1.6 the labour market

• Labour market


  Firm interact with households to buy and sell labour
• factors affecting demand for labour

  • the price of labour for firms
  • productivity
  • the price of other factors of production
• marginal productive theory


  how much extra revenue each individual worker brings to the firm
• marginal revenue product 


  the additional revenue earned from employing an additional worker
• MRP formula


  marginal physical product X marginal revenue
• EDL (elasticity do demand for labour)

  The responsiveness of the quantity demanded of labour to changes in the wage rate
• EDL formula


  %change in QD of labour/ %change in wage rate
• factors affecting EDL

  • time- in short run firms may need workers immediately and have to pay above NMW so demand for labour is inelastic, in long term firms can replace labour with capital so demand for labour is elastic
  • availability of substitutes
• factors affecting supply of labour

  • wage rates
  • job satisfaction
  • location
  • training provided
• Backward bending supply of labour

  • when the wage rate passes a certain amount (W2) people choose to work fewer hours and take up more leisure time

  
• factors affecting demand for labour

  • market forces (d+s)
  • trade unions
  • government intervention
• transfer earnings


  minimum wage a worker is paid to keep them in their job
• economic rent


  Worker paid more than what they were prepared to be paid
• impact of trade unions

  • there is excess supply of workers
  • increased wages for those still employed due to union collective bargaining
  • fall in employment leading to lost wage income

  
• benefits of trade unions

  • improves working conditions
  • protects members’ earning power
• costs of trade unions

  • slows down productivity
  • reduces competitiveness by increasing costs, reduces flexibility
• wage differentials 


  The difference in wages between workers with different skills in the same industry or similar skills in different industries
• advantages of wage differentials

  • Encourages work rather than welfare
  • Promotes efficiency and productivity
• disadvantages of wage differentials

  • Increases income inequality
  • can force down the wage rate in the market
• 2 facts about minimum wages

  • set to reduce wage differentials
  • set above equilibrium wage
• advantages of national minimum wage

  • reduces income inequality and poverty
  • reduces unemployment by providing an incentive to work
  • MACRO- increases employment which increases AD
• disadvantages of national minimum wage

  • Create unemployment as demand for labour is lower (from excess supply)
  • MACRO- cost push inflation
• Functions of price

  • ration- when supply of a good is limited, price increased to decrease demand and allocate the available quantity to those willing to pay for the higher price
  • signal- high prices signal that the market for that product makes high profits, signalling demonstrates where resources are required
  • incentives- consumer choices affect the supply of certain products
  • allocative- price determines what consumers spend their money on it also determines how scarce resources are allocated