Interaction of labour marker

• The determination of occupation/industry equilibrium wage rates in a competitive labour market

  These are set by the meeting point of the industry supply and demand curves (We)​. Firms are wage takers -the supply is perfectly elastic (wage = AC = MC) because if they set lower wages workers would not accept the wage​. The theory assumes labour markets are flexible and there is perfect information and freedom of entry and exit​. The firm will maximise profits by employing at Q1 where MRP of labour = MC of labour.
• Wage differentials

  Differences in wages between workers with different skills in the same industry or those with comparable skills in different industries.
• Labour market diagram for an unskilled job such as a cleaner or retail assistant

  A) S

  B) D = MRP

  C) Q

  D) Q1

  E) W1

  F) W

  
• Labour market diagram for a skilled job such as a lawyer

  A) W

  B) Q

  C) D = MRP

  D) S

  E) W2

  F) Q2

  
• Monopsony employer

  A labour market structure in which there is a single or dominant buyer of a particular type of labour e.g. NHS & nurses. This means that the employer has buying power over their potential employees and so this gives them wage-setting power (Wage makers).
• The impact of a monopsonist employer on a labour market

  A profit maximising monopsonist will operate at the point where MCL = MRPL. However, this will result in a wage rate and quantity of labour that is less than it would be in a competitive labour market. This impact will be greater in some industries more than others.
• Diagram showing the effects of monopsonist employer on a labour market

  A) MCL marginal cost of labour

  B) AC

  C) D=MRP

  D) Q

  E) Q1

  F) Q2

  G) W

  H) W1

  I) W2

  
• Trade union

  A collection of workers usually in the same or similar industry that collectively bargains for the workforce on issues like fairness of pay, working conditions and benefits
• Trade Union Density

  The percentage of people employed in an industry who are members of a trade union.
• Diagram showing the impact of a strong trade union on a labour market

  A) excess supply of labour

  B) S

  C) D

  D) Q

  E) Qusantity supplied

  F) quantity demanded

  G) W

  H) wage rate

  I) Quantity of labour

  
• The impact of trade union activity depends on:

  > The elasticity of the demand for labour

  > TU density​

  > If pay deals are linked to productivity

  > TU mark up​

  > If the TU is in a monopsony labour market

  > Legislation

  > Structure of the economy​

  > Competitive pressures
• Bilateral monopoly

  A labour market in which there is a single or dominant seller of labour (Trade Union) and a single or dominant buyer of labour (monopsonist).
• Bilateral monopoly diagram

  A) Marginal Cost of labour

  B) Average cost of labour

  C) D = MRP

  D) W 2

  E) W 1

  F) Q1

  G) Q2

  H) Q

  I) W

  
• Arguments for trade unions having a positive impact on labour markets

  > Counterbalance monopsony

  > Represent workers

  > Improved working practices can increase labour productivity

  > Closer harmony between workers & management

  > Higher wages can lead to greater motivation & productivity
• Arguments for trade unions having a negative impact on labour markets

  > Unemployment

  > Cost-push inflation

  > Lost productivity due to strikes

  > Confrontation

  > Less relevant in the gig economy -hard to organise
• Labour market flexibility

  The degree to which demand and supply in a labour market respond to external changes (such as changes in demand for a product or in population size) to return the market to equilibrium.
• Occupational mobility of labour

  The extent to which workers are willing and able to move between different occupations requiring different skills.
• Geographical mobility of labour

  The extent to which workers are willing and able to move geographical region to take up new jobs.
• Government methods for increasing labour market flexibility

  > Better education & training - e.g. if workers have transferable skills their flexibility would improve

  > Easier to hire and fire workers

  > Reduce minimum wages

  > Encourage immigration

  > Improvement of infrastructure e.g. public transport, internet
• Sub-labour markets​

  For example, within the labour market for footballers, there will be highly specialized groups such as the 'best strikers' etc
• Human capital​

  The skills and educational attainment of workers
• Nominal wages​

  The monetary amount of wages for a worker
• Real wages

  ​Nominal wages minus inflation e.g. if nominal wages rise 7% but inflation is 2.5%, then real wages rise 4.5%
• The working age population

  ​This is defined as everyone between 16 and 65
• Labour force​

  This is everyone who is working or actively seeking work. It excludes people who are students, early retirees or long-term disabled
• Dependency ratio

  % of dependents (children, OAPs)/ working age population (16-65)
• Replacement ratio

  Gross income after retirement/ gross income before retirement
• Participation rate​

  This is the number of people working or actively seeking work as a % of the working population (16-65)
• Government methods for increasing labour market flexibility

  > Trade union reform - Reducing TU power industries without a strong monopsony may increase the flexibility of workers to move in and out of the industry

  > Improvements in technology e.g. remote working and people can be employed at great distance

  Government methods for increasing labour market flexibility.

  > Job training schemes - education and training to build up skills needed to work in a specific job.

  > Infrastructure - improving public transport and fast internet speeds may allow the geographical mobility of the workforce
• Government methods for increasing labour market flexibility

  > Legislation - some laws reduce labour market flexibility e.g. redundancy laws which result in a financial penalty if a firm wishes to reduces its workforce even if the workforce is no longer necessary. However laws like zero hours contract allowed firms to be more responsive when employing workers
• Cause of labour market failure can be due to the inflexibility of labour
• Reasons for wage differentials

  > Differences in revenue creation of different workers (MRP) - labour is not homogenous

  > Differences in skills & qualifications - labour is not perfectly mobile

  > Differences in labour productivity

  > Differences in conditions of work - compensating wages

  > Discrimination - labour is not homogenous

  > Trade Unions / Monopsonies - drive up/down wages