Labour

Question 1

MRP

Answer 1

MPP x MR = D

Question 2

Why is MRP curve shaped like that?

Answer 2

Law of diminishing returns

Question 3

Firms will keep hiring workers until

Answer 3

MRP = MC

Question 4

why is there an inverse relationship between wage and quantity of workers

Answer 4

short run - law of DR
long run - substitutability of labour and capital

Question 5

criticisms of MRP theory?

Answer 5

• how to measure productivity?
• teamwork makes it difficult to measure individual productivity
• self employed people don’t pay themselves according to MRP
• Imperfect labour markets (trade unions)

Question 6

shifts of the labour demand curve - PDPCWT

Answer 6

P - PRICE: change in the final price of the product labour is making, higher wage rates = contraction in demand for labour
D - DEMAND: change in demand for final product - derived demand labour.
P - PROD: changes in labour productivity, affects MRP = affects MR
C - CAPITAL: change in he price of capital, cheap capital can replace labour
W - wages in other countries, as companies may relocate to this countries
T - improvements in tech means jobs can be replaced by Tech

Question 7

Elasticity of labour demand curve - SECT

Answer 7

S - substitutability of capital for labour - more substitutes = more elastic
E - elasticity of demand for the product, if PED for good is elastic, a rise in wage prices = rise in prices for consumers = less revenue so elastic = elastic for labour
C - cost of labour as percentage of total cost
T - time period - in the LR, more elastic as machinery can be developed and jobs can be moved, while in SR firms have to employ workers.

Question 8

individual labour supply curve

Answer 8

• shaped like a boomerang
• key choice between work and leisure.
  income effect - as wages go up, incomes go up - may work less to reach target income
  substitution effect - as wages rise, opp. cost of leisure time rises - higher incentive to work.

x - real wage, y hours worked

Question 9

shifts of the labour supply curve

Answer 9

• wage - can mean people come out of retirement, or move back to industry as they are incentivised by higher wages
• barriers to entry - skills, quals, higher = lower supply
• non monetary characteristics of the jobs - doctor
• improvements in occupational mobility of labour - trade union
• size + age of the working population
• trade unions
• legislation - school leaving age, min wage, retirement age

Question 10

elasticity of labour supply

Answer 10

• nature of skills required in job: greater skills required = harder to join
• length of training period to be qualified for the job
• vocation - if so, fall in wages wont really change labour supply
• time - LR more elastic as people have more time to train
• availability of suitable labour in other countries, e.g. if a company can poach workers from other industries, more elastic.

Question 11

wage determination in a competitive labour market

Answer 11

• many potential workers and employees
• labour is homogenous
• there is perfect information
• firms are wage takers
• there are no barriers to entry/ exit

Question 12

why is the market supply of labour upward sloping

Answer 12

• as wage rate goes up, ex workers will join back, more people will join, etc.

Question 13

What is the equilibrium wage rate?

Answer 13

• The equilibrium market wage rate is at the intersection of the supply and demand for labour.
• Employees are hired up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling their output.
• The diagram on the right below shows the effects of an outward shift in labour demand, leading to a higher level of equilibrium employment and wages.
• Wages will rise more quickly if the supply of labour is wage inelastic.

Question 14

Gig economy

Answer 14

is a labour market characterised with many short-term contracts or freelance work.

Question 15

Benefits for gig economy for businesses

Answer 15

1. Reduces fixed costs for business – lower payroll expenses
2. Reduced need for investment – e.g. an Uber driver usually owns their own vehicles
3. Flexibility in managing hours to expected demand for their products

Question 16

Benefits in gig economy for workers

Answer 16

1. Flexible hours / control over when to work
2. Ability to work from home (offering more autonomy)
3. A common way for people to earn extra income perhaps because their main job is relatively low paid 4. Less risk of getting stuck in routine jobs

Question 17

Key causes of occupational immobility include:

Answer 17

1. skills gaps
2. training gaps
3. experience gaps
4. confidence and motivation

Question 18

market failure in labour markets:

Answer 18

• geographical immobility
• occupational immobility
• employer discrimination
• monopsony employers
• disincentives to work
• training gaps

Question 19

The Unemployment Trap

Answer 19

This happens when the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – this creates a disincentives problem in the labour market.

Question 20

The Poverty Trap

Answer 20

• The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system.
• Working more hours means some welfare benefits are cut.
• Earning extra income means that people now pay national insurance and income taxes.
• The overall marginal rate of tax (including benefit withdrawal) may be high – perhaps close to 100%

Question 21

Monopsony is a potential cause of labour market failure because

Answer 21

monopsonist may pay lower wages than if
the labour market was more competitive. Lower wages increase the risk of people being in working poverty

Question 22

drawbacks from the gig economy for workers

Answer 22

1. Doubts over the true flexibility of hours offered by employers
2. Lack of paid vacation/sick leave/employment rights (now being challenged in the courts)
3. Job and income uncertainty make it harder to get a mortgage – many people are in precarious jobs
4. Inadequate investment in worker training which limits the growth of human capital
5. Workers bear most of the risk in their job – often incomes are lower for the self-employed and many remain
   reliant on welfare benefits and are classed as being in “working poverty”.

Question 23

wider downsides from gig economy

Answer 23

1. Shrinking of the tax base will hit revenues for the government
2. Reductions in road safety / more accidents e.g. from delivery drivers using un-licenced vehicles 3. Are platform businesses creating sufficiently high-quality jobs?

