Labour market

Question 1

define labour market

Answer 1

• the number of people of working age who are employed or who are looking for employment
• a derived demand= based on demand of goods and services

Question 2

describe the demand curve for labour

Answer 2

• shows how many workers will be hired at any given wage rate over a given period of time
• inverse relationship between WR and demand of labour
  = if WR is high, its more expensive to hire extra workers
• when wages are lower, labour becomes relatively cheaper

Question 3

causes of labour demand shifts

Answer 3

• change in final price of the product labour is making
• change in demand of final good= labour derived demand
• change in labour productivity= change in MPP= change in MRP= training
• change in price of capital= in LR FOP variable= need to hire more or less workers depending on cost of capital

Question 4

define elasticity of labour wage

Answer 4

measures responsiveness of labour demanded given a change in wage rate

Question 5

factors that impact elasticity of labour wages

Answer 5

• substitutability of capital for labour= more substitutable= more elastic wage= can replace workers w capital
• inelastic demand for final good= wage inelastic
• costs of labour as % of total cost= high cost= elastic wage
• time period= LR all FOP variable= easier to bring in capital= LD becomes wage elastic

Question 6

factors that impact elasticity of labour supply curve

Answer 6

• nature of skills required for job= more skills= inelastic demand for labour= more specialised and specific
• long training period= inelastic= harder to get qualifications
• vocation elements= if wages decrease= wouldn’t be large decrease of nurses or teachers= don’t only do job for sake of monetary benefit= vocational benefit of profession= not as responsive to change in wages= inelastic
• realtively low skilled jobs like hospitality have elastic supply curves

Question 7

characteristics of perf competitive labour market

Answer 7

• large potential of employers and employees
• labour homogenous
• perf info
• no barriers to entry and exit= no extra qualifications and can leave work wo notice
• firms are wage takers

Question 8

impact of firms being wage takers in perf competitive labour market

Answer 8

• no incentive to offer WR which is above S=D
  = WR that markets sets is equal to MRP of workers in industry= if firm increases WR= costs more than MRP brought in by worker
• workers can’t demand WR to increase= all labour homogenous and lots of workers= firms would just employ someone else

Question 9

describe imperfectly competitive labour market

Answer 9

• labour is different= diff MRPs per worker= diff wages depending on MRP= diff supplies of labour due to diff qualifications etc
• labour isn’t perfectly mobile= geographical immobility and occupational immobility of labour
• lack of perf info of market= may not know wages of all diff jobs= can’t choose best WR job
• TU and supply restrictions due to laws like MW
• monopsonies= sole wage setter= use power to drive down wages

Question 10

adv of wage differentials

Answer 10

• can incentivise productivity of ppl to get qualifications in order to get a higher income= higher productivity of labour force= makes economy internationally competitive= growth
• trickle down effect= ppl w high wages spend more= multiplier effect for small businesses etc= higher wages for firms= high demand= job creation
• high wages= higher income tax= gov can use tax revenue to redistribute income for the poor
• encourages enterprise= take risks to increase MRP and LR growth
• encourages ppl to work and not live off benefits= decrease strain on gov finances
• promote efficient allocation of labour= changes in wages per worker depending on suitable skills= workers end up in most productive profession to boost economy

Question 11

disadv of wage differentials

Answer 11

• income inequality of ppl in poverty= low SOL and low spending= low LR growth
  = gov must increase welfare spending= strain gov finances
• inequality= social costs= high crime rates, protests etc= negative externalities= spending on policies increase
• trickle down effect may not occur= high WR earners may want to save not spend due to high MP to save or may spend money on goods abroad to get good rate of return= won’t affect domestic businesses
• gov solutions are limited if its a monopolist employer= high WR= higher inflation

Question 12

EVALUATION of wage differentials

Answer 12

• depends on how much inequality
• risks of gov failure= high income= higher tax= distort incentive to work
• SR vs LR= in SR income inequality can get out of control

Question 13

criticisms of MRP theory

Answer 13

• hard to measure productivity of all worker e.g. teachers
• assumes each individual’s productivity can be measured
• the self employed don’t measure their own MRP
• assumes we all work w perf CLM= TUs bargain WR

