relationship between demand and wage rate
• If wages high more costly, if low labour cheaper than capital - substitution effect

Question 8

What is elasticity of demand for labour and what factors affect it?

Answer 8

percentage change in quantity demanded/change in wages

• Labour costs as a proportion of total costs
• Ease and cost of factor substitution
• Price elasticity of demand for final product - may pass on higher labour costs to consumers
• Time period - long run/short run easy to switch
• Availability of capital (substitutes)
• Labour market regulation

Question 9

What is the backwards bending supply of labour curve?

Answer 9

• When wage rates increase there is a substitution against leisure time - workers will be motivated to work longer hours.
• As the higher wages bring the worker to a higher level of income, a second effect causes the demand for leisure to increase as real incomes increase and so they can afford to reduce the quantity of hours worked.

-At lower wages the substitution effect is stronger however as wages continue to rise the real income effect becomes stronger.

Question 10

What is the real income effect?

Answer 10

Goods that are income elastic want to spend on these goods reserved for higher incomes and thus trade off with leisure time e.g. skiing.

Question 11

What is job satisfaction and non pecuniary benefits?

Answer 11

Workers more satisfied may be willing to accept a lower wage

Non pecuniary benefits are offered to workers by firms that are non financial in nature

Question 12

What is the industry labour supply curve?

Answer 12

Upward sloping as more people offer themselves for work when wage is high, people join the market at higher wages as they are a signal of what industries to enter. The real income effect causes it to curve inwards though

Question 13

What factors cause a shift in the supply of labour?

Answer 13

• Real wage rate plus non pecuniary benefits - pensions, insurance, food, security, conditions,
• Net migration of labour
• Education levels
• Population size and structure
• Unemployment benefits
• Wages on offer in substitute occupations
• Barriers to entry
• Improvements in occupational mobility
• Preferences in working

Question 14

What non wage factors may affect supply?

Answer 14

• Working conditions
• Amount of leisure
• Facilities at work
• Flexible hours
• Opportunities for progression/travel
• Extent of autonomy to job

Question 15

What is WES and the factors affecting it?

Answer 15

Responsiveness of quantity of labour suppleid in response to wage change

Factors affecting:

• Nature of skills and qualifications required to work in the industry
• Skills and educational requirements
• Lengthy and costly training periods
• Level of unemployment
• Geographical mobility of workers
• Short/long run
• Occupational mobility of workers
• Skill factor needed low - high pool

Question 16

What is the participation ratio?

Answer 16

-Proportion of population of working age who are in employment or seeking work excluding students, those in retirement and those not looking for work for other reasons.

Question 17

Why does geographical immobility exist?

Answer 17

• Family ties
• Financial costs of property
• Local variations in house prices
• High cost of rent
• Differences in cost of living
• Migration controls
• Cultural and language barriers
• Fear of change
• High transport costs

Question 18

Why does occupational immobility exist?

Answer 18

• Skill gaps
• Training gaps
• Experience gaps
• Confidence and motivation
• Discrimination

Cause of structural unemployment, economic vulnerability, persistent poverty, loss of efficiency and welfare.

Question 19

What is labour market equilibrium?

Answer 19

Demand curve slopes down, supply curve slopes up

-If wages below equilibrium employers cannot fill vacancies and offer higher wages

If wage above equilibrium then excess supply of labour so wage rate drifts down until equilibrium occurs.

Question 20

How may a monopsonist purchaser of labour work?

Answer 20

There is a sole or dominant employer in the market who has buying power of potential employers so have wage setting power - monopsonists may pay lower wages and employ fewer people.

The graph shows the marginal cost and average cost of labour to the firm, both sloping upwards.

• Would be allocatively efficient when average cost is equal to marginal revenue product so that supply = demand.
• Profit maximisation point is still where MRPL = MCL however as the firm has monopsonist power they can charge the lower wages
• If they pay higher wages to all workers the marginal cost is not just the wage of the individual worker but all workers so they choose not to do so.

Question 21

What is the poverty trap?

Answer 21

-People on low incomes disincentivised to look for work or work longer hours as it means benefits are cut and pay income taxes so better off not working at all.

Question 22

Why are there differentials in wages between occupations?

Answer 22

• Compensating wage differentials - reward for risk taking, poor conditions and bad hours
• Reward for human capital
• Different skill levels
• Differences in labour productivity and revenue creation
• Trade unions
• Artificial barriers to labour supply e.g. exams, migration controls
• Employer discrimination

Question 23

What is the gig economy and what are the benefits?

Answer 23

-Work where tasks are given for certain period of time - Uber, Amazon, Deliveroo - 4% of working adults in here.

Benefits:

• Like more flexile employment
• Not full time
• Can work from home
• common way to earn extra income
• Less risk of stuck in routine jobs
• Reduces fixed cost to businesses
• Reduced investment to businesses
• Flexibility in managing hours to expected demand for products

Question 24

What are the drawbacks in the gig economy?

Answer 24

• Doubts over true flexibility of hours
• Lack paid vacation
• Job and income uncertainty
• Inadequate investment
• Workers bear most of the risk
• Shrinking tax base
• Reduction in road safety
• Low quality jobs

Question 25

What are the effects of an ageing population?

