Labour market

• Demand for labour


  • Consumers demand goods and services
  • Producers require factors of production
  • Firms demand labour
  • Demand for labour is a derived demand
  • Higher demand for skill leads to higher pay
• The firm that hires labour is working in a competitive market
• The firm is a profit maximiser
• Marginal Revenue Product of Labour

  The additional revenue generated by employing one more worker
• Cost of employing labour

  • Wage rate
• The wages paid to workers are a direct reflection of their marginal revenue product
• Factors for a change in the demand for labour

  • Wage rate
  • Productivity
  • Demand for the product
• Supply of labour


  Total number of hours that people are willing to work at a particular wage rate
• Supply and demand principles apply but we are dealing with human beings
• Categories affecting individual labour supply

  • Price (wage rate)
  • Tax rate
  • Leisure preference
• As wage rates increase more people will be willing to work
• Individual supply of labour is affected by the tax rate
• Long run supply of labour factors

  • Age structure/size of the population
  • Labour participation rate
  • Tax and benefit levels
  • Immigration and emigration
• If more people enter the country than leave


  Supply curve shifts to the right
• If more people leave the country than enter


  Supply curve shifts to the left
• The demand curve for labour in the industry is the marginal revenue product curve for labour
• Where demand for labour intersects supply will determine equilibrium wage rate and quantity of labour
• Increase in incomes of consumers will lead to an increased demand for clothing
• Increase in demand for clothing

  Shifts the demand curve for clothing to the right
• Other factors that cause the demand curve to shift right include productivity increases and rise in selling price of products
• Fall in wages increases labour supply
• Increase in immigration increases the number of workers who are able to work in the clothing industry
• Factors that will cause supply to shift to the right

  • Wages or condition of work deteriorate in other industries
  • More attractive conditions in this industry
• Trade unions represent the workers' interest at work
• Functions of trade unions

  • Increase wages
  • Improve working conditions
  • Lobby for higher pay for skilled workers
  • Fight job losses
  • Provide a safe working environment
  • Secure additional work benefits
  • Prevent and assist with unfair dismissals
• Equilibrium wage rate is W
• Minimum wages lead to excess supply of labour
• Monopsony is where there is a single buyer in a market
• Transfer earnings are the minimum payment required to keep labour in its present use
• Economic rent is any payment to labour which is over and above transfer earnings
• Monopsonist


  A single buyer in a market (firm in the labour market) that determines the wage rate
• This is an imperfect labour market rather than a perfect labour market
• Hiring workers


  Hire workers until MRP equals cost of labour
• MRP


  Marginal Revenue Product
• The monopsonist pays the lower wage rate of WM
• The monopsonist will not pay the higher wage rate Wmrp that other employers pay
• Elements explaining wage differences

  • Transfer earnings
  • Economic rent
• Transfer earnings


  Minimum payment required to keep labour in its present use
• Economic rent


  Any payment to labour which is over and above transfer earnings
• Workers willing to work for any wage rate from $0 until a wage rate of W