Theme 3.5: The Labour Market

Question 1

What is meant by the supply of labour?

Answer 1

Measures the hours that people are willing and able to supply at a given wage rate

Question 2

What does the supply of labour theory suggest?

Answer 2

-Higher wage rate leads to expansion in supply of labour
-New workers enter the market due to attraction of higher wages
-Extent to which a raise in salaries will increase supply of labour depends on elasticity of supply

Question 3

Factors affecting labour supply

Answer 3

-Real wage rate
-Wages on substitute occupations
-Barriers to entry
-Occupational mobility of labour
-Non-monetary characteristics
-Net inward migration
-Income tax and benefits

Question 4

How does net inward migration affect the supply of labour?

Answer 4

Expands the available labour supply in an occupation such as NHS E.g. foreign nurses come to UK and increase NHS workforce

Question 5

How do barriers to entry affect supply of labour?

Answer 5

Artificial limits to an industry’s labour supply (e.g. minimum qualifications) can restrict supply and increase wages

Question 6

How do the Improvements in the occupational mobility of labour affect the supply of labour

Answer 6

Due to a result in expansion of apprenticeships and other types of work experience - increases numbers who can work in each job

Question 7

Factors influencing demand for labour

Answer 7

-Wage rates
-Prices of other factors of production
-Wages in other countries
-State of the economy
-Demand for the product
-Productivity of labour

Question 8

Definition of Marginal revenue product of labour

Answer 8

The extra revenue generated when an additional worker is employed

Question 9

What does elasticity of demand for labour measure?

Answer 9

Measures how responsive demand for labour is when there is a change in wages

Question 10

Factors affecting elasticity of demand for labour

Answer 10

-Substitutes
-% of total costs
-Time period
-Skills of labour

Question 11

How do substitutes affect elasticity of labour?

Answer 11

Lots of substitutes = Elastic demand
Few substitutes = Inelastic demand

Determines how easy it is to replace workers when their wages go up
e.g. Mcdonals workers are easily replaceable so demand is elastic. Not skilled or unique.

Question 12

How does time affect elasticity of supply?

Answer 12

In short run, if wages increase then demand will be inelastic as firms don’t have enough time to replace staff.
In long run, if wages increase then demand will be elastic as firms have enough time to replace staff.

Short run - no time for substitutes - unresponsive - inelastic

Long run - enough time for substitutes - responsive - elastic

Question 13

How does % of total cost affect elasticity of labour supply?

Answer 13

Wages are small % -> wage increase has small impact -> unresponsive -> inelastic

Wages are large % -> wage increase has large impact -> responsive -> elastic demand

Question 14

Define equilibrium wage

Answer 14

Refers to the wage rate at which quantity of labour supplied by workers and labour demanded by employers is equal

Question 15

Conditions for a competitive labour market

Answer 15

-Lots of employers and workers in the market
-Homogeneous workers
-Perfect information
-Mobility of labour
-No monopsony power

Question 16

Main causes of wage differentials

Answer 16

• Productivity of workers
• Compensatory wage differentials
• Trade unions
• Barriers to labour supply
• Employer discrimination
• Monopsonies

Question 17

Trade union evaluation points

Answer 17

-Economic changes - in the UK there has been a shift from manufacturing to a service-based economy which has led to a decline in traditionally unionised industries
-Legal changes - The UK has imposed various labour laws and reforms over the years that made it more difficult for unions to recruit and maintain members
-Changing workforce demographics - E.g. introduction of part-time jobs and 0-hour contracts

Question 18

Definition of a monopsony

Answer 18

A monopsony is when there is only one buyer in the market so they can pay whatever wages they want as they are the only place where people can work within that industry
E.g. NHS can pay their junior doctors as low a wage as they want as these junior doctors have nowhere else to work

Question 19

Definition of occupational immobility

Answer 19

Workers can’t move between jobs because they lack the skills needed for that job which is a labour market failure

Question 20

Explain how a monopsony can reduce the wages it pays its workers (3)

Answer 20

A monopsony is when there is only one buyer in the market (e.g the NHS is the only buyer of doctors in the UK)
A monopsony can reduce the wages it pays its workers and the workers will have to accept because they have nowhere else to work

Question 21

How does a national minimum wage work

Answer 21

If the minimum wage is above the equilibrium wage it causes the lowest possible firms can pay workers to increase so wages increase but so does unemployment

Question 22

How does a national maximum wage work

Answer 22

If the maximum wage is below the equilibrium wage it causes the highest possible wage that firms can pay workers to decrease. This improves equality. Wages decrease and so does employment

Question 23

Define geographical immobility

Answer 23

When workers struggle to move between areas, meaning they can’t move to fill new job opportunities it is a labour market failure

Question 24

How can the government intervene to reduce geographical immobility?

Answer 24

-Improve transport e.g. HS2 makes it possible to travel from London to Leeds in just over an hour meaning workers can travel up and down the country more freely

-Relocation subsidies - The government can give people, who are moving for work, money to cover costs, this helps workers take up jobs in new areas

Question 25

How can the government intervene to reduce occupational immobility

Answer 25

Provide training programmes to help people transfer between jobs so they can work Apprenticeships for younger people which incentivises them to work in a certain field

Question 26

Derived demand

Answer 26

Derived demand is demand for a factor of production (like labour) that is derived from the demand of another good/service. E.g. demand for builders is derived from demand for houses

Question 27

How does productivity of workers affect the labour market? +EVALUATION

Answer 27

If workers become more productive, then firms may demand more labour as the labour is now more productive. Each worker now has a higher Marginal revenue product, generating the firm more revenue and in turn more profits. This increases wages as demand for labour has increased, so workers will be able to demand higher wages. HOWEVER... If workers become more productive, firms may actually reduce demand for the workers because firms dont need as many workers to satisfy the demand for their goods/services. This is because the workers are more productive, so less of them are needed, reducing the wage costs for a firm, increasing profits as their fixed costs have decreased. This reduces the demand for labour in the labour market.