Answer 25

• Changing patterns of consumer demand in markets/affecting profits of businesses in particular sectors
• Impact on housing market
• Impact on labour market
• Impact on government spending
• Impact on growth rate
• Impact on UK competitiveness

Question 26

What are the effects of falling net labour migration?

Answer 26

• Shortage of skilled labours
• Impact on demand for prices of properties
• Effect on dynamic efficiency - brain drain
• Outflow of remittances
• Employment/unemployment
• Consequences for economic growth.

Question 27

What are the effects of a trade union in a monopsonist labour market?

Answer 27

As a trade union acts as a monopoly provider of labour, the monopsonist can no longer have wages below the allocatively efficient point so it will be between the wages they offer and the allocatively efficient point

Question 28

What are the roles of a trade union?

Answer 28

• Increased living standards and wages
• Protection of workers against unfair dismissal
• Promoting improvements in working conditions
• Promoting workplace training and education
• Protection of pension rights
• Wages offered above normal competitive market wage
• Leads to excess supply of labour and contraction of total employment
• Unions more success in raising wages for member is demand is inelastic
• More influential if higher proportion of workers
• Pay may rise if unions and employers agree pay deal on better productivity

Question 29

How would you evaluate the benefits of trade unioins?

Answer 29

• Long term decline in membership due to loss of closed shops and law stopping striking in other industries
• Trade union influence depends in part on density in industry
• Focuses less on wage bargaining more on protecting employment, pension rights
• Don’t assume successfully negotiate higher wages inevitably lead to contraction in employment
• Game theory - combined pay vs productivity deals

Question 30

What policies may be done to improve labour mobility?

Answer 30

• Access to training within firms
• funding for education
• Improving affordability and reliability of transportation
• Addressing housing shortages
• Creating differences between pay in work and welfare benefits
• Lowering burden of direct taxes
• Raising level of NMW
• Providing tax free child care
• Develop infrastructure
• Subsidise industry with high employment
• Tax free areas
• People move into areas with labour shortages
• Subsidise training schemes and apprenticeships.

Question 31

What is the effect of a minimum wage?

Answer 31

-All firms reduce demand for labour to account for minimum wage, so demand falls creating involuntary employment as there is a contraction in demand and extension in supply.

Positives:

• Real increase in wages
• Rise of more than 50p an hour
• Lowers inequality
• Higher rewards improve productivity
• Encourages training of wokers
• Tackles discrimination
• Provides incentives for people to work

Negatives:

• People lose jobs
• Less employment - not unemployment
• Above inflation increase - could be inflationary
• Not supporting businesses - less competitive
• Attract informal/grey economy
• Only affects those on lowest pay so those not employed in low pay fine
• If wages low proportion of costs can absorb increase by passing cost to consumers.
• Depends on proportion of cost
• Depends on how labour intensive production is
• In short term firms may be slow to adjust to new cost conditions.
• Small businesses struggle to profit

Question 32

What is the effect of a minimum wage on a monopsony employer?

Answer 32

Firm now hires up to the point where the wage is equal to the MRPL and takes the market back to perfectly competitive outcome - allocatively efficient - very hard to effectively measure the optimum minimum wage but any increase will encourage an increase in employment.

Question 33

What are maximum wages?

Answer 33

• High salaries and bonuses are needed to provide incentive for effort, but incentive effect not as strong at high levels of pay - diminishing marginal utility of income. A price cap is set to reduce the amount that CEOs can be paid - up to 370x the incomes of the lowest paid workers
• The WES and WES of a CEO is inelastic as they are hard to find, supply and demand.
• Causes an extension in demand and a contraction in supply of CEOs

Question 34

What are the arguments for and against maximum wages?

Answer 34

For:

• Equality and fairness - ratio crazy high
• Bonus culture short term decision taking rather than long term strategic direction - revenue max etc.
• Huge levels of executive pay contribute to growing income and wealth inequality

Against:

• Ceiling prevents talented executives moving to UK
• Leads to businesses relocating
• What level should it be set at
• How could it be regulated
• Capping pay and bonuses may reward executives in other ways
• High tax rates may be a better option
• Impact differently across industries not all CEOs are mental

Question 35

How can they reduce the poverty trap?

Answer 35

• If unemployment benefits too high inhibits participation and people choose to live on benefits instead of low skilled employment.
• Must be balanced for those who actually can’t find work - must be not so low that workers leave work so inhibits flexibility of labour markets.

Question 36

What are incentive afects?

Answer 36

Most people accept tax income should be progressive to redistribute income and prevent inequality from being extreme - however may come a point in which marginal tax rates so high large proportion of additional income is taxed away, reducing incentive to supply additional effort or labour.

-Important to balance these incentives against distortion caused by having too much inequality in society

Question 37

How do governments intervene with public sector wages?

Answer 37

• They determine pay
• Lead to labour market distortions if private sector sets wages according to market forces but public sector wages significantly different
• If wages lower, difficulty recruiting and end up hiring less qualified work
• If high, best workers gravitate towards public sector, leaving the private sector struggling to recruit employees.