6 Labour Markets Flashcards
(295 cards)
1
Q
What is a factor market?
A
A market for factors of production
2
Q
What is the main kind of factor market?
A
Labour market
3
Q
What is significant about the labour market for households?
A
Their role is reversed - they are no longer consumers, but instead are producers/suppliers
4
Q
What theory of macroeconomics is the labour market central to and why?
A
The circular flow of income
The relationship between the two is essentially circular - firms demand labour for production, and households use incomes earned from the sale of their labour to buy the goods and services produced by the producers.
5
Q
A firm demands labour whenever…
A
Profit can be increased by the employment of workers
6
Q
What kind of demand is labour in and why?
A
Derived demand
Firms only need employees to generate more profit when more of a good or service is demanded in the long run.
7
Q
What is composite demand?
A
When one good or service is demanded for more than one use
8
Q
Are the other factor markets also in derived demand?
A
Yes
9
Q
What is the marginal physical product of labour?
A
Literally another term for marginal product of labour - the addition to total output produced by the last unit of labour employed
10
Q
MPPL effectively measures…
A
The amount by which a firm’s total output rises in the short run when another worker is employed
11
Q
Why does MPPL slope downwards?
A
Diminishing marginal returns theory - diminishing marginal physical productivity due to decreased opportunities for specialisation
12
Q
What key assumption is made when sketching MPPL as compared to sketching marginal returns in chapter 4?
A
There is no initial increase in MPPL, hence is always in linear decline
13
Q
Why is MPPL a limited measure? How do we circumvent this?
A
Measures physical output, which is not necessarily correlated to business performance
Use a revenue measure by measuring MRPL instead.
14
Q
What is the MRPL formula?
A
MPPL x MR
15
Q
What does MRPL represent?
A
Addition to firm’s total revenue from the sale of the extra goods produced by the marginal labour unit in the labour market
16
Q
Why is MRPL easier to visualise in a perfectly competitive goods market?
A
MRPL is not steeper than MPPL
17
Q
Under perfect competition, MR = … Therefore, MRPL = …
A
AR = price
MRPL = MPPL x Price
18
Q
The slope of the demand for labour in a perfectly competitive market is therefore entirely explained by…
A
Diminishing marginal physical product of labour (MPPL)
19
Q
When is MRPL steeper than MPPL? Why? Implications?
A
Imperfectly competitive goods markets
Non-linear AR (demand) curve - hence MR is steeper downwards. Different labour market make up for imperfectly competitive markets.
20
Q
What does the labour market demand curve show?
A
Demand for all labour in the market - composite of all MRPL curves
21
Q
What is the firm’s demand curve for labour? Why?
A
MRPL
Because only for these units can profit be increased.
22
Q
What are the 3 determinants of the market demand for labour? Why is this counter-intuitive?
A
WTC
- Wage elasticity of demand for labour 2. Technology 3. Changes in labour productivity. Tech and productivity are usually determinants of LRAS. But since labour is a factor, it follows that they are determinants of demand, not supply, in this particular market.
23
Q
How is an increase/decrease in demand for labour shown?
A
Rightwards/leftwards shift of the MRPL curve
24
Q
How does a rise in labour productivity increase demand for labour and eval?
A
Higher labour productivity means higher demand for labour - MRPL shifts right.
More MR -> higher MRP -> more labour demand. Furthermore, higher profits can mean more investment and hence more demand for labour. 1. More investment could make capital substitution occur in the long run 2. Changing profile of demand for labour. Could need more skilled workers.
25
How can technological change increase labour demand?
1. Higher labour productivity relative to other factors of production increases MR, hence MRPL. 2. If a tech improvement to the capital side increases productive efficiency by lowering costs, demand may expand, hence derived demand for labour may increase.
26
How can technological change, to the contrary, decrease labour demand?
1. Highly productive capital may cause capital substitution to occur. Automation not mechanisation. MRP shifts left. 2. Technological unemployment created by creative destruction.
27
Why does MRP shift left when the capital productivity rises?
Opportunity cost of capital rises
28
How does creative destruction create unemployment?
Tech change -> existing workforce redundant -> technological unemployment from automation
29
If the wage rate increases, but conditions of labour demand remain constant, how much will employment fall?
Depends on the wage elasticity of demand for labour
30
What are 4 occasions when wage elasticity of demand is likely to be inelastic?
1. When wage costs form only a small part of total production costs 2. When demand for the good or service being produced is inelastic (firms shift incidence to consumers) 3. When factors are not readily substitutable 4. Short run vs long run
31
What is wage elasticity of demand?
How proportionate the change in demand for labour is following a change in the wage rate
## Footnote
The responsiveness of labour demanded given a change in the wage rate.
32
What is the WED formula?
% change in labour demanded/ % change in wage rate
33
You are advising a trade union for unskilled workers pushing for a pay rise. What would your advice be?
