Labour markets

• Demand curve for labour


  Shows 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. The demand for labour is derived from demand for the product the labour produces.
• Factors influencing demand for labour

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


  A wage is the price of labour and so has the same influence on demand for labour as price has on the demand for a product. As wage rates increase, demand for labour contracts since the MRP of labour must be higher for it to be worthwhile employing more people, so less people are employed.
• Demand for the product


  If there is no demand for the product, there is no demand for the labour. Firms won't employ people if the goods they make aren't going to be sold and make a profit. An increase in demand for the product leads to an increase in demand for labour.
• Prices of other factors of production


  If machinery and equipment becomes cheap, people will switch machinery for labour and therefore the demand for labour will fall.
• Wages in other countries

  If wages are lower in other countries and therefore wages in the UK are relatively high, people will be employed in other countries as it represents a lower cost for businesses. This means that demand in the UK is low.
• Technology


  Improvements in computers and technology means that many jobs have been lost with the work being done by machines. This means that there is less demand for labour, but demand for labour in technological based industries is increasing. By 2040, about 47% of jobs could be lost to technology.
• Regulation


  As laws are passed some jobs disappear, whilst other jobs are made. High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas.
• Price elasticity of demand for labour

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


  • It is directly correlated to the price elasticity of demand for the product the labour produces
  • It is affected by the proportion of wages to the total cost of production
  • If there are many substitutes, such as machinery and labour in other countries, then the demand will be elastic
  • Time also plays a role. In the long run, it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive.
• Supply of labour curve

  Shows 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
• Wages


  The supply of labour curve for an individual is a backward bending curve: an increase in wages will lead to an increase in hours worked at first but beyond a certain point, it will lead to a decrease in hours worked. However, the supply curve for a particular occupation is more likely to be the typical upward sloping curve.
• Immobility


  Labour can suffer from either occupational or geographical immobility. Occupational immobility is where workers find it difficult to move from one job to another because of a lack of transferable skills. Geographical immobility is where they 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 and this could cost £90bn a year following Brexit. There are four million too few high skilled people but six million too many low skilled people. Engineering is one industry suffering particularly badly from skills shortages.
• 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 determination in competitive markets

  In a perfectly competitive labour market, wages are determined purely by demand and supply and all workers are paid the same.
• Wage determination in non-competitive markets

  In a monopsony market, there is only one buyer of the labour. The MC curve is above the supply curve (AC) of labour because it costs more to employ an additional worker than the average cost of labour. A firm will determine how many workers to employ where the cost of employing them is equal to the value of that worker to the company.
• Trade unions


  An organisation with members who are usually workers or employees, which protects the rights and pay of workers through a process of collective bargaining. They can increase wages by setting barriers of entry to reduce supply or by setting wages at a specific level and ensuring workers are not prepared to work for less.
• Bilateral monopoly


  It is possible for there to be both monopoly and monopsony in a labour market, called a bilateral monopoly.
• Marginal cost (MC) curve


  Costs more to employ an additional worker than the average cost of labour
• Trade 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 trade 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
• Bilateral monopoly


  Firm is a monopsonist and the union sets a minimum wage
• Wage that is set

  Depends on the relative bargaining strength of both the firm and the union
• Current labour market issues

  • Skills shortages
  • Young workers
  • Retirement
  • Wage inequality
  • Zero-hour contracts
  • Gig economy
  • Migration
• National Minimum Wage


  Introduced in 1999 to raise people out of poverty and ensure decent minimum standards in the workplace
• Arguments for the National Minimum Wage

  • Reduces poverty
  • Reduces male/female wage differentials
  • Decreases labour turnover
  • Increases workforce motivation and productivity
  • Provides an incentive to work
  • Ensures fair wages
• Arguments against the National Minimum Wage

  • Potential loss of jobs
  • Increases costs and prices for companies
  • Wage spiral
  • Ineffective at reducing poverty
• Maximum wages


  Limits on the highest wages, such as for chief executives
• Introduction of maximum wages

  Leads to excess demand within the industry as people may not take the job
• Public sector wage setting

  Government can make wage decisions to improve the budget, but in the long run public and private sector wages tend to rise by the same percentage
• Ways to improve geographical mobility of labour

  • Improve housing supply and affordability
  • Improve transport links
  • National advertising of jobs
  • Subsidies in areas with labour shortages
  • Move public agencies out of London
• Ways to improve occupational mobility of labour

  • Increase vocational training
  • Encourage further study
  • Encourage training within work
  • Improve education for skills shortages and job applications
• Encouraging flexible work patterns and reducing discrimination can also improve labour mobility