Question 14

define monopsony

Answer 14

occurs when there is a sole or a dominant employer in a labour market, wage makers

Question 15

define a trade union

Answer 15

organised association of people who are formed to protect and further their rights through collective bargaining

Question 16

evaluation of TU in monopsony

Answer 16

• depends on TU density= proportion of workforce that’s part of TU
  = lead to higher bargaining power to control SL
• real world evidence proves limited power of TUs
• legislation of closed shop TUs= illegal
  = ballots must be done in order to strike and can only take place if 75% members agree with strike otherwise strike is illegal
• depends on elasticity of demand and supply for labour= if labour demand curve is wage elastic= limited bargaining power= higher decrease in unemployment and smaller increase in WR
• in theory monospony may pay low wages but in reality they dont have to
  = many firms with big bargaining power dont pay low monoposony wage
  = Aldi has increased it’s minumum pay for basic employees which is 10p higher than living wages recommended= £10.55/hour
• we assume that producitvity remains uneffected by wages but efficiency wage theory says increasing wages leads to increased productivity= repay high costs of wages through higher staff retention etc
• are monospony ‘superstar firms’ becoming too big?= do we need gov intervention

Question 17

how does a TU impact a monopsony labour market

Answer 17

• strong TU makes the monopsonist a wage taker upto point WTU= has to set WTU to employ workers
• creates a new supply curve where each worker is paid the same wage until WTU
• has to increase wages to attract more workers= supply curve goes back to og
• monopsony hires worker up until MRP=MCl= maximise profit

Question 18

define minimum wage

Answer 18

statutory pay floor that can’t be undercut, currently £11.44 for 21 yrs

Question 19

adv of minimum wage

Answer 19

• gov will impose MW above equilibrium level= make fairer wages and close gap between rich and poor
• increase incentive to work= less voluntary unemployment as ppl seeking work have higher income opportunity
• fiscal benefit to gov= high incentive to work= less benefits costs for gov= more tax revenue= can spend on other policies that will redistribute incomes
• increase worker morale= higher productivity due to more motivation in workforce

Question 20

disadv of minimum wage

Answer 20

• can cause classical unemployment= cause excess supply of labour as COP is higher= worsen unemployment
• youth will be impacted worse as they have least experience and skills to produce high MRP= harder ti justify their high costs of employment for firms= lead to long term unemployment= hard to get back into work and gain experience to get high income jobs
• ppl who don’t rely on MW may demand higher WR in order to keep an incentive to work through wage differentials= belief they deserve higher ages due to their skill set and expertise= increase MC of labour for firms
• small businesses struggle to make profit

Question 21

Alternative incentives instead of MW

Answer 21

-Living wage= hourly rate based on basic cost of living in UK= optional for businesses to pay
- Income tax reforms= cutting basic rate of income tax= improve work incentives
- benefits reforms= link benefits to participation on work programmes
- tax reliefs on apprentices

Question 22

labour market imperfections

Answer 22

• occupational and geographical immobility of labour
• monopsony employers
• trade unions
• discrimination in workplace
• imperfect info of market and employers

Question 23

policies to address labour market failure

Answer 23

• tougher equality laws, MW and measures to cut poverty
• subsidies to encourage business start ups
• 2017= free childcare for 30hrs for 2-4 yr olds
• lower travel costs and house prices= increase mobility of labour
• 2022, Sunak promised 2000 AI scholarships for free to people at economic deisadv
• increase MW= increase income= increase SOL

Question 24

define discrimination in the work place

Answer 24

refers to unfair treatment of individuals based on their race, gender, age or religion, not based on skills or qualifications

Question 25

impact of discrimination in work place

Answer 25

- decrease productivity= hiring decisions aren't based on merit= potentially high skilled worker lose out on jobs - legal cost of employers= can be fines and compliance costs= damage firms rep= deter future cursors and employees - decrease economic growth= cause unstable employment for sections of society= won't reach productive potential

Question 26

reasons for wage differentials

Answer 26

- women move in and out of labour force due to having children - different elasticities of labour supply= low paid jobs tend to have low barriers to entry= high supply of labour that won't change if wages tend to be low= elastic supply of labour