WED is likely to be elastic due to the ease of capital substitution - need to be careful
34
Example of an industry suffering from persistent labour shortages and why?
Fruit pickers - 60% of soft-fruit growers could not get seasonal employment in 2018
## Footnote
Structural barriers e.g. weak exchange rate, poor immigration rules and xenophobia.
35
Is the MRPL curve the demand curve for labour even in imperfect competition?
Yes
36
The MRPL curve for imperfect competition should be drawn...
More steeply than the one for perfect competition, because both MR and MPPL are negative
37
Explain how a company uses marginal revenue product in hiring decisions.
Firms hire up to the point where MRPL = market supply of labour
38
The MRPL curve is steeper in imperfectly competitive markets; furthermore this is the demand curve for labour. Does it follow that wage elasticity of demand for labour is more inelastic in imperfectly competitive markets?
No
39
The market supply curve of labour shows...
How much labour all the workers in the market plan to supply at different wage rates
40
A tightening labour market implies...
Demand > Supply of labour
41
The market supply for labour is a ____ curve.
Linear upward sloping curve
42
For a firm under perfect competition, the supply of labour is...
Perfectly elastic (such that S = ACL = MCL = Wage)
43
In the short run, and for the individual worker, what shape does the labour supply curve take? Why?
Slopes upwards
## Footnote
Increasing opportunity cost of that extra time at work due to availability of leisure time.
44
What are the 2 main types of factor which influence the amount of labour supply workers are willing to provide?
1. Money wage rate 2. Utility or welfare gain from other aspects of the job (job satisfaction)
45
How are differing levels of non-pecuniary benefit i.e. job satisfaction reflected in labour supply and demand curves?
More job satisfaction -> labour supply shifts right and may become more wage inelastic
## Footnote
More job satisfaction -> higher productivity -> MRPL may shift right too.
46
Why are non-pecuniary benefits hard to quantify?
Normative concept
47
What are wages usually like in markets with high pecuniary benefits, ceteris paribus?
Lower - higher supply
48
Why does the opportunity cost of working increase for the individual worker? Explain in detail.
The marginal unit of time substituted from leisure to labour experiences rising marginal cost since the opportunity cost of more leisure time lost versus the extra income gained rises.
## Footnote
This is because leisure time becomes more scarce and hence valuable, whilst simultaneously the marginal utility of extra income earned falls, perhaps due to the diminished opportunities to spend it during less leisure time.
49
When do people substitute leisure for labour? When do they do the opposite and when do they stop?
Utility of welfare from the last unit of money earned > Utility or welfare from the last unit of leisure time sacrificed
## Footnote
Whenever these two are in disequilibrium, they substitute. Substitute until they are in equilibrium.
50
What fundamental problem do labour market supply side reforms address?
Making utility/welfare from marginal unit of income > marginal utility from last unit of leisure
51
How could wage rate affect the equilibrium point where workers stop substituting income for leisure?
Higher wage rate means workers have lower opportunity cost of leisure hence do more work
52
Why is changing the wage rate the main way to influence labour quantity supplied?
Non-pecuniary benefits change slower
53
Non-monetary determinants of labour supply have what effect on the labour market diagram?
Shift the supply curve of labour left or right
54
How can attitudes to consumerism influence the supply curve?
In those economies where derived demand for wages for consumption exceeds utility from leisure time, supply curves are shifted right
55
What are 3 things that can shift the supply curve of labour?
1. Income 2. Population 3. Expectations
56
How can income affect the supply curve for labour?
1. For most people, higher incomes shift labour supply left. They are happier to substitute labour hours for leisure time. 2. For a few people though, leisure time is an inferior good. Increasing income may lead to decreased leisure time.
57
How can population affect the supply curve for labour and eval?
1. Increases in population shift labour supply right, perhaps by immigration
## Footnote
Beware factor immobility of labour. Some immigrants are highly skilled whereas some are not. Different profiles of human capital in different immigrant groups can lead to different magnitudes of effect on the supply of labour in each market.
58
How can expectations affect labour supply?
1. Longer life expectancy or high inflation expectations may increase labour supply 2. Longer periods of education may reduce labour supply
59
When the MRPL of labour shifts, what determines by how much supply of labour increases by?
Wage elasticity of supply
60
What is wage elasticity of supply and formula?
How proportionate a change in the supply of labour following a change in the wage rate is.
## Footnote
% change in labour supplied / % change in the wage rate.
61
What are 4 determinants of elasticity of supply of labour?
1. Unskilled versus skilled 2. Immobilities 3. Long-run or short-run 4. Macroeconomic state
62
What are 2 reasons unskilled labour is more wage elastic in supply than skilled labour?
1. Shorter training periods 2. Innate abilities
63
The opportunity cost of working is...
The leisure time forgone
64
Is it an oversimplification to say that non-monetary benefits lead to a shift in the labour supply curve whereas monetary benefits lead to shifts along the supply curve of labour?
