3.5 Labour Markets

Question 1

What does the demand curve for labour show

Answer 1

The quantity of labour there employers would wish to hire at each possible wage rate. The demand for labour is determined by the marginal revenue product - the extra revenue generated by an individual worker.

Question 2

MRP =

Answer 2

marginal output x price OR the difference in total revenue

Question 3

What is derived demand

Answer 3

The demand for labour is derived demand as it is derived from demand for the product the labour produces. Businesses only want the worker for as long as people are willing and able to buy the product they produce.

Question 4

Factors influencing demand for labour:
(Greater detail on page 2-3)

Answer 4

Wage rates
Demand for the product
Prices of other factors of production
Wages in other countries
Tech
Regulations
(Also the state of the economy)

Question 5

What is the price elasticity of demand of labour

Answer 5

This is the responsiveness of the quantity demanded of labour to the wage rate.

Question 6

Factors affecting PED of labour:

Answer 6

-directly correlated to the price elasticity of demand for the product.
-it is affected by the proportion of wages to the total cost of production
-if there are many substitutes such as machinery and labour in other countries then the demand will be elastic.
-time also play a role: in the long run it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive.

Question 7

What is supply of labour

Answer 7

The supply of labour curve shows the ability and willingness of people to make themselves available to work at different wage rates

Question 8

Factors influencing supply of labour:
(More information on page 4)

Answer 8

• wages
  -population and distribution of age
  -non-monetary benefits
  -eduction/qualifications/training
  -trade unions and barriers to entry
  -wages and condition of other jobs
  -legislation

Question 9

Market failure: how labour should act

Answer 9

The labour market should operate in the same way as any other. An increase in wages should attract labour to the industry and a fall in labour should mean labour leaves industry. However, labour is not a perfect free market

Question 10

Market failure - immobility:

Answer 10

• labour can suffer form either occupation or geographical immobility
• immobility can mean that there can be excess supply of labour in one area and excess demand in another. Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation

Question 11

Occupational immobility

Answer 11

Where workers find it difficult to move form one job to another as there is a lack of transferable skills. It is partially difficult in the short term when workers need to get new training but in the long run it may only be possible at a high cost.

Question 12

Geographical immobility

Answer 12

Where they find it difficult to move form one place to another due to costs of movement, family etc. There may be no jobs in one place nut jobs in another. It would be expensive to attend interviews, they would have to leave their family behind and may not know about vacancies. Housing is also a big issue (those on lower incomes are more geographically immobile)

Question 13

Factors affecting Elasticity of supply:

Answer 13

• it depends on the level of qualifications and training - also depends on the availability of suitable labour in other industries (poaching workers from other industries).
• it depends on time as in long run supply of labour will be more elastic as people will have time to train,
  -If a job is vocational, it will be inelastic since even if wages fall people won’t leave the job.

Question 14

What is elasticity of supply

Answer 14

The responsiveness of supply to a change in wage rates

Question 15

How do wage rates differ

Answer 15

Differ within occupational due to age, education, training, work experience, skill/talent/ability to perform tasks, sex and ethnic background (last two are illegal). For the highest paid there will still be a low supply and a high MRP.

Question 16

What does the immobility of labour mean for wage determination

Answer 16

There may be excess supply in one area/occupation causing Lew wages and not enough worker in another meaning higher wages.

Question 17

How does elasticity of supply/demand affect wage rates

Answer 17

The lower the elasticity the greater the change in the real wage rate and the smaller the change in employment as a result of a change in demand/supply for labour. The effect will also depend o the size of the shift

Question 18

Perfect competition in labour market - wage determination (graph on page 7)

Answer 18

In a perfectly competitive labour market we make the same assumption as in a perfectly competitive product market. Therefore, wages are determined purely by demand and supply and all workers are paid equally. If workers are not paid the same, they would simply move somewhere else where wage rarely in he industry was higher

Question 19

Monopsony in the labour market:

Answer 19

There is only one buyer in this market. Businesses know that if they want to increase their labour force they will have to increase the wage they off and (just like with monopsony product markers) an increase in wage for one increases the wage for all. (Look at bottom graph in page 7)

Question 20

Graph of monopsony in the labour market explained: (bottom graph on page 7)

Answer 20

The MC curve is above the supply curve (AC) of labour as it costs more to employ an additional worker that the average labour cost. A firm will determine how many workers to employ where the cost of employing them is equal to the value of that worker to the company. They would employ where MC=D at Q1 and at the output, they will pay their workers W1 (determined by the S curve). Compared to a perfectly competitive marker(which would produce at W2Q2), they would employ less people at a lower wage rate.

Question 21

Monopoly is the labour market (graph on page 8) - existence of trade unions

Answer 21

Trade unions means they can operate as the only seller of labour. A trade union is an organisation with members which are usually workers or employees, which protects the rights and pay of workers through a process of collective bargaining

Question 22

What are the two ways to increase wages in a monopoly labour market: (trade unions)

Answer 22

They could ser barriers of entry which would reduce supply

Alternatively they could set wages at a specific wage and ensure workers are not prepared to work for less, creating a kinked supply curve as seen in the diagram in page 8 (grey line).

Both of these will lead to higher wages but causes a fall in employment from the perfectly competitive equilibrium of Q1W1

Question 23

Monopoly in the labour market graph (page 8) explained

Answer 23

Supply is perfectly elastic up to output of QS and if the company wanted to employ more than this, they would have to increase wages further. The firms will employ where supply is equal to demand at QDW2.

