Labour market

Question 1

What is the labour market composed of?

Answer 1

Sellers of labour (households) and buyers of labour (firms)

Question 2

How does the price of the product being produced affect demand for labour?

Answer 2

• If selling price of a product increases, it increases marginal revenue product of labour and firm will demand more labour
• Higher priced products incentivise firms to supply more and demand for labour will continually increase with increasing prices

Question 3

How does the demand for the final product affect demand for labour?

Answer 3

• As demand for labour is derived demand, when an economy is booming, then demand for normal g/s will be high and demand for labour will be high
• When an economy is in a recession demand for normal g/s will be lower and demand for labour will be lower

Question 4

How does the ability to substitute capital affect demand for labour?

Answer 4

• Firms will regularly elevate whether it is more cost effective to switch production from using labour to capital
• If it is more cost effective, then demand for labour will fall

Question 5

How does the productivity of labour affect demand for labour?

Answer 5

• If the productivity of labour increases (possibly through training) this will lower average costs and firms will likely demand more labour

Question 6

How do training periods affect supply of labour?

Answer 6

• Long training periods act as a barrier to entry and exclude many households from offering labour in certain markets

Question 7

How do wages in other occupations affect supply of labour?

Answer 7

• Comparative wage rates in substitute labour markets strongly influence the supply of labour

Question 8

How do changes in migration policies affect supply of labour?

Answer 8

• Increase in net migrations increase supply of labour

Question 9

How do income tax levels affect supply of labour?

Answer 9

• At a certain level, income taxes become a disincentive to households offering their labour.
• As income taxes become rises = supply of labour decreases

Question 10

How do working conditions affect supply of labour?

Answer 10

• Working conditions and non-pay benefits can act as a strong incentive to work in certain industrie

Question 11

How does trade union power affect supply of labour?

Answer 11

• Trade unions can increase the supply of labour to certain industries as workers consider the benefits of belonging to the union

Question 12

How do levels of welfare benefits affect supply of labour?

Answer 12

• The higher the level of welfare benefits, the lower the incentive for low skilled labour to offer their labour

Question 13

How do social trends affect supply of labour?

Answer 13

• Include major changes in society and can influence supply of labour in certain industries

Question 14

What is market failure in labour markets caused by?

Answer 14

1. Geographical immobility - occurs when workers find it difficult to move from one geographical area to another, barriers to mobility may include: family ties, lack of info and challenges in securing or affording accommodation
2. Occupational mobility - refers to the ability of a worker to change occupations when they lose a job, if their skill base is transferable then their occupational mobility is high

Question 15

Where does labour market equilibrium occur?

Answer 15

Where demand for labour = supply for labour

Question 16

Why are individual firms price takers?

Answer 16

They have to accept the wage rate that workers are being paid in the industry
If they offer a lower wage: they will likely struggle to recruit workers
If they offer a higher wage: large numbers of workers will apply to work there

Question 17

What are the current labour market issues in the UK?

Answer 17

1. Skills shortages - have to increase wage rates
2. Youth unemployment - education or skills gap
3. Changes to retirement ages - retirement age is being increased, too many pensioners and improvement to life expectancy means there are more pensioners
4. School leaving age - leaving earlier lowers skill level, not enough apprenticeships to meet demand etc.
5. Zero-hour contracts - beneficial to employers, reduce costs, no longer counted as unemployed but not guaranteed work and only get paid for the work they do
6. Temporary/flexible working - meets employee’s needs, work from home, lowers company costs, more control

Question 18

What is a maximum and minimum wage?

Answer 18

Maximum - Government imposes a ceiling below market price and is rarely used
Minimum - Legally imposed wage level that employers must pay their workers - set above market rate and varies on age

Question 19

What policies are there used to tackle labour market immobility?

Answer 19

1. Improved education/training - Improves skills and a wider skill base allows workers to move more easily between jobs
2. Targeting skills shortages - Identifying markets with specific skills shortages and training workers in those skills provides some opportunities for workers to switch between occupations
3. Subsidising employers - Incentive for employers to take on workers without necessary skills and then train them
4. Relocation subsidies - Reduces both geographical and occupational immobility
5. Reducing info asymmetry - Setting up job centres and improving flow of information between employers and the unemployed helps identify new opportunities
6. Reducing discrimination - Workers improve occupational mobility

Question 20

What is the elasticity of demand for labour?

Answer 20

If demand for labour is elastic, the increase in wage rate will result in a more proportional decrease in quantity of labour demanded by firms

If demand for labour is inelastic, the increase in wage rate will result in a less proportional decrease in quantity of labour demanded by firms

Question 21

What are the factors influencing PED of labour?

Answer 21

1. Proportion of labour costs to total costs = Higher these are then the more elastic the demand for labour will be; the lower these are then the more inelastic the demand for labour will be
2. Ease and cost of factory substitution = Substituting capital for labour is easy and the cost is comparable to the increase in wages, the demand for labour will be more elastic and vice versa
3. PED of the final product - If product being produced is price inelastic, then demand for labour is likely to be more inelastic
4. Time period - In the short run, demand for labour is more likely to be inelastic, however, in the long run firms can research alternative methods of production and demand for labour is more elastic

Question 22

What is the elasticity of supply for labour? And examples

Answer 22

If supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in quantity of labour supplied

If supply of labour is inelastic, then an increase in the wage rate will result in a less than proportional increase in quantity of labour supplied

In low skilled occupations, quantity of labour supplied is very responsive to a change in wage rates
Occupations which require longer and higher level of training tend to have an inelastic supply of labour

Question 23

What is demand for labour?

Answer 23

The number of workers. firms are willing and able to hire in a particular job or industry for a given wage

Question 24

What is the formula for wage elasticity of demand?

Answer 24

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