Yes
## Footnote
Income from other sources is a determinant of labour supply. Furthermore, cause not effect - if wage rates rise, it is because demand for labour rises, not because workers want a higher wage.
65
Why are road sweepers not paid more than MPs?
Job satisfaction effect on supply of labour not as significant as MRPL factors, including productivity, as well as restrictions on supply including innate ability and learned skills.
66
What are the conditions of a perfectly competitive labour market? Eval
1. Large numbers of buyers and sellers 2. No ability to influence ruling wage rate 3. Perfect information 4. No barriers to entry nor exit in the long run
## Footnote
And... impossible.
67
The supply curve for labour for a firm operating under a perfectly competitive labour market is... WHY?
A perfectly elastic straight line S=MCl=ACl=W
## Footnote
Because, like in perfect competition, the firm is a price taker, only in this case it is supply, not demand, that is fixed.
68
A small point - wherever marginal cost is referred to in the theory of the firm or labour markets as a supply curve, this is for...
Individual firms ONLY
69
What is profit max for each individual firm employing labour and explanation?
MRPL = MCL
## Footnote
The marginal benefit from hiring the last worker is exactly equal to the marginal cost of hiring that worker.
70
For a perfectly competitive labour market, illustrate the link between MRPL and wage rates.
MRPL = MCL = ACL = W
71
Why is MRPL = W in perfectly competitive labour markets?
The marginal cost of labour is always equal to the wages paid to the workers, and we seek to ensure that MRPL = MCL
72
What happens when MRP > W, MRP < W, MRP = W?
More workers, Fewer workers, Profit max
73
What is the MRP curve the same as?
Firm's demand curve
74
Why would the perfectly competitive labour market have no wage differentials?
1. Free market forces establish equilibrium such that MCL=MRPL in all markets 2. Since all markets are competitive simultaneously, the law of one price operates. A market wage rate is established across the entire labour market.
75
The only cause of wage differentials are...
Imperfections in the labour market
76
What is the spectrum of competition for labour markets and evaluative comment?
From something approximating perfect competition to monopsony situations
## Footnote
Labour markets are more likely to lean towards imperfect competition due to the higher barriers to entry and immobility of labour.
77
Who termed monopsony?
Joan Robinson, 1933 The Economics of Imperfect Competition
78
What is a pure monopsony labour market?
Workers can only work for one employer
79
Evaluative comment on pure monopsony labour markets?
Extremely rare. Military is an example, though one could argue that the militia service etc. dampens this. Many firms operate a degree of monopsony power.
80
What is monopsony power?
The market power exercised by a firm approximating a monopsony
81
What are 2 examples of monopsony power?
1. NHS and private healthcare 2. Military and private defence contractors
82
Are there more monopsony labour markets now or in the past? Why?
In the past
## Footnote
Monopoly busting which has occurred.
83
What do free marketeers naturally say when unemployment occurs during a recession? How can we evaluate this using an example?
This is voluntary real-wage unemployment because the workers refuse to accept lower wages
## Footnote
JCB union in 2008 - negotiated a real wage cut for its workers with management to allow for worsening economic circumstances. And yet, unemployment rose, because derived demand for equipment was not there so no need even for the few who remained.
84
How does JCB hire workers and what does it show?
Many start work as temporary agency hires and then are transferred to full-time work later, or come through the JCB Academy
## Footnote
Firms seeking to combat the asymmetric information of the labour market.
85
Why is JCB particularly vulnerable to changes in AD?
1. Investment is a more volatile
86
What did JCB negotiate in 2008?
A real wage cut for its workers with management to allow for worsening economic circumstances.
87
How does JCB hire workers?
Many start work as temporary agency hires and then are transferred to full-time work later, or come through the JCB Academy.
88
Why is JCB particularly vulnerable to changes in AD?
1. Investment is a more volatile component of AD.
2. During periods of business uncertainty, stocking > investment for firms.
89
What is the supply curve of labour equal to in a monopsony labour market?
ACL.
90
Why is MCL above ACL in monopsony labour markets?
Because ACL = S is the labour supply for the whole market. The ACL shows wages rising to attract more workers.
91
What happens to wages in a monopsony market?
Wages are below MRPL because wage is read from the ACL curve and MRPL is not equal to ACL at MRPL = MCL.
92
Why might monopsony firms not charge the lowest possible wage rate?
1. By virtue of being a monopsonist, they are also likely to be a monopolist.
2. They can profit satisfice.
3. If workers unionise, they can demand higher wages.
93
What are five reasons for large wage differentials in imperfectly competitive labour markets?
1. Disequilibrium trading.
2. Imperfect information.
3. Occupational immobility of labour.
4. Geographical immobility of labour.
5. Discrimination.
94
What does disequilibrium trading create?
Wage differentials due to constant changes in economies and demand conditions.
95
How can imperfect information create wage differentials?
Workers can lack accurate information on pay rates, leading to immobility of labour.
96
What is occupational immobility of labour?
