The labour market


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  • Created on: 06-04-15 10:55
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  • The labour market
    • The Demand for labour, Marginal Productivity theory
      • Factors influencing the firms demand for labour
        • Demand for output produced
        • The Price of labour
        • Productivity
        • The price of alternative factors of production
        • Supplementary labour costs
      • Marginal Productivity theory
        • Demand for workers depends on their MRP which is the moneytary value of the physical addition to a firms total output from employing one extra worker
        • The equilibrium for labour is when the marginal ccost of labour = MRP
        • When deciding whether or not to employ someone a firm must think about:
          • How fair will total out put rise and by how much?
          • By how much will total revenue rise when the extra output is sold in the goods market?
          • How much will total costs of production rise by paying the extra wage?
        • MRP (marginal revenue product)= MP (Workers output) x Marginal Revenue (MR)
        • Definition
          • In the short run the more workers a firm employs the more output increases due to the benefits of division of labout this increases MP    After a certain employment level MP begins to fall as each worker is less productive than the last due to diminishing marginal returns
          • The MRP curve of labour = the demand curve of labour
          • MRP is hard to measure as its hard to measure the productivity of workers
      • The elasticity of demand for labour
        • Determinants of the elasticity of demand for labour
          • Time - the more often the wage rate changes the more elastic so the elasticity of demand of labour is more elastic in the long run
          • The availability of substitutes- so if workers are easily swapped for machines its more elastic
          • The elasticity of demand for the product - so if the demand for the product is more elastic the demand for labour is more elastic
          • The proportion of labour cost to total cost - so if a large amount of your total costs are labour then there will be a higher elasticity of demand for labour
        • Definition
          • It is the responsiveness of the quantity of labour demanded to the change in wage rate
          • Elasticity of demand for labour = %change of labour demanded / % change of wage rate
      • The labour market is an example of a factor market where labour is a form of derived demand
      • Firms demand labour when MRP=MC
    • The Supply of labour
      • Definition
        • The labour supply refers to those who are economically active
        • The reasons people supply labour are:
          • Monetary reasons
            • The financial rewards to a particular job
            • Wages, bonuses
          • Non Monetary reasons
            • The none financial rewards to a particular job
            • Discounts, ease of job, passion, holiday, ability
        • Occupations with high none monetary rewards will have a higher supply than those with low none monetary rewards as people are prepared to work at a lower rate
      • The elasticity of supply of labour
        • The elasticity of supply of labour is the responsiveness of the quantity of labour supplied to a change in wage rate
        • The elasticity of supply of labour depends on:
          • Time - more elastic in the long run as there is more time to find alternatives
          • Training - The longer the training period the more elastic in the long run
          • Skills and qualifications required
          • Sense of vocation
      • The backward bending supply curve of labour
        • Definition
          • For individuals the opportunity cost of supplying an extra hours work is an extra hour of leisure
          • The backward bending supply curve of labour suggests at higher wage levels an increase in wages leads to a reduction in hours supplied. Because the worker can work fewer hours to earn their target income.
        • Substitution effect
          • This dominates at lower wage rates as wages rise workers substitute an extra hour of leisure with an extra hour of work
        • Income effect
          • Once a worker has achieved their target level of income they can work fewer hours for the same overall pay
        • Implications for government policy
          • If the supply curve is upward sloping an increase in tax disincentivises workers
          • If the supply curve is backward bending an increase in tax incentivises workers
    • Types of Labour Market
      • Perfectly competitive labour market
        • A perfectly competitive labour market has the following features:
          • Many firms (large numbers of buyers and sellers)
          • Perfect information (about wages and job conditions)
          • Firms are offering identical jobs
          • Many workers with homogeneous skills
          • No buyer or seller can influence the ruling market wage by their own actions
          • Free entry and exit into the market
        • Description
          • Each employer passively accepts the ruling market wage rate. In order to maximise profit when selling the output produced by labour the firms must chose the level of employment at which :
            • The addition to sales revenue resulting from the employment of one extra worker = The addition to production costs resulting from hiring the services of extra workers
          • MRP = MCL (Marginal revenue product = Marginal cost of labour)
        • Evaluation
          • In reality labour skills are not homogenous as we are all different and there is no perfect information
          • Firms do not offer identical jobs
          • There are barriers to entry to reduce barriers labour needs to be mobile
        • Imperfectly competitive labour markets
          • In reality labour markets are very much imperfect with the extreme of imperfection being a monopsony labour market
      • Monopsony labour market
        • Monopsony means there is only one buyer in the market i.e only one employer
        • A monopsonists level of employment is where MCL==ACL where L1 workers are employed but the equilibrium is at point A making the wage rate w1
        • Examples are the government (the NHS, education) and farming
    • The influence of trade unions
      • Definition
        • The main way trade unions achieve there aims is collective bargaing. It involves the pay for a group of workers being decided through a single negotiation.
