The Labour Market

Question 1

How is Labour a Derived Demand?

Answer 1

As quantity demanded increases, output also increases, so firms need to employ more workers for production, which increases the demand for labour

Question 2

What does the Demand Curve for Labour show?

Answer 2

How many workers will be hired at a given wage rate at a given time period

Question 3

What is Marginal Revenue Product [MRP?]

Answer 3

The extra revenue generated when an additional worker is hired

Question 4

How do you calculate MRP?

Answer 4

Marginal Physical Product * Marginal Revenue

Question 5

Why do firms hire workers up until MRP = MC ?

Answer 5

1. Law of Diminishing Marginal Returns
2. The Revenue/Costs generated by each additional worker at the given wage rate

Question 6

What are some criticisms of the MRP theory as a basis of hiring workers?

Answer 6

1. Productivity Measurement
2. Assumption of Perfect Markets
3. The Self-Employed
4. Individuals in Team-Working Jobs

Question 7

What are some factors that cause a movement along the Demand Curve for Labour

Answer 7

[Assuming Ceteris Paribus]
An increase or decrease in wage prices, as the MRP needs to be justified at different wage prices

Question 8

State 4 reasons for the causes of a shift in the Demand Curve for Labour [Non wage shifters]

Answer 8

1. Price of Final Products
2. Demand for Final Products
3. Productivity of Labour
4. Cost of Factor Substitutes

Question 9

What is the Demand Elasticity of Wages?

Answer 9

It measures the responsiveness of labour demand given a change in the wage rates

Question 10

What are some factors that determine the Demand Elasticity of Wages?

Answer 10

1. Substitutes of Factors
2. Elasticity of Product
3. % cost of production to labour
4. Time Period [LR and SR]

Question 11

What is the main choice in the individual supply curves?

Answer 11

Oppurtunity costs between leisure time and work time

Question 12

What explains the shape of the Individual Labour Supply Curve?

Answer 12

1. Income Effect
2. Substitution Effect

Question 13

What is the Income Effect in an Individual Labour Supply Curve?

Answer 13

As wages rise, incomes will rise as people are incentivised [+ve]
As wages rise, people may work less as a target income is reached quicker [-ve]

Question 14

What is the Substitution Effect in an Individual Supply Curve?

Answer 14

As wages rise, the oppurtunity costs of leisure time increases, which incentivises individuals to work more

Question 15

What are the assumptions of extensions and contractions in labour quantity in an industry labour supply curve?

Answer 15

1. Economically inactive are incentivised to join the labour force
2. Trained professionals are incentivised to rejoin their occupation as wages have increased

Question 16

What is the reason for the shape of the AC=MC=S curve in a Perfectly Competitive Labour Market?

Answer 16

Industry has no control over setting wages, hence they act as wage takers

Question 17

What explains the shape of the AC and MC curve in a Monopsony Labour Market Curve?

Answer 17

The monoponist are wage makers and have control over wage prices - they are sole employers of workers which causes the upward sloping AC curve.

The MC curve is twice as steep as an increase in the wage rate is for all new or existing individual workers in the firm

Question 18

What are some reasons for the shifts in Labour Supply Curves

Answer 18

1. Wages in Subsitute Occupations
2. Non-Monetary aspects of the job
3. Barriers to Entry
4. Occupational Mobility of Labour
5. Size of Workforce
6. Value of Leisure Time

Question 19

What is the Elasticity of Labour Supply?

Answer 19

It measures the responsiveness of labour supplied given a change in the wage rate

Question 20

What are some factors that influence the labour elasticity of supply?

Answer 20

1. Nature of Skills Required
2. Length of Training
3. Vocational Jobs
4. SR / LR

Question 21

What are the characteristics of a perfectly competitive labour market?

Answer 21

1. Large number of workers and employers
2. Perfect Information about wage rates and productivity
3. Labour is Homogenous [same MRP, perfectly mobile]
4. Firms are Wage Takers [issuing higher wages are not rational as each worker has the same MRP, workers cannot demand higher wages either as they are homogenous]
5. No barriers to entry and exit

Question 22

How is the wage rate determined in a perfectly competitve labour market?

Answer 22

From the industry demand and supply

Question 23

What are assumptions made in for this determination?

Answer 23

1. Perfectly competitive market [i.e homogenous products, price takers]
2. Firms are wage takers
3. Firms are operating in the SR and are subject to Law of Diminishing Marginal Returns

Question 24

Up until which point will firms hire workers in a perfectly competitive labour market?

Answer 24

Firms will make efficient employment decisions and hire workers up until revenue is maximised, which is when MRP = W[MCl] - Any point beyond brings in extra costs and no additional benefits, and any point prior does not maximise benefits

Question 25

Why is it assumed that Wage Differentials do not exist in a Perfectly Competitive Market?

Answer 25

The occupational mobility and barriers to entry make it easy for workers to move around differemt professions where higher wages are offered, ultimately, the supply will drive prices down/up and equalise the wage between both professions

Question 26

What are some Wage Differentials that imply imperfect market conditions?

Answer 26

1. Labour is not homogenous 2. Non-Monetary Considerations 3. Immobility of Labour 4. Existence of Trade Unions 5. Monspony Labour Markets

Question 27

What is a Monopsony?

Answer 27

Sole employer of workers in a given profession , Ex. Nursing

Question 28

What are the characteristics of a Monopsony?

Answer 28

1. Wage makers 2. Maximise revenue/profit by hiring workers up until MRP = W[MCl], not MRP = Sl[ACl] like perfect labour markets

Question 29

What is the impact on Employment and Wages by a Monopsony?

Answer 29

1. Wages are paid at lower of the MRP of a worker given the wage making powers - lower the wage, higher the monopsony power, distorting labour market efficiency 2. Wage suppressions create employment restrictions for those willing and able to work, hence creating unemployment and a deadweight loss

Question 30

Why is there a DWL in a Monopsony Labour Market?

Answer 30

Because firms employ workers at MRP=W[MCl], while the social optimum is MRP=Sl[ACl], which restricts employment for those willing and able to work

Question 31

Define Trade Union

Answer 31

An organisation of different workers that bargain for higher wages and better working conditions

Question 32

What is a closed shop trade union?

Answer 32

In a profession, only one trade union is present [illegal in most countries given the strict legislations since 1970s]

Question 33

How does a Trade Union Restrict Employment?

Answer 33

1. They control labour supply at a given wage rate 2. They bargain wages above the equilibrium, regardless of MRP, some firms may not be able to afford it 3. The supply curve is horizontal up to a point at the given trade union set wage rate, beyond that, if firms want to increase employment, they need to incentivise workers with higher wages - bringing back a upward sloping supply curve

Question 34

What are some Evaluation Points to consider about a Trade Union?

Answer 34

1. If they are operating in a Monopsony Market 2. Union Density [as closed shop unions are illegal] 3. Union Mark-Up [Difference in wage rate b/w workers in and out of a trade union] 4. Real World Evidence; eg; movements from secondary to tertiary sector with part time jobs . globalisation [hard to form a TU] , legislations

Question 35

How does a Trade Union Impact a Monopsony?

Answer 35

1. A trade union controls the supply of labour at a given wage rate 2. A horizontal supply curve is present up until a wage rate, which becomes upward sloping as firms need to incentivise workers by offering higher wages 3. This may be the wage rate set by the trade union - which can cause wages and Ql to move towards competitve outcomes 4. The monopsonist will hire workers until MRP = MCl, this creates a kink and a vertical discontinuity in the supply curve 5. Trade unions improve efficiency in imperfect markets as wages and employment increases