When workers are prevented by barriers from moving between professions.
97
Example of natural occupational immobility of labour?
Does one have the physique to be a footballer?
98
Example of artificial occupational immobility of labour?
Training qualification requirements.
99
How can overheating in the housing market create wage differentials?
It can create geographical immobility of labour.
100
What is a trade union?
A group of workers who join together to maintain and improve their conditions of employment, including their pay.
101
What theoretical assumption is made to understand trade unions?
Often assumed to be monopoly suppliers of labour.
102
When trade union presence is strong, how are wages determined?
By a process of collective bargaining.
103
What is collective bargaining?
A process by which wage rates and other conditions of work are negotiated by a union with an employer.
104
What are two reasons for the decline of collective bargaining?
1. Employment Acts and trade union busting.
2. Globalisation and the rise of international competition.
105
What markets most need trade union input?
Monopsonies.
106
What effect does introducing a trade union into a perfectly competitive labour market have?
It causes unemployment to rise.
107
What type of unemployment is caused by trade union activity in a perfectly competitive labour market?
Real-wage unemployment.
108
Why do left-wing economists believe trade union activity will not lead to real-wage unemployment?
They believe MRP will shift right as workers are more motivated by higher wages. EFFICIENCY WAGE THEORY
109
How can trade union activity offset real-wage unemployment in essential goods and services?
Rising real wages fuel consumption of goods and services.
110
What are two effects of a closed shop union on a perfectly competitive labour market?
1. Shifts left.
2. Becomes more inelastic.
111
Under what circumstances will the introduction of a trade union lead to a rise in wages at the expense of jobs?
In perfect labour market competition.
112
What is the effect of introducing a trade union into a monopsony labour market?
Increase wages and employment.
113
What is significant about 2022 for trade unions?
Most instances of industrial action in the UK since 1989.
114
What professions do unions dominate today?
Those protected from the effects of international competition and monopsony labour markets.
115
Example of modern-day strike action?
2022 - RMT rejects a 3% pay rise after bargaining for 7%.
116
Why was 2022 particularly bad for trade union activity?
Cost of living crisis.
117
What is a caveat to the monopsony increase in wages and employment when a trade union is introduced?
Still below the perfectly competitive equilibrium.
118
What is the national minimum wage (NMW)?
The statutory minimum a worker can be paid for a given unit of labour.
119
Why can NMW actually increase employment?
It affects monopsony markets.
120
Why is the NMW unlikely to reduce employment?
It only affects markets where the market clearing wage rate is below the NMW rate.
121
What are four reasons to support the NMW?
1. Likely only to affect monopsony markets.
2. Reduction in poverty and income inequality.
3. Reduced possibility of trade union collective bargaining.
4. Higher wages can boost productivity.
122
What key economic property does the NMW have?
Normative concept - what is the fair wage?
123
Evidence that NMW is needed to reduce poverty?
60% of those in poverty live in a household where at least one adult is employed.
124
Who argued that the NMW reduces the likelihood of trade union confrontation?
Labour Party MPs before 1997.
125
What are three reasons to oppose the NMW?
1. Underemployment has been seen.
2. NMW can disproportionately increase unemployment among the young and low skilled.
3. Business costs rise due to the NMW.
126
Who argued that the NMW can create underemployment?
IEA think-tankists in 2014.
127
Evidence that NMW can even raise employment?
1992 - New Jersey raised minimum wage by 19%, and employment rose by 13%.
128
Difference between living wage and minimum wage?
Minimum wage is statutory; living wage is the economic concept of minimum income for no discretionary income.
129
Who has to be paid the NLW?
21 and older.
130
Current NLW and NMW rates?
NLW - 12.21, 21+; NMW - 10, 18-20.
131
When do NMW and NLW rates change?
1st April annually.
132
Example of a supply-side reform regarding NMW/NLW?
Apprentice NMW is ~40% lower than NLW.
133
What is wage discrimination?
Paying different workers different wage rates for doing the same job.
134
Why is first-degree wage discrimination best for firms?
All surplus wage costs are eliminated.
135
What is the most common form of wage discrimination?
Discrimination against a group of workers.
136
What is perfect price discrimination?
Also called first-degree price discrimination.
137
What is the effect of first-degree price discrimination on surpluses?
Total transfer of all consumer surplus to producer surplus.
138
Where is wage discrimination most likely?
Imperfectly competitive markets.
139
What are three conditions for wage discrimination?
1. Workers cannot find substitutes.
2. Must be discernible groups.
3. Law must not be enforced.
140
In imperfectly competitive markets, firms with market power seek to carry out what?
Perfect wage discrimination.
141
What are three groups who experience third-degree wage discrimination?
1. Women.
2. Minorities.
3. Religious groups.
142
When was equal pay legislation for men and women introduced?
1972.
143
Example of recent wage gaps between men and women?
2017 - Fawcett Society warned progress had stalled, with the gap stuck at 14.1%.