Question 27

how to decrease pay gap

Answer 27

- subsidies to TUs = can increase campaign funds, increase membership and strikes etc = higher bargaining power to negotiate higher and fairer working conditions e.g. longer holidays - national minimum wage - supporting/ higher investment for women in the workplace through training and education = in free labour market, wages determined where supply=demand = if women gain more skills and MRP through education and training, demand for women in labour market increases = won't cause any unemployment but high cost to gov= most permanent and long term fix to issue = risk of gov failure= OC of gov money AND time lag AND wouldn't fix the pay gap if its caused by discrimination= doesn't address key root of issue = would regulation be better? - introducing non discriminatory laws like 2010 equality act

Question 28

EVAL of min wage

Answer 28

- depends on wage elasticity of demand of labour= if labour demand is elastic, would increase unemployment more= can be shown by drawing inelastic demand of labour line and elastic demand of labour line - if labour demand is inelastic, and people on low incomes get boost to real incomes, would rise consumer spending = could shift out labour demand to LD2= lead to even higher employment than before

Question 29

describe income effect of wage rises

Answer 29

- looks at the individual labour supply decision and in particular the work leisure trade off and how this is affected by a change in wages = most individuals face a choice between hours worked and hours of leisure = the opportunity cost of taking leisure is the monetary value of the wages foregone - positive income effect= when higher wages cause people to want to work more hours in order to reach a target / desired income - negative income effect= when a target income has been reached and people prefer spending more time on leisure rather than earning more income

Question 30

describe substitution effect of wage rises

Answer 30

- rise in the real wage increases the opportunity cost of leisure = therefore higher wages will always cause people to be incentivised to work longer hours via the substitution effect BUT the income effect may work in the opposite direction - houses on low income are likely to have a positive substitution effect as they respond to higher wages - as WR increases, workers may begin to substitute leisure for hours of work due to strong income elasticity of demand or have reached their target income = will take shorter hours or work less days a week @ high WR as this is satisfactory = cause labour supply curve to bend backwards = make the income effect become negative as they choose leisure over hours of work - as wages go up so does the OC of leisure

Question 31

define transfer earnings

Answer 31

minimum reward required to keep factors of production like labour in its current occupation = shown in the labour supply and demand diagram as the area under the labour supply and before the equilibrium point of Q1

Question 32

describe economic rent

Answer 32

- any amount earned by a FOP above the minimum amount required to work in a current occupation = shown below the wage and above the labour supply curve - depends on the elasticity of labour supply = if labour supply curve is inelastic, more reward to labour will be economic rent rather than transfer earnings

Question 33

factors that affect the supply of labour

Answer 33

- geographical mobility of labour - barriers to entry= occupational mobility of labour e.g. educations and qualifications needed for job - non-monetary considerations like value of helping e.g. teacher - value of leisure= risk substitution effect of labour as they may choose leisure over longer hours

Question 34

factors that affect the demand of labour

Answer 34

- proportion of total costs = if wages are a low % of total costs, demand will still be high (inelastic) but if its high %, demand will be lower= elastic - ease and cost of substitutability = if employer can cheaply and easily substitute a worker for capital, labour demand will be elastic = e.g. security guards can be replaced with cameras and tech etc but can't do the same for a teacher - elasticity of demand for final product= if good firm is selling has inelastic demand, a rise in price won't massively decrease demand for good=

Question 35

define elasticity of demand for labour

Answer 35

measures the responsiveness to the demand of labour given a change in the wage rate = elastic= demand for labour is sensitive to a change in WR e.g. capital could just replace labour so demand would fall = inelastic= demand for labour is less responsive to a change in WR= increase WR doesn't decrease Q of labour massively - supply of a footballer is inelastic and low due to high MRP whereas the supply for a teacher is elastic

