labour markets

• Labour market


  Composed of sellers of labour (households) & buyers of labour (firms)
• Demand for labour


  Derived demand - it depends on the demand for goods/services
• If demand for goods/services increases


  The demand for labour will increase
• If demand for goods/services decreases


  The demand for labour will decrease
• Factors that influence the demand for labour

  • The price of the product being produced
  • The demand for the final product
  • The ability to substitute capital (machinery) for labour
  • The productivity of labour
• If the selling price of the product increases

  It increases the marginal revenue product of labour & the firm will demand more labour
• When an economy is booming

  Demand for most goods/services will be high, and the demand for labour will be high
• When an economy is in a recession


  Demand for most goods/services will be lower, and the demand for labour will be lower
• If it is more cost effective to switch production from using labour to capital (machinery)

  Demand for labour will fall
• If the productivity of labour increases

  This will lower average costs & firms will likely demand more labour
• Demand for labour


  The quantity of labour that employers would wish to hire at each possible wage rate
• Derived demand


  Firms hire workers in order to produce goods to meet their aim, usually of making a profit
• Factors influencing demand for labour

  • Wage rates
  • Demand for the product
  • Prices of other factors of production
  • Wages in other countries
  • Technology
  • Regulation
• Price elasticity of demand for labour

  The responsiveness of the quantity demanded of labour to the wage rate
• Factors affecting PED of labour

  • Price elasticity of demand for the product the labour produces
  • Proportion of wages to the total cost of production
  • Availability of substitutes
  • Time
• Supply of labour

  The ability and willingness of people to make themselves available to work at different wage rates
• Factors influencing supply of labour

  • Wages
  • Population and distribution of age
  • Non-monetary benefits
  • Education/training/qualification
  • Trade unions and barriers to entry
  • Wages and conditions of other jobs
  • Legislation
• The labour market should operate in the same way as any other, but labour is not a perfectly free market
• Occupational immobility

  Workers find it difficult to move from one job to another because of a lack of transferable skills
• Geographical immobility


  Workers find it difficult to move from one place to another due to the cost of movement, family etc.
• The UK suffers from a severe skills shortage that could cost £90bn a year following Brexit
• Elasticity of supply

  The responsiveness of supply to a change in wage rates
• Factors affecting elasticity of supply

  • Level of qualifications and training
  • Availability of suitable labour in other industries
  • Time
• Wage rates differ within an occupation due to age, education, training, work experience, skill/talent/ability to perform tasks, sex and ethnic background
• Perfect competition in the labour market

  Wages are determined purely by demand and supply, and all workers are paid the same
• Monopsony in the labour market

  There is only one buyer of the labour, so the firm will employ where MC=D at a lower wage and quantity than in perfect competition
• Monopoly in the labour market


  Trade unions can operate as the only seller of labour, setting barriers to entry or a specific wage rate
• Union


  An organisation with members who are usually workers or employees, which protects the rights and pay of workers through a process of collective bargaining
• Ways unions could increase wages

  1. Set barriers of entry to reduce supply

  2. Set wages at a specific wage and ensure workers are not prepared to work for less, creating a kinked supply curve
• Teachers' unions lobbied for a rule which means that all teachers must have degrees
• Kinked supply curve


  • Supply is perfectly elastic up to output of QS and if the company wanted to employ more than this, they would have to increase wages further
• Firm employs


  Where supply is equal to demand, at QDW2
• Both methods of increasing wages by unions will lead to higher wages but cause a fall in employment from the perfectly competitive equilibrium of Q1W1
• Government reducing power of trade unions

  1. Introduced postal ballots

  2. Outlawed secondary picketing

  3. Restricted the size of the picket line

  4. Forced unions to provide 14 days' notice of action

  5. Trade Union Act 2016 included a clause saying that at least 50% of people must vote in the ballot
• Bilateral monopoly


  It is possible for there to be both monopoly and monopsony in a labour market
• Firm is a monopsonist and wants to employ at Q2W2


  Union may decide to set a minimum wage at W1 and ensure that there is no one willing to work below this price, creating a kinked supply curve
• The wage that is set will depend on the relative bargaining strength of both the firm and the union
• In a time of economic recession and unemployment


  Unions may have less bargaining power and wage is most likely to be down at W1
• In times of full employment


  Unions may have the power to influence and wages could be at W3
• Unions can have a positive impact on both wages and the number of people employed: they are able to increase wages to W3 without negatively impacting the number of workers