144
What are two examples of the gender pay gap?
1. Women are almost twice as likely as men to be paid less than the statutory minimum wage.
2. ONS - stands at 7%.
145
Where is the gender pay gap worst?
ONS: 38% gap in floorers and wall-tilers.
146
Key cause of the gender pay gap?
Women leave professions where pay scales with employment time faster than men.
147
Example of how gender pay gap is hard to measure?
2024 - ONS puts the figure at 7%, 2017 Gender Salary Survey puts it at 26.8%.
148
In what field do women out-earn men?
Part-time work.
149
What are four reasons women earn less than men?
1. Women work predominantly in lower-paid sectors.
2. Blatant discrimination.
3. Disproportionately represented in small firms.
4. Higher turnover of women.
150
What are three consequences of higher turnover of women in the labour force?
1. Women may not pursue advanced education.
2. Employers have extra costs from higher female turnover.
3. The 3% rule.
151
What is the 3% rule?
For each year of work, pay increases by an average of 3%. For each year out of work, earnings potential falls by 3%.
152
How does labour market discrimination in one market affect other markets?
Leads to lower wages in other markets.
153
What is the fundamental root cause of third-degree wage discrimination?
Misrepresentation of the groups MRPL curve.
154
What did the Chair of the EHRC say about the gender pay gap?
Had gone from a glass ceiling to 'reinforced concrete.'
155
What did the EHRC say about the macro consequences of female inequality in labour markets?
Where else is the UK failing to spot talent?
156
Example of how female wage discrimination is often made legal using loopholes?
1970 - Ford Dagenham equal pay strike led to a pay rise, but still 8% less than men.
157
What are two ways firms justified female wage discrimination?
1. Male breadwinner culture.
2. Higher levels of employment.
158
What is the demand curve for labour?
How many workers will be hired at any given wage rate over a given period of time.
159
What do firms base their demand for labour off of?
MRPL.
160
Why do firms have a non-linear demand curve for labour in the short run?
They experience negative marginal returns.
161
In a perfectly competitive market, MRP is also equal to?
Price x MPP.
162
What are two reasons for diminishing marginal returns?
1. Fewer fixed factors.
2. Reduced opportunities for specialisation.
163
What does a perfectly competitive labour market mean for firms?
Firms are wage takers.
164
Why is MCL = ACL = SL in a perfectly competitive labour market?
MC is constant.
165
Firms will hire up to the point where MRPL equals what?
MRPL = W.
166
In a perfectly competitive market, MRP is also equal to?
Price x MPP
## Footnote
AR x MPP, MR x MPP
167
What are the 2 reasons for diminishing marginal returns?
1. Fewer fixed factors
2. Reduced opportunities for specialization
168
Why is MCL=ACL=SL in a perfectly competitive labour market?
MC is constant.
169
Firms will hire up to the point where MRPL=MCL which is the same as?
MRPL = W.
170
Why is MRP the demand curve for labour?
Firms only demand labour in derived demand to increase their revenue.
171
Why is the market demand curve for labour linear, unlike the accurate MRP curve?
No readily obvious reason, just keeps things simple.
172
What are the 2 reasons why wage and quantity demanded of labour is inversely proportional on the market for labour diagram?
1. In the short run, the law of diminishing returns occurs
2. In the long run, labour and capital are substitutable.
173
Movements along the MRP curve for the market can be described as?
Contractions and extensions.
174
Can you label the market demand curve for labour as MRP?
Yes.
175
When wage rates fall, why are workers with a lower MRP employed?
Because they become competitive relative to capital and other factors of production.
176
Why do both the market and individual firm MRP curve slope downwards?
Diminishing MRP.
177
Why is the market demand curve also determined by MRP as a firm's is?
It's just a composite of firm's MRP curves.
178
What do we assume when drawing diagrams?
Ceteris paribus.
179
Which workers will be hired at lower wage rates?
Those with the MRP at or above the market demand curve.
180
When is it not true that both the market and the firm MRPL curve are downward sloping due to diminishing marginal returns?
In the long run, when it is due to factor substitutability.
181
What are the 4 ways we can evaluate MRP?
1. MRP is measured by productivity. In some industries, e.g. teaching, this is hard to measure.
2. Teamwork makes it difficult to measure individual productivity.
3. The self-employed.
4. Imperfect labour markets ignore MRP.
182
Where is productivity harder to measure?
Service industry.
183
What is an example of an imperfectly competitive labour market where MRP is ignored?
Trade union activity.
184
What are the non-wage determinants of labour demand?
All increase/decrease MRP - must mention this:
1. Price of the final product
2. Change in demand for the final product
3. Changes in productivity
4. Changes in the price of capital.
185
How does a change in the price of the final product affect labour demand?
1. MR rises
2. Then MRP rises.
## Footnote
Ceteris paribus.
186
How does a change in demand for the final product affect the MRP curve?
Shift it right as more derived demand for labour.
