labour markets Flashcards
What do the labour demand and supply curves represent?
- Labour demand curve represents the number of workers that firms are willing to hire at any given wage
- Labour supply curve represents the quantity of workers that are willing and able to work at any given wage
What are the factors which cause a shift in the demand curve?
Demand curve:
- Derived demand for labour is driven by the general demand for goods and services. If the demand for goods and services increases, then firms will demand more labour in order to cope with this increased demand for their goods demand for labour shifts outwards
- Increases in productivity – demand for labour increases when workers become more productive because they have better skills – workers are more productive and so revenue increases
- Changes in the price of capital/tech – given capital can be used as a substitute to labour, when the price of capital increases, D for labour may increase as firms may be less willing to buy as much capital
- NB: increase in wage causes a movement along the demand curve
What are the determinants of the elasticity of demand for labour?
PED for the product the firm sells
- the elasticity of demand for labour is directly correlated to the PED for the product that it produces
- for instance, if demand for the good is very price elastic, and wages rise, then this increased cost, passed onto consumers, will cause a decrease in demand for the firm’s product
- therefore, a firm producing chocolate, which has many competitors for instance, and therefore very elastic demand, will also have a more elastic demand for labour, as an increase in wages will cause a rise in price for consumers.
Proportion of wages to the total cost of production
- when wages make up a large proportion of the cost of production, a rise in wages is likely to have a larger impact of the quantity of labour that a firm will demand, therefore the demand for labour will be more elastic
- a small increase in wages will cause a disproportionately large fall in demand for labour
Availability, cost, and closeness of substitutes
- if it is easy to substitute labour for capital, then the demand for labour will be elastic, as a rise in wages will cause a proportionately larger fall in the quantity of labour demanded
- depends on the profession - higher skilled jobs will have more inelastic demand for labour, because there are fewer people with the qualifications required to fill this job
- the greater the number of substitutes for a certain job, the more elastic will be the demand for labour
- compare a doctor to someone working at customer check outs - doctor has inelastic WED, as there are few close substitutes for the necessity they provide, while for someone working at customer checkout, their WED will be much more elastic, as an increase in wages will result in a disproportionately larger fall in demand for their job, because it can easily be replaced by capital equipment (self-service checkout machines).
Time
- in the short run, the demand for labour will be more inelastic because firms have to employ workers, and there aren’t as many substitutes for the work that they are doing - therefore, DfL is inelastic
- in the LR, firms can switch more easily to machinery, therefore the DfL will be more elastic
what are the factors that cause shifts in the supply of labour to a particular occupation?
Wages of similar occupation
- if the wages of another job increase, then the supply of labour for your current profession will shift left, because workers will leave their current job in search of the better-paid job
geographical mobility
- the interconnectedness between suburbs and city centres, and between cheaper locations and places of work, meaning the ability to travel from where you live to where you want to work, affects the quantity supplied of labour
- bad transport links will cause a leftwards shift in the supply curve
length of training/qualifications required for job
- if a job requires lengthy training and difficult qualifications, the supply of labour will shift left, because fewer people will be able to do this job
non-wage benefits
- if a wage is accompanied by non-wage benefits, such as fewer working hours, longer holidays, costs of transport covered, then the supply of labour will shift right, because this job will be more attractive to those looking for a job
demographic factors
- immigration will increase the supply of labour.
what are the factors affecting the elasticity of the supply of labour?
level of qualifications
- the greater the qualifications needed for the job, the more difficult it will be for people to take up the job, therefore a rise in wage rate will cause a disproportionately smaller increase in the supply of labour along the supply curve
time
- in the LR, people have more time to train, and therefore access different jobs, meaning an increase in wage will cause a disproportionately larger increase in the quantity supplied
- in effect, the long run makes the supply of labour more elastic
- in contrast, in the short run, the supply of labour will be more inelastic, because people have fixed contracts, or they haven’t yet acquired the skills for a certain job
level of unemployment
- if there are lots of unemployed people looking for a job, a small increase in wages will cause a disproportionately large increase in the quantity supplied of labour
what are the causes of wage differentials?
Level of skill required for job
- more skilled jobs tend to be better paid but not always, with the exception of teachers, doctors, nurses etc.
Region
- wages vary depending on the region. Those with the same job living in NYC and Cairo may have different wages
Trade Unions
- if the trade union for your industry is very strong, then you might have greater bargaining power than other jobs, enabling wages to rise
demand for the product
- earnings will be higher in booming industries
employer discrimination
- based on race, sexuality, gender
hierarchy within a company
- those who have been working for longer will have earnt more prominent positions, meaning they will earn more. At the top of a company, they may become entitled to a stake of the profits if they buy an interest in the firm.
what are the implications of wage differentials?
- inequality
Why might an accountant have a higher than average wage?
- occurs when demand is high and inelastic, and supply is low and inelastic
- demand for accountants is high because theyre able to make lots of money for their firm
- demand is also inelastic because accountants cannot easily be replaced - few people have the right skills and expertise
- supply is low because it takes time to gain the qualifications necessary to become an accountant
- supply is inelastic because a high level of qualifications are needed, so an increase in wages will cause a disproportionately smaller rise in quantity of accountants supplied.
What are the factors affecting flexibility in labour markets?
- TUs
- minimum wages
- regulation
- welfare payments
- income tax rates
How does trade union power affect flexibility in labour markets?
Trade Union power
- the power of trade unions is influenced by it collectiveness and its number of members
- trade unions can create labour market rigidity by preventing firms from firing employees, and by forcing them to increase wages
- otherwise they will use forceful and effective methods, such as seen with RMT strikes, which can massively disrupt the economy, thus forcing concessions
- through their collective action, they create a monopoly power
How do minimum wages affect flexibility in labour markets?
- minimum wages mean that firms are forced to pay their workers a set wage dictated by the government
- it causes real wage unemployment, as it prevents the wage from being determined by the equilibrium between supply and demand - labour market rigidity
Define labour market flexibility
The speed and ability of a labour market to respond to a change in the economy. Flexibility is often regarded as essential for good supply-side performance in an economy. Flexibility can refer to flexibility in terms of occupation / skills, location, number of hours worked, pay arrangements and so on.
How does regulation affect flexibility in labour markets?
- workers have employment contracts, regulations of working conditions, red-tape surrounding hiring and firing, e.g., having to give a reason why they have been fired.
- creates labour market rigidity because it makes it more difficult to for firms to employ workers
What is a monopsony, and why is it bad?
- a monopsony is a market which is dominated by a single buyer. One firm buys up all the labour in the industry
- people have little choice but to work there, as they are the only option of employment
- e.g., a mining town - mining firm has the monopsony of most of the men in that town
- able to lower wages
what is the impact of migration on labour markets?
Supply of labour
- increases the supply of labour in the economy
dependency ratio
- the number of people not working (0-15 + pensioners) divided by the number of people who can work
- people migrating to the UK tend to be of working age, so this will improve the dependency ratio and help to make up for the detrimental effects of an ageing population
labour market flexibility
- helps to make the labour market more flexible
- because there are more people competing for the same jobs, for instance
