labour structures

• Labour market

  A factor market where the supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers
• Derived demand

  The demand for labour comes from the demand for what it produces
• Demand for labour

  Related to how productive labour is and how much the product is demanded
• Wage rate

  Leads to movements along the supply and demand curves for labour
• Demand for labour

  • Affected by: wage rate, demand for products, productivity of labour, substitutes for labour, how profitable the firm is, the number of firms in the market
• Supply of labour

  • Affected by: demographics of the population, wage rate, migration, advantages of work, leisure time, trade unions, taxes and benefits, training
• Geographical immobility of labour

  Obstacles which prevent the factors of production moving between areas
• Occupational immobility of labour

  Obstacles which prevent the factors of production changing their use
• Labour market equilibrium

  Determined where the supply of labour and the demand for labour meet, which determines the equilibrium wage rate
• Wages are 'sticky' and do not adjust to changes in demand, due to the minimum wage
• Factors causing wage differentials

  • Formal education
  • Skills, qualifications and training
  • Pay gaps
  • Wages and skills
  • Gender
  • Discrimination
• Impact of migration on labour markets

  More competition for jobs, migrants bring high quality skills, migrant labour affects wages of lowest paid
• The UK government aims for near full employment, with an unemployment rate of around 3%
• The employment rate in the UK peaked at 73.2% in December 2014, falling to 70.1% during the financial crisis, and is currently 5.4% (as of Feb)
• Migrant labour affects the wages of the lowest paid in the domestic labour market, by bringing them down. However, this impact is only small. For the medium and higher income households, it is hard to find evidence of worker displacement or depressed wages.
• The skills of migrant labour could substitute those of the domestic market

  Workers could be replaced
• If the skills complement the domestic labour market

  There could be a welfare gain through higher productivities
• In the UK, the government aims to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.
• In December 2014, the employment rate peaked at 73.2%. The employment rate fell during the period of the financial crisis to 70.1%. Currently the unemployment rate in the UK is 5.4% (as of February 2015). It fell to a seven year low in May 2015.
• Unemployment

  A problem since, if consumers are unemployed, they have less disposable income and their standard of living may fall as a result. There are also psychological consequences of losing a job, which could affect the mental health of workers.
• If the unemployment rate increases


  The government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere. The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.
• Unemployment creates an opportunity cost to society, since workers could have produced goods and services if they were employed. There could also be negative externalities in the form of crime and vandalism.
• Youth unemployment

  Particularly damaging, because it could lead to hysteresis. This is a type of structural unemployment, where someone is out of work for a long time, so their skills deteriorate. This makes it harder to find a job, and it leads to long-term unemployment. If young people find it hard to get a job, then they might be discouraged from participating in the labour market as an adult.
• Minimum wage

  An example of a minimum price. The minimum wage has to be set above the free market price, just like other minimum prices, otherwise it would be ineffective.
• A minimum wage

  Leads to a fall in the employment rate
• There has been no evidence of a rise in unemployment with a rise in the NMW so far in the UK. Some firms say this is because the NMW is still relatively low.
• Positive externalities of a minimum wage

  Increase the standard of living of the poorest, and provide an incentive for people to work
• A higher minimum wage


  Could make it harder for young people to find a job, because their lack of experience might not be valuable to firms who are paying more for their labour
• A higher minimum wage

  Could make the country less competitive on a global scale, since they cannot compete with countries that have lower wages
• Maximum wage

  Also known as a wage ceiling, and it limits how much income someone can earn. It can be used as a means to redistribute wealth more equitably in society.
• A maximum wage

  Should limit inflation, since wages (and therefore consumer demand) is limited
• Maximum wages must be set below the free market equilibrium wage to be effective.
• One criticism of a maximum wage is that it could be a disincentive to innovate, and workers might opt for less demanding work.
• In the UK, public sector pay is higher than the private sector, in raw terms.
• Between 2008 and 2010, public sector pay grew (4.5%) relative to the private sector (1%). Women in the public sector were paid about 8% more than those in the private sector between 2013 and 2014. Across the country, public sector pay is more equal than private sector pay.
• About half of government spending goes towards public sector pay.
• Labour market flexibility

  The willingness and ability of labour to respond to changes in the conditions of the market. It is important for labour to be able to adjust to changes in demand, and it is vital for the supply-side of the economy.
• Factors affecting labour market flexibility

  • Trade union power
  • Regulation
  • Welfare payments and income tax rates
  • Training
  • Infrastructure
  • Housing
• Elasticity of demand for labour

  Measures how responsive the demand for labour is when the market wage rate changes. Affected by: how much labour costs as a proportion of total costs, the ease of substituting factors, and the price elasticity of demand for the product.
• Elasticity of supply of labour

  The responsiveness of the quantity of labour supplied to a change in the wage rate. Affected by: the skills of the workforce, length of training, sense of vocation, and time period.