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2.6 The labour market (31/03/2018) (21/05/2018)
Terms in this set (26)
What type of demand is labour?
Labour is derived demand.
- When firms demand workers it's because they need them to make goods that are being demanded by their customers . So the demand for the labour is driven by the demand the good the labour would produce - this is derived demand.
- When demand for these goods increases, so does the demand for labour. When demand for goods decreases, the derived demand for labour also decreases, resulting in unemployment.
What is the marginal productivity theory?
- The marginal productivity theory says that demand for any factors of production depends on its marginal revenue product (MRP).
- The marginal revenue product of labour is the extra revenue gained from the firm by employing one may worker.
- MPRL is calculated by multiplying marginal physical product of labour ( output produced by the additional worker) by the MR.
- Firms will only hire workers if they add more to a firm's revenue then they add to its costs. If an extra worker produced 10 units per hour that were sold for £12 each, the MPRL would be £!20. As long as the worker costs less than this to employ (per hour) it's profitable to employ the extra worker.
What is the MCl in a perfectly competitive market?
- The cost of hiring one additional worker is called the marginal cost of labour (MCl). In a perfectly competitive market the MCl is equal to the wage paid to the additional worker.
- In a perfectly competitive market the firm cannot influence the wage - the wage is the market equilibrium wage.
- When the MRPl is equal to the market equilibrium wage, the firm has the optimal number of workers to maximise profits.
- When MRPl is greater than wage, a firm could increase its profits by employing more workers - the firm is employing too few workers.
- When MRPl is less than wage, workers are adding more to costs than they are to revenue, so the firm is employing too many workers.
How is a firm's demand for labour affected by productivity?
- Generally a firms' demand for labour will decrease if wages rise. However, this depends on whether the wage increase is accompanied by an increase in productivity.
- Higher levels of productivity reduce unit labour costs. Unit labour costs are labour costs per unit of output.
- So, if wage increase is accompanied by an equivalent increase in worker productivity , this means unit labour cost stay the same and demand for labour is unaffected.
- High unit labour costs suggest there's low productivity and this would reduce a country's international competitiveness.
How is the MRPl curve also the demand curve for labour?
Anything that affect the MRP will shift the demand curve for labour:
- A change to the price of goods sold (MR) - if demand falls for a firm's product and price falls, this would decrease he firms' demand for labour and the MRPl would shift to the left.
- Factors that affect labour productivity - e.g. if new technology or training increases the productivity of workers, this would increase the price for labour and cause the MRPl curve to shift to the right.
What is wage elasticity of demand for labour?
Elasticity of demand for labour measures the change in demand for labour when the wage level changes. It's calculated by dividing the percentage change in the quantity of labour demanded by the percentage change in the wage rate.
Factors that influence elasticity of demand for labour:
- The demand for labour is always more elastic in the long-run as firms can make plans for the future to replace labour. In the short-run changes are difficult to make so demand for labour will be elastic.
- If labour can be substituted easily by capital, the demand for labour will be elastic.
- If wages are a small proportion of firms' total costs then demand will be more inelastic - this is because a wage increase will have little demand on the total costs. If wages are a large proportion of a firms' total costs then demand for labour will be more elastic - even small wage increase will have a large increase on total costs.
- Important to consider the price elasticity of demand for a product, as the more price elastic demand for a product is, the more elastic the demand for labour will be. In this situation, when wages rise firms aren't able to pass the increase in costs to consumers by increasing prices.
- An individual's labour supply is the total number of hours that the person is willing to work at a given wage rate.
- For an occupation, the labour supply is the number of workers willing to work in that occupation at a given wage rate.
- The supply curve for labour in an occupation slopes upwards, as generally as wage rate for labour rises, the quantity of labour supplied increases.
What are the pecuniary and non-pecuniary factors that affect the supply of labour in the long-run?
Pecuniary benefits: this is the welfare a worker gains from the wage they receive.
Non-pecuniary benefits: This is the welfare a worker can gain from the non-wage benefits of the job.
- flexible working hours
- employee discount
- a generous holiday allowance
- convenience of job location
- training available
- opportunities for promotion
- job security
- perks of a job e.g. ( a company car)
Firms offering non-pecuniary benefits can encourage workers to supply more labour at a given wage rate. So they can effectively cause the position of the labour supply curve to shift.
What are other factors that affect the supply of labour?
- The size of the working population in an area or the country as a whole. For example, if there's an ageing population with a large proportion of people in retirement then there may be insufficient workers to meet the demand for labour.
- The competitiveness of wages - workers may pick the job that will pay them the highest wage. Firms/industries that pay poor industries may struggle to attract enough labour.
- The publicising of job opportunities - it may be difficult to attract sufficient workers to a particular job/industry if jobs are not advertised effectively.
What is the elasticity if supply of labour for low-skilled jobs?
- In low-skilled jobs the supply of labour tends to be elastic. This means that a small rise in the wage rate causes a proportionately larger rise in the quantity of labour supplied. This is because there's a large pool of low-skilled workers and many may be unemployed and looking for work.
