The labour market

• What is meant by "derived demand" in the context of labour markets?

  The demand for labour is derived from the demand for the goods and services that workers help produce. If the demand for a product increases, the demand for the labour to produce that product also increases.
• What does the marginal productivity theory of labour state?

  The theory states that firms hire workers based on their Marginal Revenue Product (MRP), which is the additional revenue generated by hiring one more worker. Firms will employ workers until MRP = Wage Rate.
• What is the Marginal Product of Labour (MPL)?

  The MPL is the additional output produced by employing one more worker, holding all other factors of production constant.
• How is Marginal Revenue Product (MRP) calculated?

  MRP = MPL × Price of the Product. It represents the additional revenue generated by employing one more worker.
• How is the demand curve for labour typically shaped?

  The demand curve for labour is typically downward sloping, meaning that as wages increase, the quantity of labour demanded decreases due to diminishing marginal returns to labour.
• What are some causes of shifts in the labour demand curve?

  1. Changes in demand for the product.
  2. Technological advancements.
  3. Changes in the price of related inputs (e.g., raw materials).
  4. Changes in capital (machinery).
  5. Changes in government policies (e.g., subsidies, taxes).
• What factors determine the elasticity of demand for labour?

  • Substitutability: If workers can be easily replaced by technology, demand is more elastic.
  • Proportion of Labour Cost to Total Cost: Higher labour cost makes demand more elastic.
  • Time Period: Demand is more elastic in the long run than in the short run.
• What factors influence the supply of labour to different markets?

  • Monetary considerations: Wage rates and non-wage financial rewards (e.g., bonuses, benefits).
  • Non-monetary considerations: Job satisfaction, working conditions, work-life balance, and social factors (prestige, job security).
• How is the labour supply curve typically shaped?

  The labour supply curve is upward sloping, meaning that as wages increase, the number of workers willing to work increases.
• What causes shifts in the labour supply curve?

  • Changes in the working-age population.
  • Changes in immigration levels.
  • Changes in education and training.
  • Changes in non-monetary factors (job satisfaction, working conditions)
• What characterizes a perfectly competitive labour market?

  A perfectly competitive labour market has many employers and workers, no barriers to entry, homogeneous workers, full information, and free movement of labour.
• How is the wage rate determined in a perfectly competitive labour market?

  The wage rate is determined at the point where the labour demand curve intersects the labour supply curve, representing the equilibrium wage where labour demand equals labour supply.
• What happens if wages are set above the equilibrium wage in a perfectly competitive labour market?

  If wages are above the equilibrium, a surplus of labour (unemployment) occurs, as employers hire fewer workers at the higher wage.
• What happens if wages are set below the equilibrium wage in a perfectly competitive labour market?

  If wages are below the equilibrium, there is a shortage of labour (labour shortage), as employers will demand more workers than there are willing to supply at the lower wage.
• What is a monopsony in the context of the labour market?

  A monopsony is a labour market where there is only one dominant employer (or a few employers), giving them market power to set wages and employment levels lower than in a competitive market.
• How does a monopsony affect wages and employment?

  In a monopsony, the employer sets wages lower than the competitive equilibrium and hires fewer workers because they have market power to exploit the workers' supply.
• How do trade unions influence wages and employment levels?

  Trade unions negotiate for higher wages and better conditions. They can shift the labour supply curve left, leading to higher wages. In a monopsony, unions can also increase both wages and employment by raising wages closer to the competitive level.
• What happens when trade unions enter a perfectly competitive labour market?

  In a perfectly competitive labour market, unions will raise wages above the equilibrium level, causing a decrease in employment because firms reduce hiring due to higher labour costs.
• What happens when trade unions enter a monopsony labour market?

  In a monopsony, trade unions can increase both wages and employment by pushing wages to the competitive equilibrium and encouraging employers to hire more workers.
• What is the effect of the National Minimum Wage (NMW) on the labour market?

  If set above the equilibrium wage, the NMW leads to a surplus of labour (unemployment). If set at or below equilibrium, there is no effect on employment but ensures a minimum income for workers.
• What are the advantages of implementing a National Minimum Wage?

  1. Reduces poverty and income inequality.
  2. Guarantees a minimum standard of living for low-paid workers.
  3. Provides an incentive for workers to join the workforce.
• What are the disadvantages of a National Minimum Wage?

  1. It can cause unemployment, especially for low-skilled or young workers.
  2. Increases costs for businesses, leading to price rises or fewer workers hired.
  3. May not be sufficient in areas with high living costs or too high in areas with low costs.
• What is wage discrimination in the labour market?

