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FIRM: An organisation that brings together factors of production in order to produce output

DERIVED DEMAND: Demand for a g/s not its own sake but for what it produces. Labour is demanded for the output it produces

WAGE RATE: The price fims must pay in order to obtain a certain amount of labour

At lower wage rate there is more demand for labour as profits from output will be higher. In the Long term firms can increase capital stock and increase their demand

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  • output labour produces
  • the productivity of labour
  • wage rate
  • price of g/s firm produces


  • the extent to which other factors of production can be substituted for labour
  • share of wages in costs
  • short run - capital is inflexiable in the short run
  • PED of output - limits the extent to which an increase in wage rate can be passed down to consumers
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  • high wage rate = more people are willing to work
  • people from outside will join the market
  • wage rate acts as a signal for workers about which jobs offer the best returns


  • unemployment benefits
  • non wage benefits and costs
  • rate of immigration

PARCITIPATION RATE: The proportion of the population of working age who are in employment/ seeking work. this excludes students, retired etc.

DISCOURAGED WORKERS: Those who have failed to gain employment and are no longer looking

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WR< W* means there is more demand than supply- vancies aren't filled and firms have to offer higher WR to attract labour

WR>W* means there is more supply than demand - wages drift down


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MIGRATION: affects supply of labour and helps enable expansion in the parcitipation rate, increases potential capacity, contributing to economic growth.

occurs due to push and pull factors which can cause brain drain in the country of origin- minimised if workers send money back home

GOV. INTERVENTION: the gov. provides UE benefits and these need to balance to provide protecton for those unable to find work

  • high UE benefits = inhibit labour force parcitpation - works will opt to live on benefits than do low skilled jobs
  • low UE benefits = inhibit flexibility of labour market - people will be reluctant to leave their jobs in search of other ones
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PROGRESSIVE TAXATION: those on higher incomes should pay a higher tax

this will redistibute income within society & prevent inequality of labour becoming too extreme

taxation system too progressive = decentives workers

point where the marginal tax rate too high (T*) = large % of income taxes away = decentive for workers to supply additional effort

need to balance incentives against the distorton caused by having too much inequality


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Gov. set minimum wage rate below which firms aren't allow to pay workers


  • protect workers against exploitation
  • increase incentives to work + decrease voluntary UE
  • increase the standard of living + reduce poverty

no effect if its below the equillibruim

if it is above equillibruim D<S and involuntary UE is created as workers can't find work


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An organisation tha negociates with employers on behalf of its members with the objective of:

  • wage bargaining - WR>W* = causes UE
  • better working conditions
  • secure employment for members - less likely to lose jobs/ be more productive = better firms effeciency

the more inelastic demand for labour is the more dependant firms are on labour = less UE

POV OF ALLOCATIVE EFFICENCY: trade unions prevent WR from acting as a reliable signal to workers & firms - leads to subopitmal allocation of resources  

flexibility contributes to good resource allocation allowing workers to move from declining to expanding sectors and allowes firms to produce output to match patterns of consumer demand  

LABOUR FLEXIBILITY: Trade union activity can limit the entry of workers in market

they make is more difficult for firms to adapt to changes in market condition

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