The Labour Market

Ch7+8 economics AQA

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What is demand for labour?
Derived demand for the products they will be producing.
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What is the individual firm's demand for labour determined by? (4 factors- 2 on this card)
1.Price of labour →rise in wage rates which exceeds any rise in labour productivity will raise unit labour costs and lead in a contraction in demand 2. Productivity →As output per worker per hour increases, the more attractive labour becomes.
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(next 2)
3.Prices of other factors of production- e.g. capital becomes cheaper, firms may substitute some of their workers w. machines. 4.Supplementary labour costs- e.g. increase in employer’s National Insurance contributions will mean a fall in demand
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What does the marginal productivity theory state?
demand for workers depends on their marginal revenue product.
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What is the marginal revenue product?
the revenue generated for the firm by employing one extra worker. It is the result of the worker’s marginal (physical) product (MPP) and the marginal revenue (MR) derived from each additional unit sold.
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Hence MRP=
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Where is the equilibirum quantity of labour established?
where the marginal cost of taking on an additional unit of labour equals its marginal revenue product.
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Why is this?
because firms will be willing to take on an extra worker as long as the worker’s MRP exceeded the cost (W) of taking the extra unit of labour on. →extra workers are employed up until MRP = W.
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Draw diagram with MRP curve and supply of labour... (employment x-axis, wage rates y-axis). Why is the curve that shape?
Should be able to draw diagram. MRP tends to rise at first, and then falls as diminishing returns sets in.
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What is the elasticity of demand for labour?
A measure of the responsiveness of the quantity demanded of labour to changes in the wag rate. The formula is: (percentage change in quantity of labour demanded)/(percentage change in wage rate)
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Give 4 factors affecting elasticity of demand for labour.
1)Time period- easier to substitute labour for other factors of production in LR 2)Availability of subs 3)Elasticity of demand for product made- mirrors the elasticity of demand for workers 4)The proportion of labour cost to total cost
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What is the supply of labour? What does it consist of?
the total number of hours that labour is willing and able to supply at a given wage rate. consists of those who are economically active
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Define a)economically active b)unemployed c)monetary factors
a)those who are either currently in work or are actively seeking work b)those who are not actually in work, but are actively seeking it c)the financial rewards to a particular occupation e.g. wages, commissions, bonuses
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d)Participation rate e)Economically Inactive f)Non-monetary factors
d)calculation of % of population of working age that is economically active. e)those not part of the labour supply, since they are neither in work nor seeking it f)the non-financial rewards to a particular occupation e.g. holidays, leisure time
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What are the non-monetary factors affecting the supply of labour? (8) (should be able to explain how)
1)Status 2)Convenience and flexibility 3)Promotional prospects 4)job security 5)working conditions 6)Holidays/leisure time 7)perks and fringe benefits 8)job satisfaction
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What are the monetary factors affecting the supply of labour? (5) (should be able to explain how)
1)Wages 2)Real wage rate on offer 3)Overtime 4)Substitute occupations 5)Barriers to entry
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What is the net advantage concept? you should be able to illustrate this with a diagram- if cannot ...refer to notes!
The overall reward, taking into account both monetary and non-monetary factors, should be equal across the various industries in which a particular occupation could be practised.
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What are the factors affecting the supply of labour to a particular firm? (4- should be able to explain how each affect it)
1)Availability of training 2)Location 3)Level of unemployment 4)Opportunities for overtime work
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What does the backwards bending individual supply curve for labour illustrate (should be able to draw it)
at high wage levels an increase in wage will actually lead to a reduction in hours of labour supplied. -individual worker will need to work fewer hours to earn his/her target level of income which gains them the standard of living they aspire to
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What is the substitution effect?
If wages rise, the opportunity cost of leisure rises. Hence an individual will substitute extra hours of work, replacing hours of leisure.
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What is the income effect?
: the individual might opt for more leisure time whilst maintaining a sufficient level of income…
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What does the elasticity of supply measure? + give equation
the responsiveness of the quantity of labour supplied to a change in the real wage rate- varies from industry to industry. (percentage change in quantity of labour supplied)/(percentage change in wage rate)