Question 36

define wage discrimination

Answer 36

when 2 workers get different incomes but do the same job

Question 37

define wage differentials

Answer 37

when 2 workers earn diff wages for doing diff jobs due to diff skills

Question 38

causes and examples of wage differentials

Answer 38

- women can be economically inactive during their peak due to pregnancy - women may take part time work due to childcare responsibilities - footballers have more inelastic supply of labour due to high MRP and low supply= tends to be higher demand and higher wage = change in wages will lead to relatively small change in footballers supplied = due to unique skill set and training for specific job - teachers have inelastic supply of labour due to non-monetary considerations and motivations= gov can pay lower wages and still have sustainable supply of labour = due to vocational rewards of work that aren't wage related - north south divide means supply and demand for labour is diff in London than in Nottingham = higher skilled workers know London has better reputation for high income jobs= best bankers and layers would go to London= attract better MRP supply of labour= higher demand for labour due to higher MRP per worker - gap in ethnicity due to language barriers and lower qualifications= leads to lower MRP

Question 39

factors of demand for labour

Answer 39

- productivity= MRP - price of capital - derived demand

Question 40

define living wage

Answer 40

- hourly rate based on the basic cost of living in the UK = optional for firms to choose to pay the living wage to their employees = based on hourly pay in work that people need to get by = essential bills are rent, food and utility bills

Question 41

adv of paying living wage

Answer 41

- by paying Bette wages above minimum wage it improves job retention = stay in current job for longer= saves costs of hiring and re-training workers - reduce staff absenteeism= less days taken off work= higher OC of not going to work due to higher hourly wage - improve relations between TUs and firms= reduce strikes - efficiency wage theory= improved wage increases productivity= higher output per person/ hour= more equitable wage for their work = decrease unit cost per output - corporate social responsibility for firms= improve reputations

Question 42

how does living wage reduce inequality

Answer 42

- sets a higher minimum threshold for earnings than a standard minimum wage = helps lift low-income workers closer to the median income, reducing the income gap between the richest and poorest = workers now earn enough to afford essentials like housing, food, and transport= reduces absolute poverty - their earnings grow faster than higher-income groups (in relative terms), income inequality narrows, particularly as measured by indicators like the Gini coefficient - due to higher earnings, workers may need less financial support from the state (e.g. housing benefits, food assistance) = allows for reallocation of public funds toward other inequality-reducing services like education and healthcare - ensures that employers internalise the true cost of labor, rather than offloading it to taxpayers

Question 43

how does tech impact the labour market

Answer 43

- introduction of new tech creates automation, AI, robotics etc = leads to increase in capital-intensive production methods, as firms invest in machines to improve productivity = results in labour substitution, where labour is replaced by capital in routine and manual jobs e.g., manufacturing, warehousing = causes structural unemployment as workers in these sectors become occupationally immobile, lacking the skills needed for new roles = also known as technological unemployment, where workers lose jobs due to technological advancements DIAGRAM= demand for low-skilled workers decreases as machines can perform tasks more efficiently= inwards demand for labour shift - technology also creates new job opportunities in sectors like software development, cybersecurity, tech maintenance etc = increases demand for high-skilled labour, particularly in STEM fields = contributes to wage polarisation in the labour market as high-skilled workers see wage increases due to higher marginal productivity, while low-skilled workers face downward pressure on wages or job losses - tech can lead to less geographical immobbility of labour increasing the supply of labour, those previously unabke to work are now able to access work due to remote working e.g skype/google meets during covid 2020

Question 44

EVAL of impact of tech on labour market

Answer 44

- depends on elasticity of labour supply - depends on the rate of re-skilling in the economy = if workers can retrain effectively, frictional unemployment may fall and employment in high-tech sectors can grow= leading to a dynamic labour market - short-term job losses vs. long-term efficiency gains and new employment - sectoral impact: Disruption is greater in some industries than others (e.g., retail vs. healthcare). - government policy= intervention through education and training programs can mitigate negative effects and support labour market flexibility - income inequality= without redistribution or upskilling policies, inequality may rise due to technological change

Question 45

describe perfectly competitive labour market diagram

Answer 45

- assume firms are profit maximising employers, up until MRP=MC of labour= employ @Q2 - workers @ Q2 are paid exactly equal to their MRP = efficient wages - Q1 in the industry is maximum employment - wages are determines by the forces of demand and supply = always @equilibrium - shouldn't be any long term wage differentials due to supply shifts left= cause influx of workers