Question 28

What will happen to our labour market diagram for supermarket till workers, if the cost of capital decreases?

Answer 28

Demand will decrease to the left

Question 29

How does the cost of capital affect the labour market?

Answer 29

Capital and labour are substitutes. If capital machinery becomes cheaper than labour, then a firm will demand less labour which saves them money, increasing their profits due to lower costs

Question 30

How does migration impact the labour market?

Answer 30

Outward migration reduces supply of labour in one country but inward migration increases the supply of labour E.g. 20% of NHS nurses are immigrants into the UK In 2016, 330,000 people emigrated from Romania, reducing the supply of labour in Romania. However, many of these workers were skilled doctors who came to the UK and increases supply of doctors in the UK

Question 31

In 2016, the Conservatives announced they wanted to cut benefits by £6000 a year...how will this affect our labour market diagram for unskilled workers?

Answer 31

Supply will increase to the right

Question 32

What would happen to our labour market diagram for unskilled workers if the government decided to increase benefits?

Answer 32

Supply of labour decreases to the right

Question 33

Explain the effect on supply of labour if the government decide to increase benefits

Answer 33

If benefits increases, unemployed workers will have more income as the incentive to not work is higher. This may incentivise workers currently in employment to collect benefits instead of working, decreasing the supply of labour

Question 34

In 1974, the income tax rate for those in the top bracket increased to 83%. How would this 83% tax affect our labour market diagram for high income, highly skilled workers? (2 KAA + 2 EV marks)

Answer 34

Supply of highly skilled workers may decrease because a higher tax reduces the income they keep for working. This reduces the incentive to work, decreasing the supply of labour. However, some workers need to earn a certain amount of income (e.g. to pay off their mortgage each month). The higher tax means they will now have to work more hours to earn the same income (after the tax), so labour supply could actually increase!

Question 35

And on the flip side, when the tax rate came back down to 60% in 1979 - how would this tax cut affect our labour market diagram for high income, highly skilled workers? (2 KAA + 2 EV marks)

Answer 35

Supply of highly skilled workers may increase because a lower tax increase the income they keep for working. This increase the incentive to work, increasing the supply of labour. However, some workers just need to earn a certain amount of income (e.g. to pay off their mortgage each month). The lower tax means they will now be able to work fewer hours to earn the same income (after the tax), so labour supply could actually decrease!

Question 36

How will an increase in non-monetary benefits affect our labour market diagram?

Answer 36

Supply will increase to the right and decrease wages

Question 37

Impacts of monopsony power on firms

Answer 37

-Lower costs. -Fall in quality Suppliers make less supernormal profit and so reinvest less in improving product quality. As suppliers to the monopsonist may shut down, this could reduce the availability of key inputs. This could result in shortages or disruptions to the supply chain. -Risk of intervention from regulators. If the regulator believes monopsonist is abusing its market position by reducing prices for suppliers, it could intervene with fines or other sanctions. -Decreased wage costs, decreasesd fixed costs, decreased AC

Question 38

Impacts of monopsony power on consumers

Answer 38

-Lower prices, if the monopsony firm passes on its lower costs to consumers. -Lower quality of final goods As the monopsonist puts pressure on suppliers to cut costs. suppliers may cut back on quality and innovation to bring costs down. However if supernormal profits from the monopsonist are reinvested in improving product quality, consumers may be better off. -Reduced choice for consumers as some suppliers may shut down.

Question 39

Impacts of monopsony power on workers or suppliers

Answer 39

-Lower wages or prices -Lower quantity of inputs demanded (or lower employment in the case of workers). This leads to lower revenues, which reduces profits for suppliers. So suppliers may shut down or workers may leave the job market and work in a different sector. +Suppliers have a guaranteed market for their product. The monopsonist firm, who can earn supernormal profits, is less likely to go out of business. This gives a supplier a more reliable source of demand for their inputs. However, relying on one client may also lead to instability. If the monopsonist suddenly reduces demand for the input, suppliers who are dependent on the monopsonist could shut down. -Strike activity may be more likely, for example in the NHS, as lower pay leads to pay disputes.

Question 40

Evaluation for monopsony

Answer 40

-The level of regulation. A minimum price or wage may prevent firms from exploiting their monopsonist position by lowering prices or wages. -Whether trade unions exist. May strengthen suppliers’ bargaining power, leading to higher prices and wages. -How monopsonists use their supernormal profit (for investing back into the firm or for shareholder dividends).

Question 41

Monopsony diagram

Answer 41

Monopsonists can provide a wage of W2, which is lower than what they would charge in a competitive market

Question 42

Regulation of monopsony power

Answer 42

-Raising the minimum wage - Legally enforced wage floor, preventing monopsonist employers from paying below a certain level. Reduces wage suppression and improves earnings without major job losses when set properly -Strengthening Trade unions - unions give workers a collective voice, helping them negotiate better wages and working conditions. Might be accompanies by skills training, better childcare to reduce barriers which trap people in low-paid work

Question 43

Labour market application

Answer 43

-16% of jobs (4.5 million people) were compensated the new real living wage from April 2024 -As of April 2025, the NWM for workers aged 21 rose by 6.7% to £12.21

Question 44

Elasticity of demand for labour

Answer 44

How responsive demand for labour is to changes in wage