- It's also important to remember that most low-skilled jobs tend to have similar wage rates. If one low-skilled job increases its wage rate, even by a small amount, low-skilled workers from other occupations will be attracted quickly.
What is the elasticity of supply of labour for skilled jobs?
- The supply curve for skilled jobs such as doctors and pilots tend to be inelastic, particularly in the short-run.
- If there was a shortage of doctors in the UK, a rise in the wage rate would not be enough to increase the supply in the short-run as it takes several years to train to become a doctor. Increasing wage rates would have the effect of persuading more people to choose medicine at university, but this would only have an effect in the long-run.
- The mobility of labour is also another important factor that affects the elasticity of labour supply. If workers are occupationally mobile or geographically mobile then wage rises will cause a greater increase in the supply of labour, therefore labour supply will be more elastic.
What are wage differentials?
- Wage differentials are difference in wages between different groups of workers, or between workers in the same occupation.
Reasons why these differentials exist:
- Workers that are highly skilled tend to be payed more e.g. if they're highly trained or have high-level qualifications.
- Wages vary in different regions and between industries.
- A trade union can influence the wage rate paid to a group of workers.
Wages will probably be higher if demand is high and inelastic, and supply is low and inelastic. Wages tend to be low when demand is low and elastic, and supply is high and elastic.
- A trade union is an organisation formed to represent a group of workers. E.g. Professional Footballers Association (PFA)
- One of the main purposes of a trade union is to bargain with employees and get the best outcome for its members. For example they can bargain for improved pay, better working conditions and job security.
- What a trade union negotiates with an employer this is called collective bargaining. Collective bargaining can be done at a national level (e.g. secure a pay rise for all workers in an industry) or at a plant level (negotiating improved working conditions for employees at an individual workplace.
- Productivity bargains can be made where unions agree to specific changes that'll increase productivity in return for higher wages and other benefits for its members. Trade unions also have the a role in making sure workers are safe at work by making sure any laws about working conditions are adhered to. They can also protect workers from discrimination.
History of trade unions?
- At their peak in 1979, the trade unions in the UK were powerful and had around 13 million members.
- During the 1980s, when Margaret Thatcher was Prime Minister, the Conservative acted to reduce the power of trade unions - e.g. by making it more difficult for trade unions to go on strike. The government at the time saw weakening the trade unions as a supply-side policy that would help make the UK industry more flexible and competitive.
- There was a huge decline in large manufacturing industries in the 1980s and 1990s, which had huge trade union membership. This de-industrialisation meant that there was a shift in employment towards jobs in the service sector where unions tend not to exist, so union membership fell sharply.
- Modern trends in the economy have reduced membership further. Workers on flexible contracts and part-time workers are less likely to join unions.
- Since the mid-1990s trade union membership has remained fairly stable at around 7 million members.
Why may trade union wage negotiations result in unemployment?
- Trade unions cause labour market failure by forcing wages up to a level higher than the market equilibrium wage - causing a surplus of labour. Some of a firm's income is re-distributed to the workers and its cost of production increase.
- Without trade union action firms would pay the equilibrium wage rate (We) and the level of employment would be (Le).
- When the trade union forces the wage rate up to Wt this means firms can't employ workers for less than that wage.
- At a higher wage (Wt) there's an oversupply of workers- there's insufficient demand for the number of workers willing to work, so there's unemployment and this is a labour market failure.
- The level of unemployment caused by the wage increase depends on the elasticity of the labour demand curve.
- Takes place when employers with monopsony power pay different wage rates based on different workers' willingness to supply labour.
- Wage discrimination is common in professions where employees negotiate their own pay and conditions- some people will be able to negotiate higher wages than others for the same job.
- In general there are some categories of workers that are likely to be prepared to work for lower wages e.g.
- Young workers may be more interested in gaining experience than a high wage.
- Part-time workers may be willing to work for lower wages if they're not the main wage earner in the household.
- Some immigrants will accept lower wages of they're higher than the wages they could earn in their country of origin.
Advantages and Disadvantages of Wage discrimination?
- As employer's wage costs will be reduced, it can increase demand for labour providing more jobs.
- Can lead to exploitation of vulnerable workers, who could be forced to accept low wages. Could force wages down for all workers in a market.
- Reduced the cost of wages, which can lead to higher profits.
Disadvantages: Can require additional administration. Can lead to industrial unrest if workers know about the differences in wages.
- Could lead to increased employment levels through increased demand for labour.
- Could lead to increases in inequality, so benefits may be required to 'top up' low wages.
What is labour market discrimination?
Labour market discrimination is when a specific group of workers is treated differently to other workers in the same job.
- Racial discrimination can occur when employees only want to work with and employ people from a particular ethnic background. They're prepared to pay a price for this- the loss of productivity from not employing a worker that's perhaps less suited to the job.
