Labour amrket

• Productivity


  Output per worker per unit of time
• Unit labour costs


  The cost of labour per unit of output
• Economic rent


  Income earned which is more than transfer earnings
• Transfer earnings


  The minimum reward that is needed to keep labour in the current occupation
• Transfer payments


  Welfare payments from the government to provide a minimum standard of living for those on low incomes
• Bilateral monopoly


  Where there is only one buyer and one seller in the market
• Collective bargaining


  Negotiation between employers and a collective group of employees
• Geographical mobility of labour

  The ease and speed at which labour can move from one area to another
• Individual bargaining


  Negotiation between a single employee and the employer
• Labour force


  All those who are economically active; those people who are in work or are actively seeking work
• Labour market flexibility


  The willingness and ability of labour to respond to changes in market conditions
• Living wage


  The wage the government believes is necessary to cover the basic cost of living; paid to everyone over 25
• Maximum wage


  A ceiling wage which people cannot earn above
• Minimum wage


  A floor wage which people cannot earn below
• Monopsony


  A single buyer in the market
• Occupational mobility of labour

  The ease and speed at which labour can move from one type of job to another
• Productivity bargaining


  An agreement where employees agree to make changes which improve productivity in order to receive higher wages
• Trade unions


  An organisation that protects the rights and pay of workers through a process of collective bargaining
• Wage differentials


  When different workers are paid different amounts
• Working population


  Those who are economically active, the labour force
• Wage differentials


  Differences in wages even for the same job
• Reasons for wage differentials

  • Formal education
  • Skills, qualifications and training
  • Pay gaps
  • Wages and skills
  • Gender
  • Discrimination
• Monopsony power


  When there is only one buyer of labour in the market, the firm has the ability to set wages
• Monopsony employer profit maximisation


  1. Marginal cost of adding an extra worker is more than the average cost

  2. Firm employs Q2 workers where MC = MRP

  3. Wage is W2, lower than the market equilibrium competitive wage
• Monopsony employer


  Employees likely to lose out with lower wages, workers might become unproductive
• Trade union power


  Trade unions can push for higher wages above the market equilibrium, increase job security, and counter-balance exploitative monopsony power
• Trade unions try to increase wage rates


  Firms might no longer be able to afford to employ workers, causing them to close down or reduce employment
• Trade union impact on monopsony market


  1. Trade union aims to increase marginal revenue product and increase wages to the level of MRP (W3)

  2. Perfectly competitive level of employment and wage rate is W1, Q1
• Imperfect information


  Some qualified workers might not be aware of higher paying jobs, some workers might not understand the long term benefits of investing in improving their skills and education
• Bilateral monopoly


  Where there is only one buyer (monopsony) and only one supplier (monopoly) in the same market
• Bilateral monopoly wage determination

  1. Monopsony pays wage of W2 and employs quantity of Q2 where MRP = MC

  2. Trade unions try to negotiate a higher wage of W3 without causing the quantity of labour employed to fall
• Labour market equilibrium


  Determined where the supply of labour and the demand for labour meet, which determines the equilibrium wage rate
• Demand for labour falls


  Wage rate would fall from W to W1 in a free market
• Supply of labour increases


  Wage rate would fall from W to W1 in a free market
• Wages are not this flexible in the real labour market, Keynes coined the phrase 'sticky wages'
• Geographical immobility of labour


  Obstacles which prevent labour from moving between areas
• Occupational immobility of labour


  Obstacles which prevent labour from changing their occupation
• Labour market flexibility


  How willing and able labour is to respond to changes in the conditions of the market
• Factors affecting labour market flexibility


  • Trade union power
  • Regulation
  • Welfare payments and income tax rates
  • Training
  • Infrastructure
  • Housing