Micro 22- The labour market

• Why Is labour a derived demand?

  the demand for labour comes from the demand for what it produces
• Factors that shift the demand curve for labour

  • demand for products
  • productivity of labour
  • substitutes for labour
  • profitability of a firm
  • number of firms in the market
• What is the marginal productivity theory of the demand for labour?

  demand for labour is dependant on marginal revenue product
• What is the formula for MRP?

  MRP = MP x MR
• Marginal product of labour

  additional output each unit of labour can produce
• Marginal revenue of labour

  the Derived revenue each additional unit of labour brings in
• Determinants of elasticity of demand for labour

  • how much labour costs as a proportion of total costs
  • how easily factors of production can be substituted
  • PED of a product that labour makes
• factors that influence that supply of labour

  • migration
  • taxes and benefits
  • training
  • benefits of working
  • trade unions
• determinants of PES of labour

  • skill level
  • mobility of labour
  • time period SR vs LR
  • state of economy
  • age young vs old
• What is monopsony power?

  where there is one buyer of labour in the market

  price makers
• where is the profit maximising quantity on a monopsony diagram?

  Mc = MRp
• What is the impact of monopsony power?

  • reduction in employment levels
  • exploitation of workers
  • Labour market failure
• Why does the employer in a monopsonist market not set the wages at the market equilibrium but at the profit maximising quantity ?

  • Marginal cost of an additional unit of labour > the average cost of labour because to employ another worker the firm has to pay workers more
  • The wages the firm pays are less than the market equilibrium
• What is a trade union?

  a group of workers who come together to protect and improve working conditions and wages
• What is a the outcome of a trade union in a competitive labour market?

  • Higher wages
  • Fall in employment
  • Worsening of a firms finances in the long run
  • efficiency loss
• Evaluation of trade unions?

  • TU in a monopsony market?- since they can counteract it by increasing wages close to competitive outcome and increase employment
  • Strength of TU power- percentage of union density
  • success determined by union mark up- bigger the difference = greater success of TU
• What is union density?

  proportion of workforce in a given profession that are part of TU
• What is union markup?

  difference in wages between a union member and non union member
• What is the impact of a trade union in a monopsony market

  • trade unions control supply of labour at given wage rates
  • strong trade union makes monopsonist a wage taker
  • monopsonist hires workers up until MRP = new MC curve
• What is the national minimum wage?

  a minimum price created by the government set above free market prices
• What are the pros of minimum wage?

  • poverty alleviation
  • reduce wage differentials
  • incentivise to work which reduces unemployment
  • tax revenue
  • counter monopolist employer
  • increased incentive to hire human capital
• what are the cons of minimum wage?

  • unemployment but elasticity?
  • youth lose out
  • cost to business
  • regional differences
  • hit to government finances- inflation- interest rates
• features of a perfectly competitive labour market

  • no barriers to entry/exit into other labour markets
  • perfect information of wages and working conditions
  • small buyers and sellers
  • individual buyers and sellers have no influence over equilibrium wage rate
• how does imperfect information determine wage rates and employment in a competitive labour market?

  some workers may not be aware of higher paying jobs in other industries or with other firms

  workers may not understand long term benefits in improving skills and education