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Business behaviour and the labour market > Labour Market > Flashcards

Flashcards in Labour Market Deck (30)
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1
Q

Define demand for labour

A

The amount that firms are willing to pay for a certain amount of workers. Demand varies inversely to wage.

2
Q

What is the demand for labour influenced by? (4)

A
  1. Worker Productivity - when workers become productive, output becomes more efficient and firms may be prepared to pay workers more.
  2. The cost of capital (a substitute) - firms can choose to use capital if it is cheaper, more efficient or more reliable.
  3. The level of consumer demand for the product being made - The marginal revenue product is the extra output made by any one worker multiplied by the amount that output can be sold. This is a key determinant of wages.
  4. Labour costs as a percentage of total costs - the demand for labour is less elastic when labour costs overall are small.
3
Q

What is a derived demand? Give an example

A

Labour is a derived demand.

Derived demand means that the demand for labour is dependent on demand for the final goods and services that the workers produce.

4
Q

Define the supply of labour

A

Supply of labour is the number of workers willing and able to work at any given wage.

5
Q

What is the supply of labour influenced by? (5)

A
  1. Quality of education and training
  2. Migration
  3. Income tax and out-of-work benefits
  4. The strength of trade unions
  5. The opportunity cost of leisure
6
Q

Explain why is market failure common in the supply of labour ? (2)

A

Because it is often difficult for workers to move easily between jobs compared to the other factor inputs. Reasons include:

  1. Geographical immobility - Some workers find it hard to move between jobs, and seek work. This may be due to family reasons, cost of travel, accommodation etc…
  2. Occupational immobility - Some workers find it hard to move between jobs as they lack the appropriate skills and training.
7
Q

What is the wage rate in competitive markets?

A

The price of labour, where the demand and supply of labour meet.

8
Q

What happens if wages are too high in competitive markets? And what is done to solve this? (2)

A
  1. Labour supply will be too high, and demand will be too low (excess supply leading to unemployment)
  2. To clear the market, workers will have to accept lower wages without a job, meaning that wage rate will tend to fall to the market clearing wage rate.
9
Q

What happens if wages are lower than the equilibrium? (2)

A
  1. Labour demand will be high but supply will be low (excess demand, leading to labour shortage).
  2. The deficit will not disappear until wages rise, and firms will have to pay workers more (demand contracts) to convince pole to work (expansion in supply).
10
Q

What is the labour force?

What is the labour force participation rate? How is it calculated?

A

The labour force is the sum of people employed and unemployed.
The labour force participation rate is calculated as the labour force divided by the total working-age population.

11
Q

Define unemployment

A

Measures the number of people who are willing and able to work but are not currently employed.

12
Q

Define underemployment

A

This occurs when there are workers who are highly skilled, but are working in a low-skill job. And when there are part-time workers who would prefer to work full-time or work more hours.

13
Q

Why can we not assume that an employer pays the employee the value that the worker adds to the firm in a non-competitive market (e.g. monopsony, the NHS)?

A

Essentially the firm ‘exploits’ the workers, or takes advantage of their weak markets power, and forces wages down.

14
Q

What are the current labour market issues? (6)

A
  1. Skills shortages e.g. teaching
  2. Unemployment (especially amongst the youth)
  3. Increasing retirement ages, to cope with the problems in funding pensions because we live so much longer.
  4. Temporary, flexible or zero-hour contracts - these make it hard for people to make investments, and there are problems with delays in benefits for people moving in and out of work.
  5. Underemployment
  6. Tax credits
15
Q

Define the national minimum wage.

A

The minimum firms are allowed to pay their workers, by law.

16
Q

Why are some economist in favour of a maximum wage?

A

In order to reduce the rate at which the top earnings are moving away from the median earnings.
E.g. footballers, bankers

17
Q

What is the main aim of minimum and maximum wages?

A

To reduce income inequality

18
Q

How do minimum wages reduce income inequality?

A

They prevent very low wages, which can mean poverty, people struggling to stay in work, and an employment trap, where it is financially better not to go to work and to res on benefits.

19
Q

How do maximum wages reduce income inequality?

A

They are seen as a way to prevent the top 1% of earners ‘creaming off’ the profits in the business, and would allow higher wages to be earned by a wider group of the workers.

20
Q

What are some issues with minimum wages? (2)

A
  1. Lead to a surplus of a worker, in competitive markets

2. The don’t reflect the cost of living

21
Q

What are some issues with maximum wages? (2)

A
  1. Leads to a shortage of certain types of workers.

2. Destroy incentives

22
Q

Define the elasticity of demand for labour?

A

The responsiveness of demand for labour to a change in wages.

23
Q

What will businesses do if the price elasticity of demand for labour is relatively elastic (i.e. -1 to minus infinity)?

A

Businesses will cut back aggressively on employment if wage rates increase, and will expand rapidly when labour becomes cheaper relative to the other factor inputs.

24
Q

What will firms do if the price elasticity of demand for labour is relatively inelastic (i.e. 0 to -1)?

A

The response by firms to changes in wage rates will be smaller.

25
Q

What determines the PED of labour? (4)

A
  1. Proportion of labour costs in the tool costs of business
  2. The ease and cost of factor substitution
  3. The PED for the final output produced by a business
  4. The time period under consideration
26
Q

Define price elasticity of labour supply.

A

(To an occupation) is the responsiveness of labour supply to a change in wage rate.

27
Q

What do workers do if PES of labour is relatively elastic (1 to infinity)?

A

Workers respond quickly if wage rates increase and supply will expand rapidly when wages rise.

28
Q

What do workers do if PES of labour is relatively inelastic (0 to 1)?

A

The response by workers to changes to wage rates will be smaller.

29
Q

What determines PES of labour? (2)

A
  1. In low-skilled occupations, labour supply is elastic because a pool of labour is available to take the job.
  2. Where jobs require specific skills, training or qualifications, the labour supply will be more inelastic because it’s hard to expand the workforce in a short period of time when the wage for workers has increased.
30
Q

What is the significance of PES and PED of labour with regards to wage rates?

A

Generally, the higher the elasticities, the lower the wages will tend to be.