Labour-econ

• The Labour Market

  A market where firms purchase/acquire the factors of production they need in order to provide goods and services that individuals want
• The Four Factors of Production

  • Land
  • Labour
  • Capital
  • Enterprise
• Land

  Anything provided by nature that is used to produce goods/services
• Economic rent

  The return on any factor of production in excess of its supply price
• Supply price of a factor of production

  The minimum payment necessary to bring the factor of production into use and to maintain it in that use
• The supply of land (gifts of nature) is fixed; the supply curve is therefore vertical (perfectly inelastic)
• Land is considered to be a non-specific factor of production (many uses)
• Enterprise

  An entrepreneur is the person who takes a risk in order to make a profit by organising the other three factors of production to produce goods/services
• Characteristics of enterprise

  • The entrepreneur can make a negative return
  • Entrepreneurs earn returns that vary in size
  • The earnings of the entrepreneur are residual
• The role of profits

  • Profits encourage risk-taking
  • Profits are a source of revenue for expansion
  • Profits encourage firms to be efficient
  • Profits act as a signal to entrepreneurs as to how to allocate scarce resources
  • The pursuit of profits by entrepreneurs has many positive spin-off effects on the economy
  • Tax on profits is a source of government current revenue
• Ways the government encourages entrepreneurship

  • Grants/advice (Enterprise Ireland)
  • Provide loans directly to businesses (Microfinance Ireland)
  • Improve infrastructure (National Broadband Plan)
  • Encourage banks to extend credit to entrepreneurs with viable business ideas (Credit Review Office)
  • Labour market (investment in education)
• Capital

  Anything human-made that is used to produce goods and services
• Investment

  Capital formation, or the production of capital goods
• Interest

  The payment for capital
• Capital deepening

  A factory owner who hires one extra worker and invests in two extra machines
• Capital widening

  A factory owner who hires one extra worker and invests in one extra machine
• Marginal efficiency of capital (MEC)

  The extra profit that is generated by employing one extra unit of capital
• Factors that determine the size of the MEC

  • Price of output
  • Demand for the output
  • Cost of capital and the rate of interest
  • Wear and tear
• Labour

  The physical effort that goes into supplying goods and services
• Nominal wage

  The rate of pay or salary of an employee
• Real wage

  The purchasing power of wages
• Economic rent (for labour)

  The excess payment above the supply price of labour
• Marginal revenue product (MRP)

  The extra revenue generated as a result of employing an extra unit of labour
• Marginal physical product (MPP)

  The extra output generated as a result of employing an extra unit of labour
• The downward-sloping part of the MRP curve is actually the demand curve for labour
• Factors that determine the MRP of labour

  • Skills of the workers
  • Quality of the capital equipment
  • Demand for the firm's output
  • Efficiency of the organisation of production
  • Government policies
• Factors that determine the MRP of labour

  • Skills of the workers
  • Quality of the capital
  • Ability of the employer/manager
  • Morale due to working conditions/wages
  • The selling price
• MRP theory is unsuitable for determining wages in some situations
• Factors that determine the geographical and occupational mobility of labour

  • Qualifications/training required
  • Restrictions, e.g. restricted training opportunities
  • Age
  • Family situation
  • Price of property
  • Availability of information regarding availability of work
  • Visas and work permits
  • Incentives, e.g. free accommodation, etc.
• Full employment is a situation where everyone who wants a job can find one at existing wage rates
• A 4% unemployment rate generally indicates that an economy has reached full employment
• Wage drift describes a situation where wage levels rise above negotiated levels
• A rise in wage rates due to labour shortages

  Can result in higher prices for consumers
• A shortage in the availability of workers along with a rise in the cost of labour makes Ireland a less attractive location for FDI
• Ways the government could address the problems created by labour shortages


  • Increase the provision of visas to workers from non-EU countries
  • Increase the minimum wage
  • Encourage Irish emigrants abroad to return home
  • Reduce direct taxes
  • Incentivise individuals to train in areas where there are skills shortages
  • Pursue policies that reduce the cost of accommodation
  • Provide social infrastructure in geographic areas with labour shortages in order to make them more attractive
• Equilibrium wage rate is the wage rate that ensures that demand for labour equals the supply of labour (i.e. no unemployment or labour shortage)
• Positive economic implications of a minimum wage

  • Better standard of living
  • Worker exploitation is prevented/illegal
  • Increased consumer spending
  • Increased government tax revenue
• Negative economic implications of a minimum wage

  • Some employers hire fewer staff
  • Reduced hours
  • Reduction in competitiveness of Irish exports
  • Increased costs of labour for non-minimum wage workers
• A minimum wage is an example of a price floor
• At the minimum wage rate, there is an excess supply of labour (unemployment)