3.5 Labour Market

Question 1

what happens in the LR when wage rates increase?

Answer 1

• LR = all factors of production vary
• firms are more likely to substitute workers for machines -> lower demand for labour

Question 2

what happens in the SR when wage rates increase?

Answer 2

• SR = fixed amount of capital
• when adding more workers to a fixed stock of capital -> unlikely that the additional worker will be more productive

Question 3

what is meant by ‘derived demand’?

Answer 3

the demand is derived from the demand for the goods + services that labour produces

Question 4

what are the factors influencing demand for labour?

Answer 4

• wage rates
• demand for the final product
• prices of other factors of production -> if machinery = cheap, workers are substituted -> DFL dec.
• wages in other countries -> if wages are low in other countries -> people will be employed in other countries due to lower labour costs -> DFL dec. in UK
• technology -> improvements = machines substitute workers = DFL dec.
• regulation

Question 5

what is meant by ‘wage elasticity of labour demand’?

Answer 5

the responsiveness of the quantity demanded of labour to the wage rate

Question 6

what are the factors affecting WELD?

Answer 6

• PED of the product -> if good = elastic, rise in wages -> rise in prices -> big impact on quantity sold -> WELD = elastic
• proportion of wages to total cost -> if wages are a high proportion -> inc. wages = inc. costs -> large fall in DFL = elastic WELD
• no. of subtitutes -> lots of substitutes (e.g. machinery), WELD = elastic
• time -> in the LR, WELD = elastic as machinery can be developed; SR = firms have to employ workers

Question 7

what is meant by ‘MRPL (marginal revenue product of labour)’?

Answer 7

the additional revenue generated when an additional worker is employed (MRPL = MPL X MR)
- MRP of labour initiallly increases then falls (LDMR)

Question 8

what are the limitations of the MRPL concept?

Answer 8

• measuring labour productivity can be difficult
• collaborative work makes it hard to measure the productivity of each individual

Question 9

what is the +ve subsititution effect?

Answer 9

real wage rate increases -> opportunity cost for leisure increases -> more hours worked

Question 10

what is the -ve income effect?

Answer 10

real wage rate increases -> real income increases -> work less hours

Question 11

what is meant by labour supply

Answer 11

hours that people are willing and able to supply at a given wage rate

Question 12

what is the reversation rate

Answer 12

lowest wage at which workers are willing and able to work

Question 13

what are the factors affecting labour supply to a specific industry?

Answer 13

• wages
• population and age distribution -> inc. population -> inc. labour supply if they are of working age
• non-monetary benefits through job satisfaction i.e. distance, good social life, etc.
• barriers to entry e.g. education/qualification, trade union
• wages and conditions of other jobs
• legislation

Question 14

what is wage elasticity of supply?

Answer 14

responsiveness of labour supply to a change in wage rate

Question 15

what are the factors affecting WELS?

Answer 15

• natrue/levels of qualifications required -> high level of skill ->harder for people to take the job = INELASTIC
• mobility of labour -> if occupationally mobile = WELS elastic; if geographically mobile = WELS more elastic; if both = WELS is very very elastic
• level of unemployment within a country = more elastic

Question 16

what is meant by occupational mobility?

Answer 16

the ability for an individual to move between jobs

Question 17

what is meant by geographical mobility?

Answer 17

the ability for an individual to move to new locations for a job

Question 18

what are the causes of occupational immobility?

Answer 18

• training gaps - unemployed workers may not have access to affordable training schemes to inc. human capital + employability
• skills gaps - new jobs may require diff. skills from those that unemployed workers can offer
• experience gaps - long term structurally unemployed -> gaps in CVs -> less attractive to employers

Question 19

chain of reasoning as to how occupational immobility leads to market failure

Answer 19

• cause -> occupational immobility of labour -> structural unemployment inc. -> less efficiency/deadweight loss -> market failure

Question 20

what are some government schemes to correct occupational immobility?

Answer 20

• adult education and retraining programs
• apprenticeship schemes
• lifetime skills guarantee (2020) - offers free access to level 3 qualifications to adults without them
• localised career advice and support

Question 21

causes of geographical immobility

Answer 21

• family ties
• language barriers
• access to good schools
• high cost of commuting/property
• migration controls i.e. visa restrictions

Question 22

what are the conditions for a competitive labour market?