187
Explain in detail why a change in productivity can affect the position of the labour demand curve.
1. MRP is the demand curve.
2. MRP = MPP x MR.
3. MPP rises when productivity rises.
4. Hence, ceteris paribus, MRPL and demand for labour rises.
188
When do relative prices and productivity of capital lead to a change in demand for labour?
Long run only.
189
What does a wage elastic labour demand curve look like?
Almost horizontal MRPL curve.
190
What does a wage inelastic labour demand curve look like?
Steeper MRPL curve.
191
What is the key thing to look for in exams when presented with the opportunity to draw labour market diagrams?
How wage elastic in demand/wage elastic in supply is this market?
192
What are the 4 determinants of wage elasticity of demand?
1. Substitutability
2. Elasticity of demand for final product
3. Cost of labour as a percentage of total cost
4. Time period.
193
Why did many SMEs complain about Labour NIC rises in October 2024's effect on their workforce?
Proportion of costs on workforce higher so more elastic.
194
What is the substitution effect?
As wages rise, the opportunity cost of leisure time rises, providing an incentive to work. Always positive.
195
What is the positive income effect?
We substitute leisure for work as wages rise.
196
What is the negative income effect?
We substitute work for leisure for having reached our target income.
197
What is the key thing about the axes for the individual labour supply curve?
y-axis is real wage not just wage because inflationary expectations can play a part; x-axis is hours worked.
198
At relatively low wages, increases to wages have what two effects?
Positive income effect
Substitution effect (always positive).
199
For moderately high wages, increases to wages have what two effects?
Negative income effect
Substitution effect (always positive).
200
For very high wages, increases to wages have what two effects?
Negative income effect which greatly surpasses substitution effect.
201
Is everyone's supply curve of labour recurved?
No. Some see leisure as an inferior good.
202
In simple terms, why does the labour curve recurve?
Individuals realize that they can reach their target income with fewer hours worked, so the opportunity cost of leisure falls to below that of work once again.
203
Given the individual's labour supply curve is backward bending, is it reasonable to assume that the industry curve will also recurve?
No. The market supply curve for labour is linear and of a positive gradient.
204
What does an extension of labour supply mean?
Movement along the labour supply curve.
205
What does the supply curve of labour for the individual firm depend on?
The market structure.
206
Firms in perfect competition are?
Wage takers.
207
Firms in monopsony are?
Wage makers.
208
Why is MR twice the gradient of the AR curve and how can we link this to labour markets?
If the firm seeks to change Qd, they must change the price of all goods sold, hence MR is twice the gradient of AR. The labour market is the other way around.
209
What are the 7 determinants of labour supply?
1. Substitute occupation wages
2. Barriers to entry
3. Non-pecuniary effects
4. Improvements in occupational mobility of labour
5. Overtime
6. Size of the working population
7. Value of leisure time.
210
How can non-pecuniary benefits link to factor mobility?
Factor immobility of labour can serve to increase the attractiveness of local jobs.
211
What is an example of a job where non-pecuniary benefits make labour supply consistently too high?
US Regional Pilot Industry. Michael Moore investigation - many paid below minimum wage.
212
What is the elasticity of labour supplied?
Same as WES (wage elasticity of supply).
213
What are the 4 determinants of wage elasticity of supply?
1. Skills required - are they rare?
2. Length of the training period
3. Vocational
4. Time.
214
Why are teachers' wages often cut? Important eval?
Vocational jobs often have more inelastic WES because it is a vocation/passion - non-pecuniary benefit.
215
What does a non-pecuniary rich industry have?
1. Supply right
2. More inelastic WES.
216
Why does WES increase over time?
1. Erosion of savings
2. Evaluation of whether this is a permanent/temporary state
3. Time to train in other industries.
217
What are the 5 characteristics of competitive labour markets?
1. Many buyers and sellers (employers and employees)
2. Labour is homogenous
3. There is perfect information
4. Firms are wage takers
5. There are no barriers to entry or exit.
218
What mobility state is presumed for competitive labour markets?
Perfect factor mobility.
219
What is WES in a perfectly competitive labour market?
Perfectly elastic.
220
Why would firms not offer higher wages in a perfectly competitive labour market?
All workers have the same MRP so it would be irrational.
221
In the theoretical model of perfectly competitive labour markets, is it a necessary condition that the product market is also perfectly competitive?
Yes.
222
What assumption do we make when drawing the accurate MRP curve in a diagram for a firm?
The firm is in the short run (experiencing DMR).
223
For the individual firm in a perfectly competitive labour market, SL=?
ACL = MCL.
224
In a perfectly competitive labour market, employment decisions are made up to?
MRPL = MCL = W.
225
If all labour markets were perfectly competitive, wage differentials?
Would not exist:
1. All units of labour are homogenous
2. Perfect mobility of labour to pursue higher wage rates.
226
What do 5 labour market imperfections cause?
Wage differentials.
227
What are the 5 labour market imperfections?
