The Labour Market

Question 1

Labour Demand

Answer 1

Demand for labour is derived from the demand for the product.

Labour demand is determined by MRPL

Question 2

Marginal Productivity Theory

Answer 2

Demand for any factor of production (ie. labour) is determined by the marginal revenue product, ie. the additional revenue generated by employing that factor of production.

Question 3

How is MRPL calculated ?

Answer 3

Marginal Physical Product X Marginal Revenue

Question 4

Why is the MRPL Curve = Demand for Labour Curve ?

Answer 4

Both illustrate the quantity of labour required at each wage

Question 5

What caused the DL (MRPL) curve to shift ? (3)

Answer 5

Changes to the price of the product
Changes to labour productivty (eg. Training)
Changes to labour costs (eg. NMW / TU)

Question 6

What does elasticity of demand for labour measure ?

Answer 6

Meausures the responsiveness of demand for labour following a change to wages.

Question 7

What effects the elasticity of demand for labour ? (4)

Answer 7

Labour demand is elastic in the LR
Ability to substitute labour with capital
Wages % of firm’s total cost
PED of product produced

Question 8

What is labour supply ?

Answer 8

The number of hours that an individual is willing and able to work at a given wage rate at a specific point in time.

Question 9

Non-montary determinants of labour supply

Answer 9

‘Job satisfaction’
Flexibility
Healthcare
Childcare
Discounts
Progression opportunities
Job security
Location

Question 10

Factors which influnce the labour supply (5)

Answer 10

Monetary Benefits
Non-Monetary Benefits
Working population size (eg. aging population)
Competitveness of wages
Job advertisment

Question 11

Deteminants of elasticity of labour supply (3)

Answer 11

Skills required (ie. high skill = inelastic)
Occupational Mobility
Geographical Mobility

Question 12

Characteristics of a Perf. Comp Labour Market (6)

Answer 12

Many (infinite) number of firms,
Workers are all homogeneous
Workers have perfect information
Labour is perfectly mobile
No barriers to enter or exit the market.
Firms are wage taker

Question 13

Characteristics of a Monopsony (4)

Answer 13

Single employer of labour
Can pay less than a workers MRPL
High barriers to entry
Asymetric Information

Question 14

Wage Differentials

Answer 14

The difference in wages between workers with different skills in the same industry

Question 15

Causes of wage differentials (3)

Answer 15

Level of human capital required
Geographical - ie. higher pay in London
Trade Unions - union workers may get higher pay

Question 16

Components of wages (2)

Answer 16

Transfer Earnings - Minimum wage needed to keep the factor of production in its current employment.

Economic Rent - Workers recieving more than the minimum that they would work for.

Question 17

Advantages of Wage Differentials (5)

Answer 17

Incentivises workers to perform higher skilled jobs.
Wages reflect the opportunity cost of education / time spent training.
Determine how labour is allocated.
Trickle down Economics - Jobs/ Spending / Tax
Encourages enterprise/ innovation

Question 18

Disadvantages of Wage Differentials

Answer 18

Income inequality
Trickle down does not often work (savings withdraw from circular flow)
Effort is not always equal to wages earnt.
Equality / Utilitarian ideals are not achievable.

Question 19

Role of trade unions (3)

Answer 19

Represent the interests of a group of workers and bargain with employers to improve the interests of workers eg. wage negotiations, working conditions and job security.

Trade unions utilise collective bargaining (rather than individual bargaining) as it holds greater bargaining power.

Trade unions can overcome issues regarding workplace discrimination.

Question 20

National Minimum Wage

Answer 20

The NMW sets a legal minimum hourly rate of pay for different age groups.

It was first introduced in 1999 and aims to stop the exploitation of workers.

By increasing the wages for the poorest workers, a more equitable distribution of income is achieved.

Question 21

Advantages of NMW (4)

Answer 21

Helps those on very low incomes and reduces poverty.
Boosts morale of workers - higher productivity.
Incentivises people to work rather than not.
Increased Govt. tax revenue.

Question 22

Disadvantages of NMW (4)

Answer 22

Increases a firm’s wage costs leading to potential job cuts - unemployment.

Decrease UK’s competitiveness compared to economies with lower wage costs.

NMW may force firms to pass on costs to consumers via price increase.

Those unable to work are often the poorest leading to NMW not helping.

Question 23

Other Govt. interventions in Labour Markets (3)

Answer 23

Public Sector Wage = The Government determines the wages in the public sector meaning that they can ensure that they should ensure these wages are fair and working conditions are suitable.

Living Wage = An hourly wage determined by the Living Wage Foundation. It aims to cover the basic cost of living and consequently is higher than the NMW. It is a wage suggested by the Govt. The illustration and evaluation of the living wage are the same as the NMW.

Maximum Wage = The Government can impose maximum wages to increase demand for labour and reduce unemployment. This works in a similar way to a price floor.

Question 24

Benefits of Maximum Wages (4)

Answer 24

A max wage can help ease demand-pull inflation.
Limit wage inequality.
Reduce a firm’s labour costs, leading to lower prices.
A firm may employ more workers.

Question 25

Disadvantages of Maximum Wages (3)

Answer 25

It may be unfair to not reward greater effort / time spent training with higher wages.

Higher pay motivates workers to work harder.

Skilled labour may migrate to avoid maximum wage.

Question 26

Labour Market Discrimination

Answer 26

When a specific group of workers are treated differently to those who perform the same job.

Common examples include the gender pay gap and racial discrimination.

The 2010 Equality Act has made it illegal to discriminate on 12 protected characteristics (age, gender, race etc.).

Discrimination is a cause of labour market failure.