Answer 22

• many employers and workers
• perfect information
• homogeneous labour - skills + abilities are similar
• mobility of labour - workers have the ability to move from one job to another without excessive barriers

Question 23

what is meant by wage discrimination?

Answer 23

when employers with monopsony power pay diff. wage rates based on workers’ willingness to supply labour

Question 24

which workers are more likely to accept lower wages

Answer 24

• part-time workers
• younger workers looking for experience

Question 25

what are the advantages and disadvantages of wage discrimination?

Answer 25

ADV: - dec. cost of wages -> TC falls -> profits rise - more workers employed as firms can demand for more -> more employment DISADV: - could lead to inc. administrative costs (to negotiate with each worker) -> potential pushback if workers discover wage disparity - vulnerable workers are exploited -> can force wages down for all workers

Question 26

what is meant by labour market discrimination

Answer 26

when a specific group of workers is treated differently in the same job e.g. due to race, gender, sexuality, etc

Question 27

what do employers who are influenced by their prejudices believe

Answer 27

they belive that the MRP of certain workers is less than others -> some workers are forced to accept lower wages

Question 28

chain of reasoning of how discrimination causes issues in the labour market

Answer 28

discrimination -> unequal distribution of wealth and income -> misallocation of resources -> reduced efficiency -> increased costs

Question 29

draw a diagram to show how discriminated groups are forced to accept lower wages

Answer 29

draw 2 LD lines (the LD line for the discriminated group would be lower than the favoured group); draw LS and everything else as normal

Question 30

chain of reasoning to show the impact of labour market discrimination

Answer 30

- resource misallocation -> increased inequality -> social costs - leads to scarce human resources being underutilised -> slower trend growth rates - lack of diversity -> hampers innovation -> lower productivity -> big variations in wages for the same job

Question 31

how to evaluate the impact of labour market discrimination

Answer 31

equality act 2010 protects employees and workers from facing discrimination

Question 32

what is the impact of imperfect information in the labour market?

Answer 32

- workers end up w/ jobs that don't fully utilise their skills -> less productive -> cost of production increased -> prices for goods up -> less competitive goods - increased frictional unemployment (workers between jobs) -> need time to search for the right job -> increased 'discourgaed workers' (people who have tried to find work but have given up) -> waste of scarce labour resources

Question 33

what is the impact of skills shortages?

Answer 33

- shortage -> wage costs increased -> production costs increased - firms may employ workers who are underqualified out of desperation -> reduced productivity and quality levels

Question 34

solution(s) to skills shortages

Answer 34

- provide training to employees to increase productivity - encouraging the immigration of workers with the desired skills

Question 35

how does labour immobility lead to market failure?

Answer 35

- geographical immobility -> labour shortages in one area and surpluses in another -> regional wage differences - occupational immobility -> evolving economies mean certain industries decline -> structural unemployment rises -> skills shortages are harder to fix

Question 36

what is meant by a zero-hour contract

Answer 36

employment agreements where an employer does not guarantee a minimum no. of working hours to an employee

Question 37

pros and cons of zero hour contracts

Answer 37

ADV: - flexibility - cost efficiency for employers -> only pay for hours worked -> labour costs reduced - entry-level opportunities -> people can gain work experience - workers can accept or decline shifts -> better work-life balance DISADV: - income insecurity -> no guaranteed hours -> unpredictable earnings - lack of benefits -> no sick pay, holiday pay, pensions, etc -> lower job satisfaction - job insecurity -> workers are very replaceable - risk of exploitation

Question 38

how does wage elasticity of labour affect the impact of a minimum wage

Answer 38

wage elastic = employment falls more

Question 39

what are the arguments for minimum wages

Answer 39

- **poverty reduction** - more equitable distribution of income - increased consumer spending: workers receive higher wages -> more disposable income - reduced reliance on state welfare - more workforce participation - increased wages -> improved morale and productivity

Question 40

what are arguments against minimum wages

Answer 40

- **job losses** - higher labour costs -> reduced workforce size, cutting hours, automating tasks, etc - **higher prices** - higher labour costs -> passed onto consumers as higher prices -> cost-push inflation -> reduced real incomes - higher costs -> lower profits -> less investment - small businesses may struggle with higher labour costs

Question 41

what happens to total earnings when NMW is implemented

Answer 41

- WELD = elastic; total earnings fall - WELD = inelastic; total earnings rise