Please enable JavaScript.
Coggle requires JavaScript to display documents.
Test 1: Labour Markets: Micro - theme 3.5 Labour Markets, 2.1.3…
Test 1: Labour Markets: Micro - theme 3.5 Labour Markets, 2.1.3 Unemployment + employment
3.5.1 Demand for Labour
Factors influencing demand for labour
Demand for the product
labour = derived demand
Derived Demand
i.e. businesses only want the worker for as long as ppl are willing+able to buy the product they produce
thus, demand for labour is derived demand as it's derived from demand for the product labour produces
firms hire workers to produce goods to meet their aim (usually of making a profit)
thus, if there's no demand for the product, there's no demand for the labour
linked to concept of MRP - an increase in output/price of a good will increase demand for the labour that produces that good
Wage rates
wage = price of labour
same influence on demand for labour as price has on demand for a product
as wage rates increase, demand for labour decreases as the MRP (material requirements planning) must be higher for it to be worthwhile to employ more people
so less ppl are employed
Prices of other FoPs
if machinery + equipment become cheap, people will switch machinery for labour
thus demand for labour falls
Wages in other countries
if wages are lower in other countries and therefore wages in UK are relatively high, people will be employed in other countries as it represents lower costs for businesses
thus, demand in the UK is low
Technology
improvements in tech means many jobs are redundant
less demand for labour, but demand for labour in tech industries increases
By 2040, around 47% of jobs could be lost due to tech
Regulation
As laws are passed some jobs disappear, e.g. conductors, whilst others are made
high regulation within the labour market is likely to discourage firms from hiring as it can be costly + time consuming
so it reduces demand for labour in these areas
e.g. France used to have high levels of labour regulation, which Macron tried to change
state of economy
state of economy affects demand for product
when economy in poor state, there is low demand for product
state of economy affects expectations for future, and business confidence. so, if confidence is low, the business may lay off workers, be less likely to employ people to cut costs as they are worried for the future
Price/Wage Elasticity of Demand (WED)
Factors affecting WED
proportion of labour costs to total costs
Higher proportion of labour costs to total costs, more elastic demand for labour.
Lower = more inelastic demand for labour
Ease+cost of factor substitution
If substituting capital for labour is easy, the cost is comparable to the increase in wages.
Demand for labour will be more elastic + vice versa
PED of final product
If product being produced is price inelastic, demand for labour is likely to be inelastic.
E.g. if wages rise, firms pass on increased costs of production to the final consumers
Time period
In the short-run, demand for labour is likely to be more price inelastic. I.e. an increase in wages will have a less than proportional decrease in qty demanded.
However, in medium to long-term firms can research alternative methods of production, + the demand for labour becomes more price elastic
WED = how responsive a firm's demand for labour is to a change in price (change in wage rate)
Elastic = increase in wage rate results in a more than proportional increase in qty of labour demanded by firms
Inelastic = increase in wage rate results in a less than proportional decrease in the qty demanded of labour demanded by firms
3.5.2 Supply of Labour
Factors influencing supply of labour
Wages
Supply of labour curve for an individual is a backward bending curve.
Increase in wages will lead to increase in hrs worked at first, but beyond a certain point it will lead to a decrease in hrs worked.
Population + distribution of age
high population means high supply of labour as long as the majority is active in the labour market
migration plays a role here
non monetary benefits
supply of labour will increase if there is high job satisfaction, e.g. in vocational jobs
some jobs are attractive as they have a good location, or some offer perks e.g. free private healthcare, which will increase supply
factors e.g. holiday, hours of work, flexibility, promotion opportunities affect supply of labour
Education/training/qualification
more educated workers means higher supply of workers
important for some industries which require qualifications
occupations which require high levels of education may suffer from lower supply of labour compared to low skilled jobs
trade unions + barriers to entry
trade unions may be able to restrict supply of labour by introducing barriers to entry,
e.g. you have to have a degree for teaching
Wages and conditions of other jobs
if many jobs in a local area are considered to be unpleasant and offer low wages, supply for alternatives will be higher
legislation
gov rules can affect supply of labour
e.g. school leaving and retirement ages
e.g. changes in migration policy
Social trends
e.g. work from home during covid resulted in significant changes to labour markets once economies opened up again
income tax + welfare benefits levels
income taxes become a disincentive to households offering their labour
assumption = as income tax increases, labour supply decreases
high welfare benefits can also reduce incentives
Market Failure
= Market failure occurs in labour markets when workers can’t easily move between jobs
Causes
geographical immobility of labour
Workers find it difficult to move from one geographical area to another in order to secure employment
Barriers to mobility may include family ties, lack of information about possible jobs in different parts of the country
Challenges in securing/affording accommodation in an unknown location
occupational mobility of labour
Ability of a workers to change occupations when they lose a job
If their skill base is transferable between occupations, their occupational mobility is high.
Big issue when the economy is faced with structural unemployment.
