micro labour markets Flashcards
(11 cards)
demand for labour
- the demand curve for labour shows how many workers will be hired at any given wage rate over a given period of time
- MRP - the extra revenue generated when an additional worker is hired
factors affecting demand for labour:
- P - change in the final price of the product - price increases - demand decreases - demand for labour decreases
- D - change in demand for the final product - demand for final product increases - demand for labour increases - labour is a derived demand
- P - change in labour productivity - labour productivity increases - COP decreases - lower costs passed onto consumers - demand increases - demand for labour increases - labour is a derived demand
- C - change in the price of capital - if price of capital decreases then demand for labour will decrease
diagram:
- x axis: quantity of workers, y axis: wage
elasticity of the labour demand curve
elasticity of labour demand curve - measures the responsiveness of labour demanded given a change in the wage rate
elastic demand diagram:
- change in labour demand is proportionately greater than the change in the wage
- x axis: quantity of workers, y axis: wage
- elastic demand curve
inelastic demand diagram:
- change in labour demand is proportionately less than the change in wage
- x axis: quantity of workers, y axis: wage
- inelastic demand curve
factors that affect elasticity of labour demand curve (SECT):
- S - substitutability of capital for labour - the more substitutable capital is for labour, the more wage elastic labour demand is - small rise in wages will lead to a proportionally larger reduction in labour demand (opposite less substitutes - firms will not be able to reduce workers by very much)
- E - elasticity of demand for the product - if elasticity of demand for the final product is inelastic and wages increase, firms can pass on increased wage cost to consumers via higher prices - this means that firms won’t have to reduce labour demand
- C - cost of labour as a percentage of total cost - the greater the cost of labour as a % of total cost, the more elastic labour demand is going to be
- T - time period - in the long run, all FOP are variable - easier to bring in capital - labour demand is elastic// in the SR, it’s difficult to bring in capital - labour demand is inelastic
individual labour supply curve
- key choice between work and leisure
- positive income effect - wages rise - people want to work more to reach their target income// negative income effect - wages rise - people need to work less to reach their target income
- substitution effect - as wages rise, the opportunity cost of leisure time increases providing an incentive to work (always positive - as wages rise, there’s a stronger incentive to work)
diagram:
- x axis: number of hours worked, y axis: real wage
- called backward bending supply curve —> can be split into 3 different sections
- 1st section —> wages are increasing at low rates —> individuals respond by working more —> positive income effect// positive substitution effect - opportunity cost of leisure time is increasing// overall wage effect is positive
income effect - +ve
substitution effect - +ve
wage effect - +ve
- 2nd section —> wages are increasing even more - opportunity cost of leisure time increases even more - substitution effect is positive// income effect - they are working more but the rate at which they’re working more is slowing down, suggesting that individuals are reaching a target income (-ve)// overall wage effect is positive
income effect - -ve
substitution effect - +ve
wage effect - +ve
- 3rd section —> substitution effect is positive as wages get really high - opportunity cost of leisure is huge// income effect has become negative - individuals have reached their target income// overall wage effect is negative
income effect - -ve
substitution effect - +ve
wage effect - -ve
supply of labour
supply of labour - people who are willing and able to work at given wage rates
diagram:
- x axis: quantity of workers, y axis: wages
factors that affect supply of labour:
- wages in substitute occupations - high wages in another job - workers leave - supply decreases
- barriers to entry e.g. qualifications and skills - high barriers to entry - supply decreases
- non monetary characteristics of the job e.g. health benefits, good pension plans, ability to work overseas - more benefits there are, the more supply increases and shifts right
- size of the working population - if economically active group increases - supply of labour increases
- value of leisure time - if people’s value of leisure time increases then the supply of labour shifts left
elasticity of labour supply curve
elasticity of labour supply curve - measures the responsiveness of labour supplied given a change in the wage rate
elastic labour supply diagram:
- change in labour supplied is proportionately greater than the change in the wage
- x axis: quantity of workers, y axis: wage
- elastic supply curve
inelastic labour supply diagram:
- change in labour supplied is proportionately less than the change in wage
- x axis: quantity of workers, y axis: wage
- inelastic supply curve
determinants:
- the nature of skills required in the job - greater skills - harder to enter - inelastic supply
- length of the training period - long training period - less likely people from outside will enter even if wage rates goes up - inelastic supply
- vocation - vocational qualification - inelastic supply
- time - immediately after a wage change, there’s not a large impact on the labour supply - wage inelastic// long run - wage elastic
competitive labour markets and TU
competitive market:
- wage takers
- infinite number of employers and employees
- homogenous labour
diagram:
market diagram:
- x axis: quantity of labour, y axis: WR
- demand curve - D=MRP
- supply curve - S=AC
firm diagram:
- x axis: quantity of labour, y axis: WR
- demand curve - D=MRP
- perfectly elastic supply curve - S=AC=MC
