Labour Market

Cards (18)

  • Total population = potential workers + the rest
  • Potential workers = labour force + the rest
  • Labour force = unemployed + employed
  • Potential workers are divided into three categories:
    • Employed persons hold a paid full-time or part-time job.
    • Unemployed persons are without a job and are actively searching for a job.
    • “Not in the labour force” people are those without a paid job and not actively searching for one (hysteresis).
  • Unemployment rate = Unemployed / Labour Force * 100
  • Participation rate = Labour Force / Potential Workers * 100
  • The labour demand curve is the value of the marginal product of labour because profit-maximising firms hire workers until that value equals the wage.
  • A firm will hire if the marginal benefit is greater than or equal to the additional cost.
    • The marginal benefit is the value of the marginal product of labour - the increase in revenue resulting from hiring an additional worker.
    • The marginal cost is the market wage.
  • The labour demand curve slopes downward because the marginal product of labour diminishes as more labour is used.
  • The labour demand curve shifts when a change in any of the following occurs:
    • Derived demand
    • Technological progress and high productivity
    • Input prices of capital and land
  • The labour supply curve is derived from “Household Behaviour” - the choice between consumption and leisure (or non-market work).
  • An increase in real wage (relative price of leisure to consumption) induces substitution and income effects.
  • The labour supply curve is upward-sloping when the substitution effect is stronger than the income effect.
  • The labour supply curve shifts when a change in any of the following occurs:
    • Tastes or preferences
    • The opportunity cost of time
    • Population and demographics
  • Frictions are obstacles, or barriers, to the clearing of markets.
  • Wage rigidity is caused by
    • Minimum wage laws
    • Unions negotiating higher wages.
    • Firms paying higher wages to raise worker productivity
    • Workers resisting wage reductions
  • Workers are highly averse to reductions in wages, resulting in what economists call downward wage rigidity. As a result, most firms would rather fire some workers than cut the wages of all or many workers.
  • Similar to decomposing GDP into trends and business cycles, the actual unemployment rate can also be decomposed into:
    • The natural rate of unemployment – the average unemployment rate over an extended period
    • Cyclical unemployment – deviation of the unemployment rate from its natural rate