3.5 Labour market

Question 1

What is the demand for labour?

Answer 1

The amount that firms are willing to pay for a certain number of workers.

Question 2

What is derived demand?

Answer 2

Means that the demand for labour is dependent on demand for the final goods and services that worker produce.

Question 3

What is the relationship between wages and demand for labour?

Answer 3

Inverse.

Question 4

State three factors influencing the demand for labour:

Answer 4

Level of consumer demand for the final product - more workers will be required to cope with rise in demand.

Price of the product - if the price of the product rises then firms are likely to be willing to employ more workers.

Cost of capital - capital may be more productive and efficient than labour and actually be cheaper to employ in the long run.

Question 5

What is the supply of labour?

Answer 5

The number of workers willing and able to work at given wage.

Question 6

What is the relationship between wages and supply of labour?

Answer 6

Positive.

Question 7

State three factors influencing the supply of labour:

Answer 7

The size of population - this impacted by birth rates as well as net migration.
Since the UK left the EU, there has been a shortage of workers to pick fruit and vegetables.

The quality and content of education - some firms face shortages of workers with appropriate and up to date knowledge fort certain roles.

Income tax rates and out-of-work benefits - a reduction in income tax rates and a fall in unemployment benefits would result in an increased supply of workers.

Question 8

What is geographical immobility of labour?

Answer 8

Where some workers find it hard to move to different places to seek and find work. E.g. due to the cost of relocating.

Question 9

What is occupational immobility of labour?

Answer 9

Where some workers find it hard to move between jobs because they lack appropriate skills or training. E.g. in dynamic markets, job skills could become obsolete quickly.

Question 10

What happens if wages are too high in a competitive market?

Answer 10

Labour supply will be high but labour demand will be low - there will be an excess supply leading to unemployment - workers will have to then accept lower wages or face unemployment as the level reaches equilibrium.

Question 11

What happens if wages are too low in a competitive market?

Answer 11

Labour demand will be high and labour supply will be low - there will be excess demand and therefore a shortage - employers will have increase wages as the level reaches equilibrium.

Question 12

Draw the ‘labour market equilibrium’ diagram:

Question 13

If a firm has monopsony power, how may this affect wage rate?

Answer 13

Workers may be exploited with their wages not reflecting the value of the work they do for the firm.

Question 14

If an industry has a strong presence of trade unions, how may this affect wage rate?

Answer 14

The trade union can act as a monopoly and therefore force wages above the equilibrium level.

Question 15

State four current issues with the labour market:

Answer 15

Unemployment - the COVID-19 pandemic resulted in many businesses going bankrupt and therefore causing large scale unemployment.

Ageing population - there is a rising dependency ratio (51.4 in 2010 to 56.4 in 2018).

Low productivity - the UK has suffered low productivity since the 2008 financial crisis and has consistently been the lowest or second lowest in the G7.

AI and robotic technology - some jobs are disappearing whilst some industries are rapidly evolving, meaning skills of workers must also be changing.

Question 16

What is the national minimum wage?

Answer 16

The minimum firms are allowed to pay their workers, by law

Question 17

What is the national living wage?

Answer 17

A premium paid to over-25s.

Question 18

Draw the ‘minimum wage’ diagram:

Question 19

State two advantages of a national minimum wage:

Answer 19

Prevents exploitation.

Might eliminate poverty trap, where it is financially better to not go to work and claim state benefits.

Question 20

State two disadvantages of a national minimum wage:

Answer 20

Might lead to unemployment.

May lead to inflation if the increased costs are passed on by firms in the form of higher prices.

Question 21

What is a maximum wage?

Answer 21

An upper limit to what workers can earn in a given time period.

Question 22

Draw the ‘maximum wage’ diagram:

Question 23

State two advantages of of a maximum wage:

Answer 23

Reduce income inequality.

May allow higher wages to be earned by a wider group of people.

Question 24

State two disadvantages of of a maximum wage:

Answer 24

May lead to shortages of certain types of workers.

Can remove incentives, e.g. firms may find it difficult to attract top businesspeople due to a countries wage cap.

Question 25

What may impact public sector wage setting?

Answer 25

For example, the number of people employed by the state in one country compared to another.

Question 26

State three measures to reduce occupational immobility of labour:

Answer 26

Training/retraining schemes. Improvements in job information. Reduction in educational requirements.

Question 27

State three measures to reduce geographical immobility of labour:

Answer 27

Provision of affordable housing. Subsidies towards moving expenses. Improvements in transport.

Question 28

What is the price elasticity of demand for labour?

Answer 28

Refers to how responsive the demand for labour will be to a change in wage rate. (estimated to be -0.4 in the UK)

Question 29

What does a price elasticity of demand for labour of -1 to infinity suggest?

Answer 29

Price elasticity of demand for labour is elastic.

Question 30

What does a price elasticity of demand for labour of 0 to -1 suggest?

Answer 30

Price elasticity of demand for labour is inelastic.

Question 31

When the price elasticity of demand for labour is elastic, what would a increase in wage rate cause?

Answer 31

A more than proportionate increase in job losses.

Question 32

When the price elasticity of demand for labour is inelastic, what would a increase in wage rate cause?

Answer 32

A less than proportionate increase in job losses.

Question 33

State three factors influencing the elasticity of demand for labour:

Answer 33

Labour costs as a proportion of the total business costs - tends to be more inelastic if labour costs are a small proportion of total costs. The price elasticity of demand for the final output produced by the firm - link to derived demand. Time - demand for labour will be more inelastic in the SR and elastic in the LR.

Question 34

What is the price elasticity of supply of labour?

Answer 34

Refers to how responsive the supply of labour will be to a change in wage rate.

Question 35

What does a price elasticity of supply of labour of 1 to infinity suggest?

Answer 35

Price elasticity of supply of labour is elastic.

Question 36

What does a price elasticity of supply of labour of 0 to 1 suggest?

Answer 36

Price elasticity of supply of labour is inelastic.

Question 37

When the price elasticity of supply of labour is elastic, what would a increase in wage rate cause?

Answer 37

A more than proportionate increase in supply of workers.

Question 38

When the price elasticity of supply of labour is inelastic, what would a increase in wage rate cause?

Answer 38

A less than proportionate increase in supply of workers.

Question 39

State three factors influencing the elasticity of supply of labour:

Answer 39

Level of skill/education required for occupation - in low-skilled occupations, labour supply is elastic because there is a large pool of workers available for the job. Degree of mobility of labour - if workers are both geographically and occupationally mobile then the supply of labour will be relatively elastic. Time - in the SR, supply of labour tends to be inelastic because workers might be required to give notice before leaving their current job.