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What are the factors affecting the supply of labour to an industry? (4- should be able to explain how each affect it)
1)Skills + qualifications 2)Length of training period 3)sense of vocation 4)time period
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Draw the model of wage determination in a perfectly competitive market
if cannot draw, refer to notes + should also be able to explain it
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If the labour market for the economy as a whole was perfectly competitive, what would happen?
Everyone would be paid the same amount as they have the same skill set and if wages in one job were to rise, supply would increase and drive wages back down until pay gap was eliminated
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So why do wages differ? (5 reasons- should be able to explain each)
1)Each worker is unique 2)Market forces equalise net benefits to workers rather than wages 3)labour isn't perfectly mobile 4)lack of competition on supply-side due to TU's 5)lack of competition on demand-side due to powerful monopsonist employers
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What is economic rent?
The difference between what a person is paid and what they could earn in their next best employment opportunity = total earnings- transfer earnings
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The more inelastic the supply..
...the greater the economic rent
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What is transfer earnings?
What someone could earn in their next best occupation.. equivalent to the minimum a worker must be paid in order to keep them in their current job
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Use the example of footballers and nurses to explain wage differentials
Demand for nurses= elastic (Easier to substitute than footballers) Supply of nurses = elastic- there is a non-monetary benefit and there is a larger pool of nurses that can be employed.
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Demand for footballers =inelastic (must possess talent hence difficult to sub), supply of footballers =inelastic (natural ability + lots of training needed).
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Should be able to draw diagram demonstrating differences in elasticity and hence wages
if cannot- refer to notes
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What is discrimination in labour market?
when a group of workers or potential workers are treated differently to other workers in the same job in terms of pay, employment, promotion, training opportunities and working conditions
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What is negative discrimination?
When workers of similar ability are treated less favourably than others, and are paid lower wages because of race, gender, age or disability. Prejudice leads employers to believe that MRP of these groups is lower than it really is
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How does negative discrimination have supply-side effects? (3 steps)
workers who are refused employment look elsewhere --> increases supply of labour to firms who don't discriminate --> leads to lower wages for groups discriminated against
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The costs of negative discrimination are..? (7 things- 3 on this card)
1)Will lead to lower pay for the groups who experience the negative discrimination 2)Such groups will find it harder to find work, or may result to taking less demanding jobs than they are qualified to do. 3)May also not be considered for promotion
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next 2...
4)Firms themselves will have less workers to chose from if they discriminate; will increase their production costs & damage their international competitiveness 5)Higher costs are likely to be passed onto consumers
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next 2...
6)Potential economy wide effects as government spending on welfare benefits may have to be increased to support the incomes of groups discriminated against 7)Opportunity costs arise if time & money is spent introducing & monitoring legislation to e
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What is positive discrimination..?
Firms may discriminate in favour of certain groups. Employers perceive the MRP of a particular group of workers to be higher than it actually is.
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What happens to demand curve?
further to the right than it should be; some groups will earn higher wages than others of
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What is affirmative action?
When the government positively discriminates in order to offset negative discrimination
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What happened recently in relation to discrimination?
Conservative party recently launched the Equal Pay and Flexible Working Bill, for which it hopes to secure cross-party support, mainly in a bid to address what it sees as pay discrimination against women.
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What is TU's key role and how do they do this?
to seek better wages for their members through collective bargaining with management, with the pay for a group decided by a single negotiation
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Why is this considered a market imperfection?
the supply-side of labour market is no longer competitive
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What is a 'closed shop'?
When every worker in an occupation is a member of a single union- union density = 100% and acts as a monopoly supplier
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What does it imply?
The firm will not receive any supply of labour until it accepts the wage demands of the unon
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What happens to the supply curve for labour?
