Labour Market

Question 1

what is derived demand?

Answer 1

a demand resulting from demand of something else

Question 2

what is the marginal productivity of labour (MRPL)?

Answer 2

• the additional revenue from hiring one more worker

- firms should continue up until the MRP from the last labour input is equal to the marginal cost

Question 3

what is the marginal productivity of labour equation?

Answer 3

MRP= marginal physical product of labour (MPP) x marginal revenue (MR)

Question 4

what is elasticity of demand for labour?

Answer 4

• a measure of how much demand for labour changes as wages change
• the easier it is to replace a worker, the more elastic the demand is
• the more price elastic the demand for the product is, the more elastic demand for labour will be

Question 5

what is the equation for elasticity of demand for labour?

Answer 5

% change in the quantity of labour demanded/ % change in the wage rate

Question 6

what factors affect elasticity of labour demand?

Answer 6

• if firms can easily swap labour for capital (elastic)
• if wages only make up a small amount of total cost (inelastic)
• if wages make up a large amount of total cost (elastic)

Question 7

what causes the demand curve for labour to shift?

Answer 7

• change in demand for good/ service
• number of firms
• technology (replacing labour)
• education
• govt legislation

Question 8

what is individual labour supply?

Answer 8

the number of working hours labour are willing to work at a particular wage rate for a job

Question 9

what is occupation labour supply?

Answer 9

the number of employees who will work at their wage rate

Question 10

what factors affect supply of labour?

Answer 10

• job satisfaction
• non-monetary factors
• monetary factors
• net advantage

Question 11

what shape is the labour supply curve?

Answer 11

upward sloping

Question 12

what causes shifts in the labour supply curve?

Answer 12

• number of workers (eg from immigration)
• education
• wage rates
• advertising
• government policies

Question 13

how does imperfect information impact the labour market?

Answer 13

• there may be an asymmetry of information between employers and employees
• employers may not realise the actual value of an employee to the firm
• so employer may not pay them correct wage according to their marginal revenue product

Question 14

how do trade unions impact the labour market?

Answer 14

• they try to change the balance of power by forming an organisation of workers and dealing with employers as a group
• negotiations are often called collective bargaining

Question 15

how does labour immobility impact the labour market?

Answer 15

• geographical immobility: not everyone can move to a different area for a job
• occupational immobility: isn’t easy to switch career if your skills are not transferrable

Question 16

what does the MRP curve show?

Answer 16

shows the extra revenue that each worker generates

Question 17

what does the MC curve show?

Answer 17

shows the additional cost of employing each extra worker

Question 18

where and what is the market equilibrium wage?

Answer 18

where MRP=MC:

• the firm will hire the number of workers where the two lines meet. Hiring more than that means the firm loses money employing the extra worker
• hiring any less means the firm is missing out on any potential profit

Question 19

how are wages determined in a perfectly competitive market?

Answer 19

by the forces of demand and supply

Question 20

what is the model of wage determination?

Answer 20

• in a perfectly competitive market, firms become price-takers, and so do not have control over the wage they pay
• it is determined by the interaction of market labour demand and supply
• this wage is equal to the marginal cost and average cost for the firm because the supply because the supply is perfectly elastic for an individuals firms labour

Question 21

what is wage?

Answer 21

• the wage is the sum of economic rent and transfer earnings
• as supply gets more elastic, economic rent reduces to 0 (as the labour market for this particular job gets more competitive)

Question 22

model of wage determination diagram?

Answer 22

https://www.economicsonline.co.uk/Business%20economics%20graphs/Wage-taker.png

Question 23

what is economic rent?

Answer 23

what is in addition to the minimum wage required to keep labour employed

Question 24

how does marginal revenue product (MRP) determine relative wage?

Answer 24

• the higher the MRP, the more valuable the worker is as they generate more revenue for the firm
• so the demand for productive workers is higher leading to a higher relative wage

Question 25

how does the role of skills determine relative wage?

Answer 25

- the more skills a worker has the more valuable they are as skills are usually correlated with the MRP of a worker - fewer workers will have these skills, so their supply is more inelastic - workers with more inelastic supply will tend to get higher relative wages

Question 26

what are the reasons for wage differentials?

Answer 26

- location- wages differ by region - industry- some industries pay better than others - trade unions- these can impact on wage rates - skill differences

Question 27

what happens when there is an elastic supply of labour?

Answer 27

- often elastic in low-skilled jobs - wage rate increases will result in large increases in quantity supplied as wages are often similar in low skilled professions - supply is often more elastic if workers are mobile

Question 28

what happens when there is an inelastic supply of labour?

Answer 28

- often inelastic in skilled jobs - this is because it takes a long time to become skilled so high wages encourage people to study - but supply will therefore only change in the long term

Question 29

when is labour demand inelastic?

Answer 29

- when wages are a low % of total costs - when capital cannot substitute for labour - when the demand for the product produced is inelasitc

Question 30

what is the national minimum wage?

Answer 30

a government imposed law to try to improve the equality of living standards. Makes sure the poorest in society have enough for their own basic needs

Question 31

what was the 2018 NMW for over 25s?

Answer 31

7.83 an hour

Question 32

what is the effect of the national minimum wage on labour markets?

Answer 32

- in a perfectly competitive labour market, the minimum wage will raise the wage level above equilibrium - this will cause firms to downsize, and there will be excess supply at the new wage level. This will generate unemployment

Question 33

how can market failure come about from the NMW?

Answer 33

- the more inelastic the supply of labour is, the smaller the increase in unemployment - very elastic labour supply could lead to a large fall in unemployment

Question 34

what are the benefits of the minimum wage?

Answer 34

- workers should get a high enough wage to afford essentials. Reduces poverty levels - incentivises people to work and get off unemployment benefits - may increase the MRP of workers - improves morale and productivity

Question 35

what are the negatives of the minimum wage?

Answer 35

- reduces the quantity demanded of low skilled labour leading to lost jobs and worsening of inequality - increases firm costs - decrease competitiveness - may not actually alleviate poverty - has to be above equilibrium

Question 36

what are the pros of a maximum wage?

Answer 36

- reduce unemployment levels and encourages hiring - prevents wages spiralling - reduces inequality

Question 37

what are the cons of a max wage?

Answer 37

- reduces motivation and incentives - workers may migrate - unfair to limit the rewards a worker can gain

Question 38

what is a living wage?

Answer 38

different wage rate for London