Chap 22

• Labour market


  • The demand for labour comes from firms (buyers) which pay the wage rate (price for labour)
  • The supply of labour comes from the working population (sellers)
• See Case Study


  • pages 163 + 164
• Demand for labour


  • There is an inverse relationship between demand for labour & the wage rate
  • If the wage rate is high - more costly to hire extra employees
  • When wages are lower, labour becomes relatively cheaper than capital
• Demand for labour


  Shows how many workers an employer is willing and able to hire at a given wage rate in a given time period
• Higher wages


  Contraction of demand
• Lower wages


  Expansion of demand
• Derived demand


  The demand for labour is determined by demand for the goods/services that the companies produce
• High demand for the product

  Demand for labour increases (especially in times of economic boom -> demand for goods increases, prices and wages go up, unemployment falls)
• Price of a substitute product falls


  Demand for the product falls leading to a fall in demand for labour
• Rise in the demand for a complementary product


  Demand for labour for our product will rise too
• Capital is a substitute for labour


  The cheaper and more efficient machines are the less demand for labour (replace people with robots)
• Factors determining the Demand of Labour

  • Demand for the product
  • Availability of substitutes
  • Productivity of labour
  • Other employment costs
  • The price of other workers
• Increase in the productivity of labour

  Makes labour more cost efficient than capital -> shift in labour demand to the right
• Recession


  Labour demand curve would shift inwards as businesses shed labour
• Economic boom


  Labour demand curve would shift outward
• Labour supply curve


  • Upward sloping - as wages rise, other workers enter this industry attracted by the incentive of higher rewards
• Minimum pay rate


  At which people are willing to work in an occupation
• Factors determining the Supply of Labour

  • Population size
  • Income Tax and National Insurance contributions
  • Welfare Benefits and Government labour regulations
  • Changes in migration pattern
  • Age distribution of the population
  • Retirement age
  • School leaving age
  • Female participation
  • Skills and Qualification
• Geographical immobility


  Workers find it difficult to move from one area to another
• Occupational immobility


  Inability of workers to move between jobs
• Equilibrium Wages in the Labour Market

  The equilibrium market wage rate is at the intersection of the supply and demand for labour
• Outward shift of labour demand

  Increases wage
• Outward shift of labour supply

  Decreases wage
• Importance of Quantity and Quality of Labour

  • Not only the cost of labour is important for firms but also the number (sufficient number of people available in case of expansion) and quality of human capital available (employees meet the necessary skills or will have to invest huge amounts for training)
  • Education and Training improve the quality of human capital and thus its productivity but they are also needed in cases of changes in working practices, introduction of new technology, increase range of workers' skills (flexibility/multi-skilled) -> workers feel motivated and more secure
• Some businesses begin to find recruitment difficult in China due to one-child policy and due to the fact that many do not want to work for exporters that have more challenging working conditions