labour markets

• labour market?


  set of arrangements allowing buyers and sellers to come into contact

  consists of the demand and supply of labour

  a factor market as it if a market for one of the factors of production

  determines the price of labour/ wage

  different labour markets for different jobs as they require different skills
• derived labour?

  demand that comes from the demand for something else

  The demand for factors of production is derived from the demand of the good or servicesit produces

  eg demand for doctors as people require medical services
• demand for labour curve?

  downward sloping, higher wages mean lower quantity of labour demanded

  higher wages represent higher costs for firms

  As wages rise firms will replace labour with machinery
• determinants of demand for labour?

  productivity of workforce

  derived demand for labour

  government employment subsidies

  change in the cost of capital
• productivity on demand for labour?

  if output per head rises, unit costs fall so the firm can charge lower prices. This means quantity demanded rises and the firms need more labour to produce extra output

  If productive, firms will be more likely employed than machines
• derived demand for labour?

  demand for labour is derived from the demand for services it produces, so any changes to demand of item it produces also changes demand for labour. May be due to:

  incomes, population and economic activity changes
• government employment subsidies on demand for labour?

  subsidies reduce cost of production for firms, increasing the supply of the good, which reduces the price of the good and increases the quantity demanded. This causes an increase in the demand for labour
• change in cost of capital equipment on labour demand?

  capital equipment is a substitute for labour, so if it becomes cheaper the demand for labour will fall as labour is replaced by machines
• elasticity of demand for labour?

  the responsiveness of the quantity demanded for labour to changes in the wage rate

  ED labour= % change in Qd/ % change in wage rate

  Always negative as a negative relationship: as wages rise, quantity demanded falls

  Inelastic curve is steeply sloping
• determinants of elasticity of demand for labour?

  time

  elasticity of demand for the product

  proportion of labour costs to total costs

  availability of substitutes
• time as determinants of ED of labour?

  in the long run, it’s easier to substitute labour for capital if wages rise and therefore demand is more elastic. In short run, firms may not be able to react to higher wages due to employment contracts, and they may not want to lose their skilled workers which are hard to recruit, making ED inelastic
• proportion of labour costs on ED for labour?

  if labour costs are a small proportion, then demand for labour will be inelastic as a rise in wages will have little effect on the price of the good, so demand for the item produced will fall by a small amount
• availability of substitutes on ED for labour?

  if substitutes are available it’s easy to substitute other factors of production for labour if wages rise, making demand for elastic
• supply of labour curve?

  upward sloping, higher the wage rate the higher the quantity of labour supplied. Higher wages represent a greater reward for working

  Widens the gap between income for benefits and income from work

  as wages rise opportunity cost of not working rises
• determinants of supply for labour?

  size of population, immigration policy changes, changes in social attitudes, changes of wage rate in other labour markets, changes to tax and benefit system, changes to training and education system, changing to school leaving age and retirement age, changes in power of trade unions
• elasticity of supply for labour?

  The responsiveness of quantity supplied of labour to changes in the wage rate (price of labour)

  ES labour= % change in quantity supplied/ % change in wage rate

  Always positive as a positive relationship
• determinants of ES of labour?

  time- in the long run, the supply of labour is more elastic as it takes longer for changes to reach workers, and new skills to be gained

  mobility of labour- the more mobile labour is, the more elastic supply will be. If workers are geographically and occupationally mobile, they can respond to changes in wage rates by seeking a job in another market
• factor mobility?


  the ease of which the factors of production can be transferred between alternative uses and locatios

  If a factor of production is immoble, it cannot easily move between alternative uses or locations so may become unemployed- the economy will not be operating on the PPF
• wage differentials?


  the difference in wages between workers with different skills in the same industry, or between those with comparable skills in different industries or locations
• causes of wage differentials?

  compensating wage differentials- high risk or anti social hours

  skills/qualifications

  discrimination

  profitability in different industries- bonuses

  inherited privilege

  trade unions

  labour mobility- perfectly competitive labour market?
• perfectly mobile labour?


  all workers would be paid the same as if one labour market has higher wages, workers will move between the markets, reducing the supply un the lower wage market and increasing the supply in the other. Brings equilibrium into balance, creating a perfectly competitive labour market

  Issues regarding family ties, housing costs, requiring specific skills
• minimum wages?


  a wage rate below which employers cannot pay

  A legal/ statutory MW: imposed by the government

  A trade union imposed MW: union threatens strikes or industrial action
• effect of minimum wage- unemployment?

  when imposed, the demand for labour decreases as firms want to employ less workers and replace them with capital. At the same time, the supply of labour rises as the incentive to work is higher.

  Results in excess supply of labour creating unemployment
• effects of minimum wage- positive?

  unemployment only occurs when the wage was previously below minimum wage so does not affect certain industries such as medicine.

  MW benefits those on lower incomes who have a higher MPC so this additional expenditure, throiugh the multiplier boosts AD. The demand for labour then increases, reducing unemployment
• minimum wage advantages?


  improves equity

  creates labour market incentives (supply side policy)

  reduces discrimination

  reduces relative poverty
• minimum wage disadvantages?


  creates unemployment

  reduces international competitiveness

  May deter FDI

  Effect on relative poverty is questionable- does not benefit those who cannot work such as single parent households
• ED of demand for labour?

  Higher wages increase firms costs causing the price level to rise. If demand if inelastic, the demand for labour will fall less than proportionately to the price increase. If elastic the demand for labour will fall more than the price increase