Labour Markets Flashcards
(6 cards)
Why Labour Demand Curve slopes downwards
1) In the short run the labour demand curve is downward sloping due to the law of diminishing marginal returns. The law of diminishing returns states that in the short run (where there is at least one fixed factor of production), as variable factors of production are added to a stock of fixed factors of production, total/marginal output wil initially rise and then fal.
This is significant because it means the marginal revenue product (MRP) curve (marginal product of each worker multiplied by the marginal revenue) follows the same pattern as the marginal product curve. A profit maximising firm will only employ workers up until the MRP of the last worker hired is equal to the
wage rate. Therefore a worker’s MRP determines whether they will be employed or not at a given wage
rate by a firm i.e. the MRP curve is the demand curve for labour
in the short run.
2) In the long run, al factors of production are variable, therefore the demand curve for labour is downward sloping due to the substitutable nature between workers and capital machinery. In Figure
2, as the wage rate increases from W1 to W2, there wil be a contraction of labour demand and less employment from Q1 to Q2 as firms find it more profitable to hire machines instead of workers whereas when the wage rate decreases from W1 to W3, there will be an extension of labour demand with greater employment from Q1 to Q3 as it si more profitable for firms to hire workers instead of machines.
Why labour supply curve slopes upwards
1) Income Effect is always positive where incomes rise as the wage rate rises, increasing the incentive
to work more hours and earn a higher income. The idea that individuals have a target income and thus
may work less at higher wage rates is offset in the market. Take the market for nurses for example; workers who have skills to work in the nursing profession but are currently inactive decide to re-enter the labour force and take employment. Furthermore, individuals with skills working in alternative professions decide to come back into the nursing profession thus explaining why at higher wage rates,
employment continues to rise with a positive income effect.
2) Substitution Effect is always positive where the opportunity cost of leisure time increases as the wage rate rises, always providing an incentive to work instead of enjoying leisure time.
Trade Unions
Trade unions use collective bargaining, where the pay of a large group of workers is determined through one negotiation thus providing workers more strength and market power. An assumption is made that there is a closed shop agreement whereby all workers in a profession are members of one trade union giving that one union maximum market power where it essentially becomes a monopoly supplier of
labour, able to control the labour supply at given wage rates.
The labour market above is operating efficiently at competitive levels, W1 and Q1. fI workers through
their trade union are unsatisfied with pay and conditions, the union can bargain for a higher wage
of Wtu, controlling the labour supply at that wage rate up until the existing labour supply curve at Qs. Firms are very likely to accept this given the number of workers they can lose if they reject the
settlement and the threat of strike action with no production and negative publicity that comes with it.
The firm therefore becomes a wage taker at the trade union wage rate Wtu with
the new supply curve equal to the wage up until Qs. The union cannot control labour supply beyond this point as those
workers require a higher wage to enter the profession therefore the new supply curve with trade union involvement possesses a kink reverting back to the original supply curve beyond Qs.
With new market conditions, where demand equals supply si now at employment Qtu ta the wage rate Wtu. Although the wage rate is higher than competitive levels, employment levels are lower, with the trade union creating an excess supply of labour, i.e. unemployment between Qs and Qd hence improving pay and living standards for some but worsening outcomes significantly for others who are left without a job distorting efficient competitive labour market outcomes.
Trade Unions Evaluation
1) The impact of trade unions depends on their strength and power i.e. the union density. The union density measures the percentage number of workers in a profession that are members of a union. The higher the percentage density is, the greater the power of the union to bargain collectively and increase wages/improve working conditions. Workers in professions where union density is weak are unlikely to benefit from higher
than competitive wages.
2) The success of the union fighting for higher wages is
determined by the union mark up. This is the difference in wage between workers who are members of a trade union and those who aren’t. The bigger the difference in favour of union workers, the more successful the union is in bargaining for better pay and conditions, however the impact on unemployment is greater as well.
4) Union power is significantly weakened with regulation that reduces their power. Governments can use regulation as a supply side policy to improve the efficiency of labour, making the economy more competitive and increasing potential output. Trade unions increase costs in various ways for businesses; wage increases, longer maternity/paternity leave, longer holidays and breaks, extra perks to
the job, increasing health and safety standards etc. The government is also a significant e m p l o y e r w h e r e successful unions increase their
costs and thus borrowing
or taxation requirements. Regulations to reduce trade union power include, making closed shop unions illegal, making strike action legal only fi a certain percentage of the union workforce agree when voting in secret and only allowing workers to strike against their own employer rather than allowing any workers in a profession to partake in a strike. Union density and the threat to strike are the biggest weapons a union possesses therefore reducing their impact significantly lowers the union’s power to increase wages and improve working conditions.
ALSO - Efficient outcomes in monopsony!
