Week 10 - Labour markets

Question 1

What is the circular flow diagram?

Answer 1

Market for goods and services -> goods and services -> Households
Households -> money -> Market for goods and services

Market for goods and services -> money -> Firms
Firms -> goods and services -> Market for goods and services

Market for factors of production -> money -> Households
Households -> factors of production -> Market for factors of production

Market for factors of production -> Factors of production -> Firms
Firms -> Money -> Market for factors of production

Question 2

What is labour supply?

Answer 2

how we as workers make decisions on how much to work

Question 3

What are two options with how we spend or time (applying an economic model to the decision on how much labour to supply)?

Answer 3

1. Spend time earning money (working)
2. Spend time enjoying leisure

Question 4

How to draw a labour supply diagram to do with wage determination?

Answer 4

Consider a worker whose utility is defined as a function of leisure and
weekly income. An indifference map and budget line (the slope of which
is determined by the hourly wage) may be drawn:

x axis leisure
y axis income (weekly)
downward sloping line budget line
different indifference curves

Question 5

What does the point of tangency between the budget line and the highest attainable indifference curve determine?

Answer 5

hours of leisure demanded and labour supplied

Question 6

What does a decline in the wage lead to a change in the diagram?

Answer 6

an increase in leisure demanded, and a fall in labour supply due to income decreasing, causing the budget line to decrease too

Question 7

Is the substitution effect positive or negative?

Answer 7

The substitution effect of a wage change on labour supply is always positive

(i.e. the substitution effect of a rise in the wage always tends to increase labour supply, and the substitution effect of a fall in the wage always tends to reduce labour supply

it depends on the indifference curve as a decline in wage may increase leisure demanded, can also increase labour supply)

Question 8

Is the income effect positive or negative?

Answer 8

The income effect of a wage change on labour supply may be positive or negative

Question 9

When could the income effect dominate the substitution effect?

Answer 9

at high wages which could lead to a backward bending supply of labour

Question 10

What approach is there to increase working hours?

Answer 10

a two tier salary, paying more when you work eg weekends

this introduces a kink in the budget line, and ensures that workers will wish to supply more labour

Question 11

What approach is there to reduce working hours in the country?

Answer 11

charge income tax, payable only over a certain threshold, also makes the budget line kinky

might encourage workers not to go beyond the kink

Question 12

What is labour demand?

Answer 12

the amount of labour that employers seek to hire during a given time period at a particular wage rate

Question 13

What is the marginal product of labour?

Answer 13

the additional output a firm gets by employing one additional unit of labour

Question 14

What does the law of diminishing marginal product show?

Answer 14

shows how, eventually, the
addition to output generated by the last unit of a factor (e.g. labour) employed declines

Question 15

What does multiplying the marginal product of labour (MPL) by output price give?

Answer 15

the marginal value product of labour (MVPL)

Question 16

What is the wage in a perfectly competitive labour market?

Answer 16

is the marginal cost of labour,
and each firm treats it as given

Question 17

What is the marginal value product of labour?

Answer 17

the money value of the additional
output a firm gets by employing
one additional unit of labour

Question 18

Where will a profit maximising firm in a perfectly competitive market employ workers up to?

Answer 18

the point where w=MVPL

Question 19

What happens if the market price of labour decreases?

Answer 19

will hire more workers since its cheaper

Question 20

What does the workers attractiveness to the employer depend on?

Answer 20

not only on how many units of
goods she produces, but also on the price of the good and on the wage rate

The MVPL is therefore the labour demand curve of a perfectly competitive profit maximising firm

Question 21

What should the MPL be multiplied by if the firm has monopoly power in the product market?

Answer 21

MPL should be multiplied by MR (not price) to give the labour demand curve (the MRPL).

Question 22

What does the labour diagram look like if the firm has monopoly power in the product market?

Answer 22

MRP is the left of MVP. Since monopoly produces less output than a competitive firm, it will also employ fewer workers.

Question 23

What does the labour diagram look like if the firm has monopsony power in the labour market?

Answer 23

MCL will be upward sloping
Profit maximisation occurs where MCL = MRP, but wage is determined by the average cost of labour (= labour supply)

Question 24

What is monopsony?

Answer 24

one buyer and many sellers (eg NHS)

Question 25

When do firms gain monopsony power?

Answer 25

when workers arent constantly searching for alternative employment

Question 26

What does a minimum wage graph look like?

Answer 26

x axis labour y axis £ wage Demand and supply curves market wage and labour set a minimum wage above equilibrium new labour demand and labour supply causes excess supply of labour, unemployment

Question 27

What does minimum wage cause in a monopsony?

Answer 27

can raise employment, MCL becomes the minimum wage (up to the point where ACL passes above it)

Question 28

What does differences in pay reflect?

Answer 28

differences in the corresponding marginal value product of labour but even if people appear equally talented and hard-working, we may observe differences in their incomes

Question 29

What are 4 reasons why we may observe differences in incomes?

Answer 29

1. the human capital theory 2. trade unions 3. compensating wage differentials 4. discrimination by employers winner takes all too?

Question 30

What is the human capital theory?

Answer 30

a theory of pay determination that says a worker's wage will be proportional to his or her stock of human capital

Question 31

What factors are included in human capital?

Answer 31

education, training, experience, intelligence, energy, work habits, trustworthiness and initiative that affect the value of a worker's marginal product

Question 32

How may two workers with the same amount of human capital earn different wages?

Answer 32

if one of them belongs to a labour union

Question 33

What is a trade union?

Answer 33

a group of workers who bargain collectively with employers for better wages and working conditions

Question 34

What is compensating wage differential?

Answer 34

wage differences associated with differences in working conditions we expect jobs with attractive working conditions will pay less than jobs with poor conditions

Question 35

What does employer discrimination refer to?

Answer 35

refers to wage differentials reflecting an arbitrary preference by an employer for one group of workers over another

Question 36

What is customer discrimination?

Answer 36

the willingness of consumers to pay more for a product produced by members of a favoured group, even if the quality of the product is unaffected

Question 37

What are winner take all markets?

Answer 37

difference in human capital do much to explain observed differences in earnings. Yet earnings differentials have also grown sharply in many occupations within which the distribution of human capital among workers seems essentially unchanged like sports market

Question 38

What is an example of trends in inequality?

Answer 38

Families in the bottom 20 per cent of the income distribution saw their share of national income decline from 4.1 to 3.4 per cent, whereas the highest 20 per cent of the income distribution saw their share of national income increase from 43.5 to 50.3.

Question 39

What is a way of measuring the distribution of income or wealth?

Answer 39

gini coefficient

Question 40

What is the gini coefficient?

Answer 40

A measure of equality of distribution of income or wealth by percentages of households or individuals from poorest to richest. It provides a basis for comparing distributions on a objective numerical basis.

Question 41

How is the gini coefficient graph constructed?

Answer 41

If the income of the population was perfectly equally distributed, then any x per cent of the population would earn x per cent of the income. – 45 degree line

Question 42

What is the gini index coefficient?

Answer 42

A/ (A+B)

Question 43

What is the lorenz curve?

Answer 43

the graph of the cumulative distribution of income or wealth by percentages of households or individuals from poorest to richest

Question 44

What is the x and y axis of the gini coefficient?

Answer 44

x axis: accumulative percentage of households y axis: accumulative percentage of income/ wealth