  Wage discrimination occurs when workers with identical qualifications, experience, and productivity are paid differently based on characteristics like gender, ethnicity, age, or disability.
• What are the conditions necessary for wage discrimination to occur?

  Wage discrimination occurs when employers have the power to segment workers based on non-productive characteristics (e.g., gender, race), and they pay them differently despite equal productivity.
• What is the impact of wage discrimination on workers, employers, and the economy?

  • For workers: Discrimination results in lower wages, fewer career opportunities, and reduced job satisfaction.
  • For employers: Discrimination leads to inefficiencies, as the best candidates may be overlooked.
  • For the economy: Discrimination causes inefficiency, as resources (labour) are not allocated according to productivity.
• What are some real-world examples of wage discrimination?

  • Gender Pay Gap: Women earn less than men for the same work in many industries.
  • Ethnic Discrimination: Ethnic minorities face lower wages and fewer job opportunities despite equal qualifications.
• What is diminishing marginal returns in the context of the demand for labour?

  Diminishing marginal returns occur when each additional worker adds less to total output than the previous one. This principle explains why the demand curve for labour slopes downward: as more workers are hired, their individual contribution to production decreases.
• How does technology affect the demand for labour?

  Technology can either increase or decrease the demand for labour. In cases of labour-saving technologies (e.g., automation), fewer workers may be needed, shifting the demand curve to the left. On the other hand, labour-enhancing technologies (e.g., computers in offices) can increase the productivity of workers and raise demand for labour, shifting the curve to the right.
• What is the substitution effect in the context of the demand for labour?

  The substitution effect refers to the impact on labour demand when firms substitute capital (e.g., machines) for labour. As wages rise, firms might substitute expensive labour with cheaper capital, reducing the demand for labour. Conversely, when wages fall, firms may hire more workers in place of capital.
• What is the income effect in the context of labour supply?

  The income effect suggests that as wages increase, workers may choose to work fewer hours because they can achieve their desired income in less time. This is especially relevant in the case of high wages or for workers with a high marginal utility of income.
• What are wage differentials?

  Wage differentials refer to the differences in wages paid for different jobs, occupations, or industries. These differentials arise from factors such as skill levels, training, experience, location, and the level of demand for specific jobs.
• How does human capital affect the supply of labour?

  The supply of labour is influenced by the level of human capital (skills, education, and experience) workers possess. Higher human capital increases a worker's productivity, making them more attractive to employers and potentially increasing the wage rate they can command.
• How does migration impact the supply of labour?

  Migration increases the supply of labour, especially in sectors where there is a shortage of workers. Immigrants often fill low-skilled jobs, which can lead to downward pressure on wages in those sectors. However, migrants can also contribute to higher-skilled sectors, enhancing productivity.
• What is labour market equilibrium?

  Labour market equilibrium occurs when the quantity of labour demanded equals the quantity of labour supplied at the prevailing wage rate. At this point, there is no surplus or shortage of workers, and the market is "cleared."
• What happens in a labour market disequilibrium?

  A labour market disequilibrium occurs when the wage rate is set above or below the equilibrium wage. If wages are above equilibrium, there will be a surplus of labour (unemployment). If wages are below equilibrium, there will be a shortage of labour (a labour shortage).
• What is the effect of a minimum wage on the labour market?

  If the minimum wage is set above the equilibrium wage, it can cause a surplus of labour (unemployment) because firms may not hire as many workers at the higher wage. If it’s set below the equilibrium, there is no effect on employment, but workers are still guaranteed a minimum wage.
• How do trade unions affect wage negotiations?

  Trade unions negotiate on behalf of workers for better wages, benefits, and working conditions. They can shift the labour supply curve to the left, increasing wages by reducing the supply of workers willing to work at the lower wage rates and improving overall labour market conditions.
• What determines the bargaining power of trade unions?

  The bargaining power of trade unions depends on:

  1. Union Density: The percentage of workers in a union within an industry.
  2. Elasticity of Labour Supply: If the supply of labour is inelastic (few workers with the skills required), unions have more bargaining power.
  3. Economic Conditions: In times of economic growth, unions are stronger, while in recessions, they may be weaker.
• What is economic rent in the labour market?

  Economic rent refers to the extra income that workers receive above what they would be willing to accept. For example, a highly skilled surgeon might earn a wage that is higher than the amount they would accept due to the limited supply of qualified surgeons, which creates economic rent.
• What is discrimination in the labour market?

  Discrimination in the labour market occurs when workers are paid differently or are given unequal opportunities based on non-productive characteristics such as gender, ethnicity, age, or disability, rather than their qualifications or performance.