1. Labour is not homogenous
2. Non-pecuniary considerations are different
3. Labour is not perfectly mobile
4. Trade unions and supply restrictions
5. Monopsonies and monopsony power.
228
What are the 3 reasons labour is not homogenous?
1. Different MRPs
2. Different supplies of labour
3. Discrimination.
229
What are the 3 reasons labour is not perfectly mobile?
1. Occupational immobility
2. Geographic immobility
3. Imperfect information.
230
What determines a worker's desire to work in a particular industry in a perfectly competitive labour market?
Wage only.
231
What does a government scheme to improve perfect information about labour markets represent?
Collaborative filtering to improve the mobility of labour.
232
What is a monopsony an example of?
Labour market imperfection.
233
What are 2 examples of monopsony sectors?
1. Teachers
2. Nurses.
234
Monopsonies are not wage takers, they are?
Wage makers.
235
For a monopsony, supply of labour is?
ACL.
236
Why is MCL > ACL in monopsonies?
1. Monopsonies have a limited supply of labour to draw from.
2. In order to increase quantity of labour supplied, they must increase wages.
3. But they must do so for all previous workers too.
237
How to measure the degree of monopsony power?
The difference between the paid wage rate and the MRP of a worker.
238
What are the two effects of monopsony?
1. Reduce employment
2. Reduce wages.
239
For a monopsony, we read the wage rate off the?
Supply curve (ACL curve).
240
What false assumption about trade unions does economics make which might influence conclusions?
That trade unions are only bargaining for wages.
241
What is the key assumption of trade unions?
Monopoly supplier of labour.
242
What happens to the supply curve for a trade union in a competitive labour market?
Becomes horizontal at WTU until it meets SL.
243
Why is the supply curve for the trade union in the perfectly competitive labour market not just horizontal forever?
Wage must rise to attract workers who won't work for WTU into the market.
244
What is the employment outcome for a trade union in a perfectly competitive labour market?
Fall in employment and creation of real wage unemployment.
245
Who loses their job after a trade union enters a labour market in a perfectly competitive labour market?
The distance between QD at the trade union level and the original QEB.
246
Why can trade unions make worker outcomes worse in the long run?
Greater costs of labour mean that other spending e.g. on investment or capital is reduced.
247
What are the evaluations of trade unions?
1. In monopsony labour markets, can make them allocative efficiency and reduce underemployment.
2. Strength of trade union is important - union density.
3. Size of the union mark up.
4. Real world evidence.
248
Why are perfectly competitive labour market trade unions very rare?
Union density is lower due to trade union busting legislation.
249
What is union density?
The proportion of the workforce in a given trade union - measure of the success of trade unions.
250
What are the 4 legislation facts about trade union power?
1. Closed shop trade unions illegal.
2. Secret ballots for striking.
3. 75% of trade unions must agree to strike.
4. You can only strike against your own employer.
251
How has restructuring of the UK economy reduced trade union power?
1. Deindustrialisation reduced power of trade unions because of the fragmentation of the labour market - no longer huge workforces on homogenous tasks working for large firms.
2. Part-time work on the rise.
252
How have competitive pressures reduced trade union power?
Trends, particularly globalisation, mean we are in competition with other low-cost firms. To stay competitive, trade union action cannot be accepted.
253
What is the trend in trade union membership?
Down from over half in the 1970s to 22.4% today.
254
What are the changes in trade union membership?
1. More likely to be a graduate.
2. More likely to work in skilled/service sector.
3. More likely to work in the public sector.
4. More likely to be a woman than a man.
255
Why is the trade union supply curve initially horizontal?
Workers on this curve would've worked for less.
256
What is the initial horizontal part of the monopsonist trade union supply curve?
SL = ACL = MCL.
257
What is the Winter of Discontent?
1978-79.
258
What evidence is there of a development gap in the gender pay gap?
In developed countries, the gap is narrowing versus developing countries where the gap is widening.
259
What is the effect on MRP of high female turnover in the labour force?
Stagnates or does not move right when women are out of the labour market for children.
260
Is it fair to say that MRP for women is lower due to differences in education?
Not in developed countries - more female UGs than male. But could explain in other developing countries.
261
Why does the fact that many women work in the public sector worsen the gender pay gap?
Government keeps wages low to prevent inflation (also a monopsonist).
262
What is the simplest explanation for the gender pay gap?
Supply of female workers has been more marked for women.
263
Why do footballers get paid more than teachers?
1. MRP of footballers very high due to marginal element.
2. Low supply of footballers.
3. Inelastic supply of footballers - there is one Mbappe.
4. Monopsonies employ teachers, free market employs teachers.
5. Footballers are not homogenous.
6. Highly competitive demand to prevent other clubs from getting them.
264
Why is the MRP of the footballers high?
1. TV revenue.
2. Huge increase in revenue from league position.
265
When do teachers strike?
Summer term after exams - vocational reluctance to strike.