- The gender pay gap is where the average rates are lower for Women than they are for men. Part of this pay gap is though to be due to discrimination by employers that are prepared to pay male employees more than female employees for doing the same job.
In the UK this sort of discrimination is against the law. The Equality Act of 2010 replaced all previous anti-discrimination laws and made discrimination illegal in the UK.
Discrimination can also lead to an unequal distribution of wealth and income and can lead to a misallocation of resources, reduced efficiency and increased costs.
Why do employees who discriminate incur increased costs?
- Employers who are influenced by their own prejudices believe that the marginal revenue product (MRP) of the discriminated group of workers is lower than it really is. This means they demand fewer of these workers.
- When demand falls the MRP/demand curve shifts left, which means wages go down for the discriminated group.
- By discriminating like this, firms have fewer workers to choose from. By ignoring workers who may have been more suited to the job and more efficient, they increase their costs of production. Increased costs lead t increased prices.
Why does discrimination lead to increased costs for government and economy?
- The government may need to increase welfare payments to support discriminated workers.
- Discriminated workers working for unfairly low wages will also reduce the government's tax revenues, which would be higher if these workers were paid fairly.
- If discriminated workers aren't in a job that's well suited to them (e.g. if they're overqualified) their levels of productivity can fall. When output and efficiency fall, a country may loose international competitiveness. This could negatively affect the country's balance of payments, reducing the sale of exports and in turn, causing unemployment.
- People are classed as economically inactive if they're not working and not looking for work. Economically inactive people are considered by economists as a waste of scarce resources.
- People are economically inactive for several reasons:
- They care for the sick, elderly or young people.
- They're in full-time education.
- They have a long-term illness or disability.
- They're choosing not to find a job or have given up.
It can be good for some people to be economically inactive:
- People who look after family members may actually save the government money. For example, the benefits paid to people caring for an elderly relative may be more expensive than the cost of providing professional care.
- Those in full-time education are going to add value to the economy in the future when they will increase the quality of the labour force.
However people who are inactive due to long-term illness or disability, but are still able to work represent market failure. Labour is a scare resource and these people can still add to the economy's output if work can be found for them.
Why do labour markets suffer from imperfect information?
Imperfect information is another source of market failure:
- Many workers end up in jobs that aren't the best fit for them and don't pay enough.
- Employers end up with workers who aren't productive as they could be, which increases the costs of production and makes their goods less competitive.
Imperfect information increases frictional unemployment. When people are between jobs they need to spend time researching to the right job. If they had the benefit of perfect information, their task would be simpler.
Why do skill shortages increase the costs of production for a firm?
- A shortage of anything drives up its price. Therefore shortages of skilled labour drive up the wage costs for firms, which in turn increases their costs of production.
- A shortage also means firms may be forced to employ workers who don't have the desired skills, which will reduce productivity and quality levels.
- Training can increase employee skills and make them more productive, but employers can be reluctant to provide it as they often worry about other firms poaching their newly trained employees without incurring the cost of training.
- Encouraging the immigration of workers with certain skills is one way of tackling skill shortages.
What is the problem with unemployment?
Unemployment is a waste of scarce resources as it means the economy isn't making the use of all its resources effectively.
For example, if everyone in an economy had a job and an employer wanted to higher a worker, they would have to offer them a higher wage than their current job. A firm could offer better non-pecuniary benefits instead, but this would still increase costs.
Unemployment only becomes a serious market failure if it's at a high level and persists for a long period of time. The replacement ratio is how much a person would earn if the were unemployed to how much they'd earn if they were employed.
If the replacement ration is too high this means people would be better off if they'd choose not to work and claiming unemployment benefits than working on low wages - this is called the unemployment trap.
What is the national minimum wage?
- The NMW sets a legal minimum hourly rate of pay for different age groups. A NMW was first introduced by the UK government in 1999 to stop firms setting wages so low that their employees couldn't afford a decent standard of living. Prevents the exploitation of workers.
- By increasing the pay of the poorest workers a NMW leads to a more equitable distribution of income.
- A NMW encourages people to get a job as it improves the replacement ratio.
Advantages and disadvantages of a NMW?
- Introducing a NMW may help those on very low incomes and reduce the level of poverty in a country.
- A NMW may also boost the morale of workers as they'll receive a better wage. Happier workers tend to be more productive, so output may increase as a result.
- A NMW means there's a greater reward for doing a job that pays the NMW. It gives people more of an incentive to get a job rather than be unemployed.
- The government's tax revenue is likely to be better if a NMW is introduced.
- A NMW can increase wage costs for firms. This may mean they have to cut jobs resulting in increased unemployment.
- A NMW could decrease the competitiveness of UK firms compared to firms in other countries that have lower wage costs.
- UK firms may have to pass on increased wage costs to consumers by increasing their prices, and this could contribute to inflation.
- There are doubts whether introducing a NMW really decreases poverty. This is because many of the poorest members of society, such as the elderly and disabled, are not in work.
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