- trade unions - they have collective bargaining power and aim to protect workers rights e.g. better pay and working conditions
TU - perfectly competitive labour market: - x axis: quantity of labour, y axis: WR
- demand curve - D=MRP
- supply curve - S=AC
- new supply curve - draw horizontal line to supply curve then draw normal supply curve - label S=AC+TU
- draw on new QD and new QS - excess supply - unemployment
evaluation: - depends on union density - high union density - stronger collective bargaining power
- depends on union mark up - extra pay that union workers get compared to non-union workers doing similar jobs - bigger the union mark up, the greater the success of the TU
- strike action can only legally take place if a particular threshold of votes is reached
- TU interference can lead to excess supply and create unemployment
imperfectly competitive labour market and TU
imperfectly competitive labour market (monopsonist):
monopsony diagram:
- x axis: quantity of labour, y axis: WR
- downwards sloping demand curve - D=MRP
- upwards sloping supply curve S=AC
- upwards sloping supply curve twice as steep MC
- public sector - go to MC=MRP - draw WR from supply curve
- private sector - wages where D=S - private sector generates high SNP - can give workers higher wages
- show area of exploitation - employers can give WR of __ but only give __
- DWL
- trade unions - they have collective bargaining power and aim to protect workers rights e.g. better pay and working conditions
monopsony employer - dominant buyer of labour
trade union - dominant supplier of labour
known as bilateral monopoly
TU imperfectly competitive labour market:
- x axis: quantity of labour, y axis: WR
- downwards sloping demand curve - D=MRP
- upwards sloping supply curve S=AC
- upwards sloping supply curve twice as steep MC
- public sector - go to MC=MRP - draw WR from supply curve
- go to where D=S - draw on WR+TU and then normal supply curve - label S=AC+TU
- line of discontinuity and MC - label MC+TU
- draw down - QOL+TU
e.g. NEU - education - strike action led to a 5.5% increase in pay
chains of analysis:
- prior to TU, WR set at __ and __ workers are employed
- TU involvement will cause WR to increase from __ and increase QOL from __
- higher WR will mean area of exploitation falls
- increase in WR will motivate workers and increase productivity of labour - quality of labour will improve
- quantity and quality of labour increasing - shift in PPF
- moreover, as productivity increases - AC falls - increases profitability from __ - can be used to further increase wages
- higher WR could increase the number of hours worked by employees
evaluation:
- income effect kick in - number of hours won’t increase
- higher profitability may not translate into higher WR
- depends on union density - high union density - stronger collective bargaining power
- depends on union mark up - extra pay that union workers get compared to non-union workers doing similar jobs - bigger the union mark up, the greater the success of the TU
- strike action can only legally take place if a particular threshold of votes is reached
market failure in labour markets
market failure in labour markets
- geographical - occurs when workers find it difficult to move from one geographical area to another in order to find a job - barriers to mobility include family ties and affordability of housing etc
- occupational - occurs when there’s a skills mismatch
government intervention in the labour market
- subsidies to increase supply of housing
- improve transport links
- training
- advertising
wage differentials
males and females:
- women move in and out of the labour force - e.g. maternity leave - lose skills/aren’t gaining any new skills - earning potential is limited in the future
- differences in education/qualifications - happens in developing countries - women don’t have high skills and qualifications - low wages
- women work in low paid occupations e.g. vocational work, service sector, public sector work
- increase in the supply of female workers - has become more socially acceptable and opportunities have increased - wages fall
- discrimination
londoners and northerners:
- known as north south divide
- negative multiplier effect - north - fall in manufacturing sector - unemployment - less spending - other industries see fall in demand - labour is a derived demand - further unemployment - large wage difference between north and south
- occupational and geographical immobility in the north - workers in north don’t have skills to work down south or have family ties up north
- migration of labour to more proporous areas is only the most productive workers - widens north south divide
advantages and disadvantages of wage differentials:
advantages:
- incentives - lower paid workers are motivated to gain skills and move into higher-paid jobs - this increases productivity
- trickle down effect - higher paid workers spend money - demand for goods/services increase - labour is a derived demand - jobs created// progressive income tax - government can use this to redistribute money to the poor
- encourages enterprise - high-skilled individuals are motivated by the potential for higher earnings compared to standard jobs - incentive to take risks by starting a business - can lead to job creation and economic growth
disadvantages:
- income inequality - government may have to spend money on benefits// can reduce growth - poor have highest MPC and rich have highest MPS
- trickle down effect may not occur - those on higher incomes may save money - high MPS// also may avoid paying taxes - money not redistributed
maximum and minimum wage
maximum wage:
- wage ceiling
- highest WR that could be given to employees
- WR falls from __
- QS of labour falls __
- QD of labour increases __
- excess demand
minimum wage:
- wage floor
- WR increases from __
- QS of labour increases __ - more people are willing and able to work at higher wages
- QD of labour decreases __ - more expensive
- excess supply - unemployment