266
What are the reasons for the North-South wage divide?
1. UK economic restructuring - cluster effects of new economy in London.
2. MRP of Northern workers lower due to deindustrialisation - skills redundant.
3. Negative multiplier effects due to regional recessions - demand is falling across the.
267
Why is the MRP of the footballers high?
1. TV revenue
2. Huge increase in revenue from league position
268
When do teachers strike?
Summer term after exams - vocational reluctance to strike
269
Reasons for North-South wage divide?
1. UK economic restructuring - cluster effects of new economy in London
2. MRP of Northern workers lower due to deindustrialisation - skills redundant
3. Negative multiplier effects due to regional recessions - demand is falling across the North, so employment falls to (derived demand)
4. Migration is only of the most productive workers
270
Why does the wage differential between the North and South persist?
1. Immobility of labour
2. Emigration concentrated to most skilled
271
Why do different ethnic groups experience wage differentials?
1. Minority groups are on average less qualified, with a lower MRPL
2. Lack of language proficiency reduces MRPL
3. Concentration in low pay sectors, areas and a reluctant to migrate
4. Discrimination
272
5 ways wage differentials are a good thing?
1. Incentives to gain skills, or migrate, ensuring allocative efficiency
2. Trickle down effect
3. Encourages enterprise
4. Encourage work not welfare
5. Promote efficient resource allocation
273
How do wage differentials create incentives?
1. Encourage training to boost MRPL
2. Encourage migration to find higher paid job
3. Higher productivity also makes the economy's LRAS shift right
274
How does wage differentials create the trickle down?
1. High wage spenders spend, creating multipliers and high demand. LABOUR IS IN DERIVED DEMAND. Job creation and wages rise
2. The higher productivity workers at the top innovate and create employment in their businesses
3. Higher incomes means average tax rates are higher, meaning the government can use this to redistribute
275
How does a wage differential encourage enterprise?
Entrepreneurs are encouraged to start businesses, take risks and earn income
276
Why do wage differentials encourage work not welfare?
Individuals aspire to the higher wages and not the lower ones, creating an incentive to substitute leisure for labour. There is INFORMATION FAILURE about how far in the labour market they will go.
## Footnote
Reduces strain on public finances
277
How can wage differentials promote an efficient allocation of resources?
Signalling function of relative prices - helps workers allocate their labour in a way that maximises social welfare
278
3 problems with wage differentials.
1. Income inequality and broader social equity problems
2. Trickle down effect may not occur
3. Government solutions limited if they are the monopsonist employer
279
How can income inequality offset the trickle down effect when wide wage differentials occur?
Higher MPC are for lower income groups
280
Why might the trickle-down not occur?
Made some assumptions: rich tend to save, many REPATRIATE their profits overseas to enjoy HOT MONEY HIGH RATES OF RETURN
281
How can the government being a monopsonist employer cause a wage differential problem?
1. Reducing wage differentials can cause public sector finances to struggle if the government is the biggest monopsonist employer (which it is)
282
Eval of wage differentials
1. How much inequality? Cost/benefit analysis
2. Risk of government failure
3. SR v LR
283
What key argument can be made that reducing wage differentials messes with incentives?
1. LAFFER CURVE ARGUMENT
2. Poverty trap
284
How can we use SR/LR analysis in a question about wage differentials?
Short run inequality may be worse, but long run trickle down may help
285
What is UBI?
Welfare policy that guarantees a monthly income to everyone in the population
286
Key benefit of UBI?
No earnings trap
287
6 pros of UBI?
1. Reduce poverty and inequality
2. Overcome problems with means tested benefits such as earnings trap
3. Make labour market more allocatively inefficient by giving workers time to find a good job
4. Reduced administration cost
5. Reduce costs for firms
6. Reduce the problem of underemployment and allow a flexible labour market to work
288
4 cons of the UBI?
1. Negative income effect and negative substitution effect - disincentive to work - high structural unemployment
2. Inflation concerns
3. Budget deficit concerns
4. Some people need more benefits than UBI would cost
289
What is a wealth tax?
Tax on assets
290
Where has a wealth tax?
Most of Europe
291
4 pros of wealth tax?
1. Reduce wealth inequality and through wealth inequality reduce income inequality
2. Big revenue earner for government
3. Target unfair windfalls
4. Ease up the housing market and reduce the buying up of housing stock
292
Windfalls versus earned wealth?
Windfalls are not the work of the asset owner
Earned wealth e.g. share prices rise because profits rise
293
4 cons of the wealth tax?
1. Discourages investment and savings leading to consumers overleveraging
2. Risk of capital flight and emigration
3. Tax loopholes
4. Admin challenges - admin value hard to measure?
294
How can a wealth tax create a disincentive for workers?
Reduces working since income -> wealth and less incentive to do this
295
What could a wealth tax do to the financial sector?
Create SYSTEMIC RISK because it incentivises consumers to get overleveraged rather than use their own savings