Factors influencing WES/PES
= responsiveness of supply to a change in wage rates
level of qualifications + training
if there is high level of qualifications necessary,
people can't easily take up the job
so supply of labour will be inelastic
availability of suitable labour in other industries
e.g. if a company can 'poach' workers from other industries, it will be more elastic
time
in long run, supply of labour will be more elastic as people will have time to train + FoPs can change
if job is vocational, it willl be inelastic since even if wages fall people won't leave the job
level of unemployment
high levels of unemployment make supply more elastic
as the firm can increase the number of people it employs w/o having to raise wages significantly
3.5.3 Wage determination in competitive and non-competitive markets
Current Labour Market issues
Skills shortages
Firms are effectively poaching skilled labour from each other
Shortage of new skilled labour entering the market
Shortage of skilled labour means firms have to increase wages to attract labour
Youth unemployment
Where possible employers prefer to higher workers w/ more experience as it can lead to higher productivity
Education/skills gap means young people leave school w/o the skills that employers require
Changes to retirement ages
Recently, state pension reform has been ongoing, the retirement age is gradually being increased to 68 for both men + women
This means workers are expected to remain in the workforce for longer
This is because w/ too many pensioners in the system, it’s hard for the gov to fund monthly pension payments
An improvement to life expectancy has meant there are more pensioners in the system
School leaving age
The earlier a student leaves school the lower their skill level
Diff policies are in place in England, Scotland, Ireland and wales
Scotland Ireland wales - school leaving age = 16 and no further conditions in place
England - student can leave school at 16 but until they are 18 they must either:
Stay in full time education
Start apprenticeship/training
Spend 20hrs/more a week working/volunteering, while in part time education/training
This aims to increase the skill level but also puts pressure on training providers
There are not enough apprenticeships to match demand
Zero-hour contracts
Very beneficial to employers
Workers are not guaranteed work + only get paid for what they do
Workers do not receive many of the benefits that full time employees receive - this reduces costs for the firm
Some workers enjoy the flexibility
These contracts change unemployment figures as workers may not end up receiving much work but are no longer counted as unemployed
Temporary/flexible working
= working in such a way that it meets the employee’s needs
Many workers now want to work from home
Some employers prefer this as it lowers company costs
Others want more control over their workforce + want a return to the workplace
Focus on wellbeing, more people opting to work part-time jobs / jobs that offer more flexibility
Government Intervention
Policies to tackle labour market immobility
improved education/training
Wider skill base allows workers to move more easily between jobs
Education improves skill
Targeting skills shortages
Identifying markets w/ specific skills shortages + training workers in those skills provides opportunity for workers to switch between occupations
Subsidising employers
Per hire subsidy from the gov provides an incentive for employers to take on workers w/o the necessary skills (+train them)
Or workers from a specific demographic (e.g. disabled workers) which improves occupational mobility
Relocation subsidies
Providing relocation subsidies to workers reduces geographical + occupational mobility
Reducing information asymmetry
Setting up job centres + improving the flow of information between employers + the unemployed helps workers to quickly identify new opportunities
Reducing discrimination
Reducing discrimination in hiring practices will help some workers improve occupational mobility
National Minimum Wage
= labour introduced NMW in April 1999 to raise people out of poverty and to create decent minimum standards in the workplace.
It changes every April, all workers over school leaving age receive minimum wage and a failure to pay employees can lead to the firm being fined
National Living Wage has been introduced for over 25 year olds.
For
reduces poverty as it mainly impacts the lowest wages + ensures these people have enough to live on
can reduce male/female wage differentials as women are more likely to take up lower paid jobs (as they're vocational, offer more flexible hours etc)
makes employees feel more loyal to businesses, so they're less likely to leave their job.
This can decrease labour turnover + so recruitment + training costs
this will increase profit BUT WEAK ARGUMENT as if they're offered a higher wage elsewhere they will leave
could be a more content, motivated workforce
so increase productivity and thus profits
but this assumes all people are motivated by money - not necessarily true
minimum wage provides incentive to work
prevents the 'unemployment trap' where benefits are higher than the wage people would otherwise receive
ensures people aren't drastically exploited
Against
potential loss of jobs in the industry (or unemployment on a macro level)
BUT
When evaluating NMWs do not assume they will automatically increase unemployment.
Many studies have shown unemployment doesn’t increase + in some instances employment increases.
This is likely due to the fact some workers are receiving higher wages + choose to consume more as lowest paid normally have high MPC (marginal propensity to consume).
This increases AD which increases firms’ demand for labour.
raises costs for companies so can increase their prices
wage spiral -
individuals will try to protect wage differentials between them
an increase in lowest paid means others will expect their pay to rise too
this will reduce profit + further reduce competitiveness
Maximum wages
some say CEOs should have a maximum wage to reduce inequality
introduction of maximum wage will create excess demand within the industry, as people may not put themselves forward for the job if they don't think the salary is sufficient, or know they could get higher wages abroad
UK could suffer from a loss of the best workers - reducing quality of businesses + competitiveness
impact of this depends of inelasticities of supply + demand. inelastic = little impact
its argued that supply + demand for the highest paid workers is very inelastic as there is a small supply of them and firms only need few of them, so their cost is a very small part of total costs
hence, maximum wages could have almost no effect on the market, other than causing a reduction in wages
Public sector wage settings
since UK trade unions = weak, in the short run, the gov can effectively make whatever wage decisions it decides in order to improve the budget
e.g. in 2010-2015, public sector workers experienced a pay freeze.
this put downward pressure on private sector wages since few people were likely to leave the private sector for the public sector, + private sectors employers could use this as evidence to limit pay rises for their workers
however, in long run, if private sector workers receive pay rises, and public sector don't
people will move from public to private sector, forcing gov to increase public sector wages to increase supply
hence, wages of public + private sector tend to rise by same % of a long period of time, but in short term can rise by different rates
Wage determination
Perfectly competitive
= there is a balance of negotiating power between the buyer and seller (as alternative buyers + sellers are available)
Monopsony
= buyers are able to use their negotiating power to lower prices (in a labour market increase wages) to a point where they can maximise their consumer surplus (as shown in diagram by point B)
Monopoly
= sellers are able to use their negotiating power to increase prices (in a labour market decrease wages) to a point where they can maximise their producer surplus (as shown in diagram by point B)