- Effective labour supply curve (S=AC) is perfectly elastic at the wage demanded by the union (W2), but beyond the kink, higher wages are necessary to elicit further extensions of supply... (should be able to draw this)
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What are the 2 outcomes
1)higher wages than in competitive market 2)unemployment created due to contraction of labour demand from higher wages and extension of supply
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What does the extent of this unemployment depend on?
the elasticity of demand for labour
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What is a trade union mark up?
The % by which the wages of the union members exceeds those of non-union members who are doing the same or comparable work
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What has lead to a decline in union membership over recent years? (3 factors)
1)Increasing product market pressure 2)restructuring economy- decline in heavy industry where TU were strong, labour more dispersed in service sector- harder for TU to organise 3)Gov. policy- reducing TU power was a key SS-policy of conservative gov.
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Why was TU power targetted by the conservative government? + what policies were used?
It was seen as a major obstacle to labour flexibility. 1)secondary picketing was made illegal
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What are the benefits of a TU? (4)
1)reduced wage discrimination by collective negotiations 2)reduce exploitation 3)raise standards of health and safety 4)education and training for workers
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In what cases do TU's not necessarily create unemployment... 4 circumstances (3 on this card)
1)higher wages have minimal effect on employment if there's inelastic demand for labour 2)protects jobs if countering the power of a monopsonist 3)- Unionised workers may feel less need to switch jobs in search of better conditions
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last circumstance
4)may help raise moral amongst workers by improving pay and conditions. This may make labour more productive, making the workers more valuable to the employers and hence less likely to be laid off as a result of higher union wage. 4)
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Facts and figures in UK for TU's
33 million in workforce... 7 million in TU... 15% in private sector... 60% in public sector
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What is a monopsony employer
Describes a situation where a single firm accounts for all, or a substantial proportion, of the employment in a labour market. It is a sign of lack of competition on the demand side of the labour market.
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Why is MCL>ACL in hiring an extra worker?
a higher wage must be offered not just to the new worker, but also to all the other workers.
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Draw the diagram for a monopsony and analyse it. What does it show?
That a monopsonist reduces both wage levels and employment in comparison to a competitive labour market
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What is a bilateral monopoly?
A monopsony with trade union
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How does it work?
A closed shop trade union renders the monopsonist once again a wage-taker.
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You should be able to draw and analyse the bilateral monopoly diagram. What does it show?
With a monosponistic employer, employment is higher with a union present than without, meaning they don't always destroy jobs. This is because the monopsonist now the wage taker can employ additional workers up to a point w/out paying more to all
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What is a national minimum wage?
A price floor whereby every employer has to set its wage rate on or above; if they don’t they can be prosecuted & fined.
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Give 5 advantages of NMW (3 on this card)
1)helps to alleviate poverty 2)offers greater incentive to work for those who receive it 3)a morale boost from higher wages could lead to a productivity boost- MRP shifts right eliminating excess supply and hence unemployment
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(2 on this card)
4)could increase both employment and wage in case of monopsonists 5)if successfully increases wages, should increase AD which would then increase demand for labour
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Give 6 disadvantages of NMW (3 on this card)
1)contraction in demand with extension in supply of labour (unemployment) 2)unemployment disproportionately effects the young, whose inexperience results in lower MRP 3)raises costs of firms, making them uncompetitive in international markets
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(3 on this card)
4)potentially inflationary 5)fails to account for regional differences in cost of living 6)not well targeted.. often recipients are second wage earners in household and hence aren't in poverty. those who need help are unemployed + hence won't benefit
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Card 2


What is the individual firm's demand for labour determined by? (4 factors- 2 on this card)


1.Price of labour →rise in wage rates which exceeds any rise in labour productivity will raise unit labour costs and lead in a contraction in demand 2. Productivity →As output per worker per hour increases, the more attractive labour becomes.

Card 3


(next 2)


Preview of the front of card 3

Card 4


What does the marginal productivity theory state?


Preview of the front of card 4

Card 5


What is the marginal revenue product?


Preview of the front of card 5
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