4) The Labour Market

4) The Labour Market

1. Demand For Labour

   • A firm's demand for labour varies based on profits, it's a derived demand
     • Derived Demand; Demand for a good/factor of production which is a consequence of the demand for something else
   • Shifts of the market demand curve for labour reasons;
     • Change In Labour Productivity
       • If labour productivity increases, more labour is demanded at each wage rate, if demand increases for a good, raising the price labour curve shifts to right
       • REMEMBER; If a firms demand curve for labour shifts to the right, market demand curve for labour (sum of each firm's demand for labour) shifts to right
     • Change In Technology
       • If technical progress makes labour more productive relative to other factors of production, firms are likely to substitute labour for other factors of production
         • A firms demand for a particular type of labour is likely being inelastic because
           • Inelastic; Quantity demand/supplied of a good/service is unaffected when price of a good changes
           • Relevant wage cost forms a part of total production
           • Demand for the good being produced by the labour is inelastic
           • Difficult to substitute for other factors of production/different types of labour for labour currently employed
       • Technical progress is also likely to improve productive & dynamic efficiency, reducing the cost of making the product, reducing the product price. Resulting in a rise of demand for product & labour
   • Marginal Product of Labour; The addition to a firm's total output brought about by employing one more worker
   • To convert the maginal product of labour to marginal revenue product of labour, MPP multiplied by MR
     • Marginal Revenue Product of Labour; Money value of addition to a firm's total output by employing one more worker
   • Elasticity of Demand For Labour - % change in Qty Labour Demanded / % change in Wage Rate

2. Supply of Labour

   • An individual worker's job choice depends on the net advantage they expect to derive from different occupations
   • A worker supplies more labour to increase personal economic welfare (maximise private benefit). The welfare the worker derives is divided into two parts sometimes called net advantage
     • Net Advantage; The sum of the monetary & non-monetary benefits of working
     • Net Advantage Includes; Utility/Welfare derived from the wage, welfare derived from non-monetary benefits i.e. job satisfaction, job security, holiday entitlement
     • When the worker enjoys the job, the net advantage of worker is greater than welfare from wage
   • An individual worker's supply curve of labour shows how many hours of labour the worker plans to supply
   • The supply curve of labour illustrates the substitution effect of a change in the wage rate. A higher wage rate makes work more attractive than leisure. There can also be an income effect
     • Substitution Effect; A higher hourly wage makes work more attractive than leisure, so workers substitute labour for leisure
     • Income Effect; An increase in hourly wage rate means higher real income, if leisure is a normal good, the quantity of leisure increases, so decrease in quantity of labour supplied
     • Shifts In The Market Supply Curve of Labour
       • Changes In Population; A rise in population caused by immigration, increases the supply curve of labour
       • Changes In Expectations; Older people expect to live longer yet become less optimistic about their future pensions this could increase supply of labour
       • Changes In Income; A rise in income may cause a change in demand for leisure, effecting supply of labour

3. Perfectly Competitive Labour Markets

   • A perfectly competitive labour market if it were to exist it would have to meet all the conditions i.e. large number of buyers & sellers, each unable to influence market ruling wage
   • Just like in a perfectly competitive goods market it is impossible for all these requirements to be met simultaneously, perfectly competitive labour markets do not exist in its truest form
   • A firm employing workers would have to accept the market ruling wage, it would also be the average cost of labour curve & marginal cost of labour curve affecting each individual firm
     • Average Cost of Labour; total wage cost / number of workers
     • Marginal Cost of Labour; The addition to a firm's total cost from employing one extra worker
     • Firm faces a perfectly elastic supply of labour
   • To maximise profit when selling its output produced by labour, each firm demand labour up to the point MRP = MC
   • *MRP > W - More workers should be hired. *MRP < W - Fewer workers should be employed. *MRP = W - Firm employing workers consistent with profit maximistation

4. Imperfectly Competitive Labour Markets

   • In a pure monopsonistic labour market workers cannot choose between alternate employers since there is only one firm (one employer)
   • Many large firms exercise a high degree of monopsony power in the labour market in which they hire workers
     • Monopsony Power; The market power exercised in a market by the buyer of a good/services of factor of production (labour)
   • NHS Monoposony buyer of Midwives closest example
     • Monopsony; One buyer in a market
   • The market supply curve of labour is the firms average cost of labour curve. ACL curve shows different wage rates monopsony must pay to attract workers
     • Must pay hourly wage rate £30 per hour, wage rate must rise to £40 to attract extra worker

5. Influence of Trade Unions

   • Trade Union; A group of workers who join together to maintain & improve conditions of employment
   • In labour markets where trade unions are strong & possess significant bargaining power, wage rates are usually determined through process of collective bargaining
     • Collective Bargaining; Process by which wage rates & other conditions are negotiated & agreed upon unions with empolyer
   • Effect of Trade Union in Monopsony Labour Market
     • In a monopolistic market it is possible for the union to raise both wage rate & employment
     • Introduction of a trade union on monopolistic market has same effect on supply curve as in perfectly competitive market
   • Many, UK employers are now reluctant to recognise & bargain with the unions
   • Effect of Trade Union in Perfectly Competitive Labour Market
     • Without a TU the competitive wage rate is w1. TU negotiates a rise in wage rate to w2.
     • With the TU the market supply curve of labour is W2XS

6. National Minimum Wage & Discrimination In Labour Market

   • National Minimum Wage; A wage rate that must be paid to workers as a minimum required by law
   • Advantages of NMW
     • Helps to set a fair level, by redistributing income from employers towards low wage workers a minimum wage reducing income inequality & poverty
     • A national minimum wage can eliminate or reduce labour market exploitation of low paid workers
   • Wage Discrimination; Paying different workers different wage rates for doing the same job
   • Gender Discrimination
     • Although women have accounted for an increasing share of total employment in the UK, women's pay often continues to be lower than men's pay
       • There are two main reasons why women earn less than men: *Women work predominantly in low paid industries & occupations. *With many occupational groups, women are paid less than men

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