Question 24

How can the government reduce the power of trade unions

Answer 24

Through acts which have introduced postal ballots, outlawed secondary picketing, restricted the size of the picket line and forced unions to provide 14 day’s notice of action. A recent example is the TRADE UNION ACT. This included a clause saying at least 50% of people must vote in the ballot, the most refrán teacher union ballot only had 28% voting turnout.

Question 25

What is a Bilateral Monoploy

Answer 25

Where it is possible for there to be both monopoly and monopsony in a labour market.

The firms is a monopsonies and want to employ Q2W2. However the union may decide to set a minimum wage at W1 and ensure that there is no one willing to work below this price (creating a kinked supply curve).

Question 26

Bilateral monopoly graph explained (page 9)

Answer 26

The MC and AC curves are the purple curves. There is a battle going on on between the two parties. The wage that is set will depend on the relative bargaining strength of both. This is dependent on a number of factors including union size and the strength of the economy.

This diagram highlights that UNIONS can have a positive impact on both wages and the number of workers employed (able to increase wages to W3 without negatively impacting the number of workers).

Question 27

In a time of economic recession and unemployment, what happens to unions and wages in a Bilateral monopoly

Answer 27

Unions may have less bargaining power and wage ps is most likely to be down at W1. In times of full employment they may have the power to influence and wages could be at W3. (Graph on page 9)

Question 28

Labour marker issues include: (check page 10)

Answer 28

Skills shortages
Young workers
Retirement
Wage inequality
Zero-hour contracts
The Gig economy
Migration
(Also issues over the correct levels of unemployment, underemployment, the minimum wage, condition in work etc)

Question 29

Government intervention in the labour market: National Minimum wage:

Answer 29

Labour introduced the National Minimum Wage in 1999 to raise people out of poverty and decent minimum standards in the workplace. It changes every April, all workers over school leave age receive their minimum wage and a falliere to pay employees can lead to the firm being fined.

Question 30

Arguments for the national wage limit:

Answer 30

• the wage is able to reduce poverty as it mainly impacts lower wages
• it can reduce male/female wage differentials as women are more likely to take up lower paid jobs (as they are vocational)

-it may make employees less likely to leave as they feel more loyal to the businesses (which decrease labour turnover and therefore recruitment and training costs).

• there could also be a more content workforce who will be motivated and thus make business more productive. However, this assumes all people are motivated by money.
• a minimum wage provides an incentive to work and prevent the unemployment trap
• it ensures everyone receives a fair wage

Question 31

Arguments against the national minimum wage:

Answer 31

• potential loss of jobs in the industry
• raises costs for the companies so increase prices (likely leading to a fall of profit)

-could be a wage spiral as individuals will try to protect wage differentials between them and the lowest price workers. A increase in the wage of the lower paid will mean the others expect theirs to rise too. This will reduce profit and reduce competitiveness

-there is no consideration of regional differences, and so alongside the fact many people on minimal wages are secondary earners, means the minimum wage may be ineffective at reducing porverty

Question 32

What does the impact of any minimum wage depend on

Answer 32

• where it is set
• Whether this is above or below the current wage
  If both the supply and demand of a job is relatively elastic there will be a large job loss but if both are inelastic the losses are smaller.

Question 33

What macroeconomic effects does minimum wages have

Answer 33

-they are able to reduce inequality
-they will lead to a rise in AD since the poorest people see a rise in income and they have a high MPC. This will lead to economic growth and employment
-the rise is business costs will lead to a reduction in competitiveness which will negatively affect the trade balance and reduce the net trade component of AD. It will also increase SRAS causing inflation in the short term.

Question 34

Where are maximum wages suggested to be set?

Answer 34

For chief executives or a maximum pay ratio compared to the lowest wage earners.

The government can set maximum pay limits for public sector workers in order to keep public sector spending down (help reduce inequality)

Question 35

How will maximum wages affect demand

Answer 35

Lead to excess demand which in the industry since people may not put themselves forwards for the job if they don’t)t think the salary matches the stress and responsibility or they know they can get higher wages abroad.

Question 36

How does the affect on demand due to maximum wages set be impacted by elasticity of supply and demand

Answer 36

Being inelastic means there will be little impact. It argues that supply and demand for the highest paid workers such as chief executives is very inelastic since there is a small supply of them and firms onto need one so their costs is a very small part of the total cost. This could mean maximum wages will have almost no effect on the market.

Question 37

Since trade unions in the UK are weak what happens in the short run?

Answer 37

The government can effectively make whatever wage decisions it decides in Order to improve budget

Question 38

How did the pay freeze experienced by sector workers between 2010 and 2015 affect sector wages

Answer 38

It put downwards pressure on private sector wages since few propel were likely to leave to private sector for the public sector employers could use this as evidence to limit pay rises

Question 39

What happens in the long run if private sector workers receive pay rises and public sector doesn’t

Answer 39

People will move from the public sector and private sector and this will force the government to increase public sector wages to expand supply

Question 40

Public sector wage setting trend

Answer 40

Wages of public and private sector workers rend or rise by the same percentage over a long period of time but in the short term they can rise by different rates.

Question 41

How can governments attempt to improve geographical mobility of labour

Answer 41

-they could improve the supply of houses
-they could improve transport links
-national advertising could be used so people know about jobs all over the country
-introduction of subsidies on houses, taxes etc. in areas where there are labour shortages
-to move public agencies out of London.

Question 42

How will improving occupational mobility of labour through education help make the workforce more employable and better at a waiver range of jobs:

Answer 42

-vocational training can be increased, particularly for younger students
-they could encourage further study
-they could encourage greater spending on training within work
-education could be targeted at improving skills shortages and helping with job applications

(They can also encourage flexible work patterns)