Topic 6 - The Labour Market

• 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
• No demand for cars


  No demand for car manufacturers
• Demand for labour


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


  1. Marginal revenue product (MRP) calculated by marginal product multiplied by marginal revenue

  2. Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour
• Elasticity of demand for labour

  Measures how responsive the demand for labour is when the market wage rate changes
• Factors affecting elasticity of demand for labour


  • How much labour costs as a proportion of total costs
  • Ease of substituting factors
  • Price elasticity of demand for the product
• Factors influencing supply of labour


  • The wage rate
  • Demographics of the population
  • Migration
  • Advantages of work
  • Leisure time
  • Trade unions
  • Taxes and benefits
  • Training
• 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 falls
• Supply of labour increases

  Wage rate falls
• Wages are 'sticky' and do not adjust to changes in demand
• Monopsony power


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


  Wage rate and employment rate are below those that would exist in a perfectly competitive labour market
• Trade union power


  Trade unions can push for higher wages above the market equilibrium, increase job security, and counter-balance exploitative monopsony power
• Imperfect information can limit the productivity and potential progression of workers
• Trade unions


  • Aim to protect workers, secure jobs, improve working conditions, and achieve higher wages
• Trade unions increase wage rates too much

  Firms might no longer be able to afford to employ workers
• Employer has monopsony power


  Workers are only paid W2, and only Q2 number of workers is employed
• Trade union aims to increase marginal revenue product and increase wages to the level of MRP


  To stop the exploitation of labour
• National Minimum Wage


  An example of a minimum price that has to be set above the free market price to be effective
• Minimum wage is set


  Employment rate falls (Q1 - Q3)
• No evidence of a rise in unemployment with a rise in the NMW so far in the UK
• Positive externalities of the NMW


  • Increases the standard of living of the poorest
  • Provides an incentive for people to work
  • Might make it harder for young people to find a job
  • Might make the country less competitive on a global scale
• Factors affecting different wages for the same job


  • Formal education
  • Skills, qualifications and training
  • Pay gaps
  • Gender
• The wage gap between skilled and unskilled workers has increased in the UK recently due to technological change and globalisation
• Women still earn less than men on average due to career breaks, fewer hours worked, being crowded into low-paid or part-time jobs, and discrimination in promotions