The labour market

• Labour is derived demand
• The demand for labour is affected by:

  • The wage rate -> the higher the wage, the less demand
  • Demand for the product which is derived from labour
  • The productivity of labour -> the more productive, the higher demand
  • Availability of substitutes -> if labour can be replaced for cheaper capital, the demand will shift left
  • The profitability of the firm -> more profit allows them to employ more and expand
  • The number of firms in the market
• The marginal productivity theory of the demand for labour states that equilibrium will occur when the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour
• If the demand of labour is inelastic, due to few substitutes or high skills needed, then unions can force higher wages, without having much affect on employment
• What effects the elasticity of labour:

  • How much labour costs as a proportion of total costs
  • How many substitutes there are
  • The price elasticity of demand for the product
• The higher the cost of labour as a proportion of total costs, the more elastic the demand.
• The supply of labour is the number of worker willing to work at the current wage rate. It is influenced by both monetary and non - monetary factors
• wage is the price of labour
• Marginal Physical Product x price = Marginal revenue product of labour
• The optimum employment decision for a profit maximising firm is when marginal revenue product = marginal cost of labour
• The higher the labour costs as a percentage of total costs, then labour demand is more wage elastic
• When labour can be substituted easily and cheaply for capital / machinery, the wage is more elastic
• The more price inelastic the good is, the higher the labour costs the firms can pass to consumers, making the wage rate more inelastic
• In the long run, it is easier for firms to switch from labour to capital, making the ware rate more elastic
• A perfectly competitive labour market has many buyers (firms), many sellers (workers ), no one has market power, there is perfect information and homogeneity of labour
• Arguments for NMW


  Reduce relative poverty

  Reduce the amount the governments spends on 'top up' welfare benefits

  Reduces the possibility of the poverty trap

  Encourage workers to be more productive

  Encourage firms to invest in training
• Arguments against NMW


  Classical Unemployment

  Poorest people (pensioners / unemployed ) wont benefit

  Firms may seek to employ illegally and undercut the pay floor

  Firms pass on wage increase to consumers, causing cost push inflation

  Reduce competitiveness of UK