        • A trade union is an organisation of workers whos aim is to improve the pay and other conditions of work of its members
        • Closed shop is something that keeps none union workers out of the labour market
        • With out a trade union the competitive wage rate is W1 which shifts to W2 with a union any labour below L3 us supplied perfectly elastically if employers want to hire workers above L3 they must charge more than W1. This causes excess supply of labour leading to classical unemployment
      • Assumptions
        • It is a monopoly supplier of labour
        • It is able to keep none members out of the labour market and prevent workers supplying their labour below the trade union wage rate
        • It can fix the wage rate it choses and employment is determined by the amount of labour that employers will hire at this rate
        • The assumptions are unrealistic
      • Effect on a monopsonist labour market
        • A none unionised labour market is at W1 adding a trade union to a monopsony has the same effect on supply as in the perfectly competitive firm
      • National minimum wage
        • A national minimum wage is the lowest wage at which employers could employ their workers it has the same diagram as a perfectly competitive labour market.
        • Untitled
    • Wage differentials
      • Definition
        • These exist when labour markets are not perfectly competitive and are differences in wages that occur between different groups of people
      • Benefits
        • Incentives
        • Encourages people to work
        • Encourages enterprise
        • Promotes efficient resource allocation
        • The trickle down effect
      • Why they exist
        • Demand and supply
          • Economic theory suggests that wages will be high when demand is high and inelastic and supply is low and inelastic
          • Wages will be low when supply is high compared to demand and both are elastic
        • Relative bargaining strength
          • Jobs that are not easy to replace have more bargaining strength than those that are
        • Government policy
          • National minimum wage has a large impact on low skilled workers. Ageing population so government spend more money on health therefore higher demand for doctors
        • Esteem
          • Some jobs are perceived as important this boosts their MRP
        • Differences between skilled and unskilled workers
          • Skilled workers have higher wages due to higher demandand less suplly making the MRP higher
      • Wage discrimination
        • Definitions
          • This is when workers get paid different amounts for doing the same job
          • Negative discrimination is when a group of workers is treated less favourable than others and positive discrimination is when theyre treated more favourable
          • Flexible working bill - Getting paid the same but with flexible hours e.g. maternity leave
          • Equal pay - The principle of non discrimination in compensation for work. It states that pay should be based on the kind and quality of work done
        • Costs of negative discrimination
          • For workers
            • Lower pay
            • Harder to find work
            • Will settle for lower skilled jobs than capable of doing
          • For a firm
            • Fewer workers to chose from this increases production costs and reduces international competitiveness meaning higher costs for the consumer causing a loss of reputation (vicious circle)
          • For an economy
            • Increased government spending on welfare benefits
            • Opportunity cost of the time money spent on moniotring legislation
      • Examples
        • Differences between male and female workers
          • Females on average have a lower degree of attatchment to the work force
          • Women are more likely to move in and out of the labour force and take substantial career breaks like maternity leave
          • Time spent out of the labour force causes a loss of experience lowering MRP
          • The age at which women tent not to be economically active is the age at which most progress up the career ladder
        • Differences between ethnic groups
          • Workers from minority group are on average less qualified suggesting a lower MRP. Immigrants may speak English as a second language reducing productivity and employability
          • Ethnic minorities are often concentrated in poor areas where the state of the local economy lowers MRP and employment prospects
          • Discrimination may lead employers to perceive the MRP of a worker to be below their productivity
        • Differences between full and part time workers
          • Part time workers get paid less in total than full time workers due to shorter hours
          • The hourly rate for part time workers is less than for full time due to higher demand especially for women with families
    • The distribution of income and wealth
      • Definition
        • Income is a flow of factor incomes such as wages, rent and interest
        • Wealth is a stock of financial and real assets such as property, savings and land
      • Causes
        • Differences in pay in different jobs and industries
          • High growth industries enjoyed above average increases in pay and earnings
          • Worst paid jobs are still found in lower skill service sector industries
        • The effects of unemployment
          • Causes relative poverty
          • Many workers have no or limited skills
        • Falling relative incomes of people dependant on state benefits
        • Changes to the tax and benefit system
      • How its measured
        • The Lorenz curve
          • The further the lorenz curve lies below the line of equality the more unequal the distribution of income
        • The Gini coefficient
          • It is a commonly used measure of income inequalty it condenses the income distribution for a country into a number between 0 and 1. The higher the number the more unequal the society
          • Gini= Area of section A/ Area of section B
      • Advantages
        • Some wealthy members of society contribute to funding and charities if it were less ewual there would be more money donated
        • There would be less incentive for entrepreneurs to set up their own business leading to decreased innovation and a shift in AD and AS
        • People should recieve more money for working harder and this can contribute to higher national output incentivising workers
        • Trickle down effect. By earning money and setting up a new business jobs are being created then the employed spend more
        • If thier skills merit it people deserve higher incomes
      • Disadvantages
        • It would have negative impacts on the growth of an economy
        • It would limit the overall possible growth and mean any growth that occurs wont benefit the majority of the population therefore only high earners benefit
        • The more unequal the society the more inefficiency can cause a reduce in demand
        • If firms have monopoly power this leads to the redistribution of income from consumers to shareholders of monopolies
        • Unfair distribution occurs when some firms have monopsony powers as they can set wage rates
        • Income has a diminishing marginal utility i.e the more you earn the less essential it is
        • It can lead to social friction and cause riots and crime
        • It can cause unemployment and relative poverty
  • Imperfectly competitive labour markets
    • In reality labour markets are very much imperfect with the extreme of imperfection being a monopsony labour market

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