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LABOUR MARKETS - Coggle Diagram
LABOUR MARKETS
Factors that influence the supply of labour:
The supply of labour is calculated by the number of workers willing and able to work at the current wage rate, multiplied by the number of hours they can work. It is influenced by monetary and non-monetary considerations. Non-monetary considerations include how satisfied workers are with their job and their working conditions.
The wage rate: The upward sloping supply curve shows the proportional relationship between how much the worker is paid and the number of workers willing and able to work.
Demographics of the population: The more people there who are able and willing to work, the higher the supply of labour. It can be illustrated with a shift to the right of the supply curve.
Migration: Migrants are usually of working age, so the supply of labour at all wage rates tends to increase. Migration particularly affects the supply of labour at the lower wage rates.
Advantages of work: This can influence how much people prefer to work, and is linked to non-monetary advantages.
Leisure time: Leisure is a substitute for work. People have to choose whether to spend their time on work or leisure.
Trade unions: These could attract workers to the labour market, because they know their employment rights will be defended.
Taxes and benefits: If taxes are too high and benefits are too generous, people might be more inclined to withdraw from the labour market.
Training: If a lot of training or high qualifications are required for a job, then the supply of labour may fall.
Factors affecting demand for labour
The wage rate: The downward sloping demand curve shows the inverse relationship between how much the worker is paid and the number of workers employed. When wages get higher, firms might consider switching production to capital,
which might be cheaper and more productive than labour.
Demand for products: Since the demand for labour is derived from the demand for products, the higher the demand for the products, the higher the demand for labour.
Productivity of labour: The more productive workers are, the higher the demand for them. Can be increased by education, training or technology.
Substitutes for labour: If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left.
How profitable the firm is: The higher the profits of the firm, the more labour they can afford to employ.
The number of firms in the market: This determines how many buyers of labour there is. If there is only one employer, the demand for labour is lower than if there are many employers, such as in the supermarket industry. The lower demand for labour can mean wages are lower, so trade unions try to encourage higher wages.
Marginal productivity theory of the demand for labour
This theory states that the demand for labour is dependent on the marginal revenue product (MRP). The demand curve shows the MRP.
MRP is calculated by marginal product multiplied by marginal revenue. MRP = MP x MR.
The marginal product of labour is the additional output each unit of labour can produce. The marginal revenue of labour is the additional revenue derived per extra unit of
labour.
Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour.
Monopsony power:
When there is only one buyer of labour in the market, there is said to be monopsony power. It means the firm has the ability to set wages.
The marginal cost of adding an extra worker is more than the average cost. This is because in order to employ another employee the firm has to pay all of their workers more.
At MC = MRP, the firm profit maximises. This means they employ Q2 workers. This makes the wage W2, lower than the market equilibrium competitive wage. The employment rate and the wage rate are below those that would exist in a perfectly competitive labour market.
National Minimum Wage:
The minimum wage has to be set above the free market price, just like other
minimum prices, otherwise it would be ineffective.
The diagram above suggests that a minimum wage leads to a fall in the employment rate (Q1 – Q3). It depends on what level the wage is set at. There has been no evidence of a rise in unemployment with a rise in the NMW so far
in the UK.
The NMW will yield the positive externalities of a decent wage, which will increase the standard of living of the poorest, and provide an incentive for people to work. It could make it harder for young people to find a job, because their lack of experience might not be valuable to firms who are paying more for their labour. The government might make more tax revenue, due to more people earning higher wages. A higher wage could make the country less competitive on a global scale, since they cannot compete with countries that have lower wages.
The labour market is a factor market. The wage rate will lead to movements along the supply and demand curves for labour. All other factors will shift the curves. Labour is a derived demand. This means that the demand for labour comes from the demand for what it produces. Demand is related to how productive labour is and how much the product is demanded. The elasticity of demand for labour is linked to how price elastic the demand for the product is.
Elasticity of demand for labour:
The wage rate and level of employment is affected by shifting the demand or supply curve differently, depending on how elastic the other curve is. If labour demand is inelastic, because there are few or no substitutes, strikes will increase the wage rate but not affect the employment rate significantly. Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate, than where there is a more elastic demand. The elasticity of demand for labour measures how responsive the demand for labour is when the market wage rate changes.
Determinants of the elasticity of demand for labour:
(1) How much labour costs as a proportion of total costs. The higher the cost of labour as a proportion of total costs, the more elastic the demand. Labour costs are high as a proportion of total costs in the services. (2) The easier it is to substitute factors, the more elastic the demand for labour, because firms can easily to switch to cheaper forms of production, such as capital. (3) The PED of the product also affects labour. The more price elastic the product, the more price elastic the demand for labour.
Labour market equilibrium:
Labour market equilibrium is determined where the supply of labour and the demand for labour meet. This determines the equilibrium price of labour, i.e. the wage rate.In the real labour market, wages are not this flexible. Keynes coined the phrase ‘sticky wages’. Wages in an economy do not adjust to changes in demand. The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead.
Trade union power:
If trade unions are pushing for higher wages above the market equlibrium, the labour market is likely to be more flexible. Trade unions can also increase job security. Higher wages can be demanded by limiting the supply of labour, by closing firms, or by threatening strike action. Higher wages could cause unemployment, however. Trade unions can counter-balance exploitative monopsony power.
Imperfect information:
Some qualified workers might not be aware of higher paying jobs in other industries or with other firms. Some workers might not understand the long term benefits of investing in improving their skills and education. This can limit the productivity and potential progression of workers. It makes the market inefficient.
Discrimination in the labour market:
Sometimes, even in the same job, workers can be paid different amounts. This is due to: formal education, pay gaps, skills, qualifications, training, gender, age, disabilities, gender and ethnicity.