Question 24

uk has an

Answer 24

ageing population

Question 25

Possible microeconomic effects of an ageing population

Answer 25

- Changing patterns of consumer demand in markets / affecting profits of businesses in particular sectors - Impact on housing market e.g. if people can live in their own homes for longer - Impact on labour market for different jobs – labour demand and labour supply consequences to consider

Question 26

Possible macroeconomic effects of an ageing population

Answer 26

- Impact on government welfare spending and future tax revenues e.g. NHS care - Impact on the rate of growth of productivity and long-term GDP growth - Impact on UK competitiveness if the median age continues to rise rapidly

Question 27

Trade unions use

Answer 27

collective bargaining with employers to protect their members.

Question 28

key roles for trade unions

Answer 28

* Protecting and improving the real living standards / real wages of their members * Protecting workers against unfair dismissal (i.e. upholding employment rights) * Promoting improvements in working conditions, work-life balance & related health and safety issues * Promoting better workplace training and education, i.e. the accumulation of human capital * Protection of pension rights for union members

Question 29

trade unions/ labour market eval

Answer 29

- LT decline in union membership, reflects growing flexibility of UK labour market - trade union influence on pay depends on trade union density in an industry - unions may negotiate a combined pay and productivity deal with employers - maybe game theory

Question 30

Arguments in favour of zero-hour contracts

Answer 30

1. Supporters of flexible employment contracts argue that they are good for businesses where demand and production is highly seasonal - for example in retailing, brewing, tourism and catering. Employing people on a zero-hour contract may allow businesses to better control their costs. 2. Zero-hours contracts might benefit some people who want a high level of flexibility in choosing when they want to work.

Question 31

Arguments against zero hours

Answer 31

1. A counter argument is that zero-hour contracts have contributed to an increase in "in-work poverty" where people are not able to work enough hours each week (often at relatively low wage rates) to earn sufficient to avoid remaining in poverty and reliant on top-up welfare benefits. 2. Uncertain incomes make it harder for people to be given loans, mortgages and mobile phone contracts.

Question 32

Case for a higher minimum wage

Answer 32

- equity justification - poverty reduction - training - incentives - anti discrimination

Question 33

Arguments against a rise in the minimum wage

Answer 33

- jobs - small businesses - training - competitiveness - inflation

Question 34

Arguments for executive pay ceilings

Answer 34

* Equity and fairness: o Damages social cohesion when the super-rich see their pay and earnings soar o Shareholders are reluctant to impose controls on pay at the AGM, many are passive investors * The high bonus culture encourages short-term decision-taking rather than focusing on the long-term strategic direction of a business * Huge levels of executive pay contribute to growing income and wealth inequality in society

Question 35

Arguments against executive pay ceilings

Answer 35

* Ceiling might prevent talented executives moving to the UK – high rate of pay is a price signal within the market * Might lead to businesses re-locating overseas to countries with lower top-rate taxes * Capping pay and bonuses could lead to rewarding executives in other ways e.g. using complex share options * Introducing higher marginal income tax rates on top executive pay might be a better option than capping

Question 36

Define labour demand

Answer 36

​quantity of labour that employers would wish to hire at each possible wage rate

Question 37

Define labour supply

Answer 37

ability and willingness of people to make themselves available to work at different wage rates

Question 38

Labour market issues

Answer 38

- skill shortages - young workers - hard to find jobs for them - retirement - wage inequality - zero hour contracts - gig economy - migration - may cause falls in wages

Question 39

Maximum wage

Answer 39

For chief executives to reduce inequality, but will lead to excess demand and uk may lose best workers

Question 40

Public sector wage setting

Answer 40

● Since trade unions in the UK are weak, in the ​short run​, the government can effectively ​make whatever wage decisions it decides ​in order to improve the budget. ● Between 2010 and 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 and private sector employers could use this as evidence to limit pay rises for their workers. ● However, in the ​long run​, if private sector workers receive pay rises and public sector workers don’t, people will move from the public sector to the private sector and this will ​force the government to increase public sector wages in order to expand supply. ● As a result, the wages of public and private sector workers tend to rise by the same percentage over a long period of time but in the short term they can rise by different rates

Question 41

Tackling immobility

Answer 41

- supply of houses - transport links - vocational training - National advertising - information

Question 42

Immobility labour market failure

Answer 42

- can suffer from either occupational or geo immobility - occupational immobility where workers find it different to move around jobs due to a lack of transferable skills, more ST prominent - geographical immobility, difficult to move from one place to another - immobility could mean excess supply in one area and excess demand in another, where roles can’t be filled in due to barriers of occupational/ geographical downfalls.

Question 43

Perfect competition wage determination

Answer 43

- same as perfectly comp product market where wages are determined purely by demand and supply and all workers are paid the same - if they weren’t paid the same, they’d simply move to an industry where the wage rate was higher D = S

Question 44

Monopsony in labour market.

Answer 44

- Only one buyer of labour, so businesses know that to increase labour forces they wil need to increase wages, so MC>AC, because it costs more to employ an additional worker than the average cost of labour. They employ less people at a lower wage rate than PC. At MC = D

Question 45

Monopoly in the labour market

Answer 45

The existence of trade unions means they can operate as the only seller of labour. They could set barriers of entry = reduce supply. Or could set specific wages, at W2, so firms will employ at QDW2, higher wages but less employment than perfectly competitive equilibrium of Q1W1.

Question 46

Bilateral monopoly

Answer 46

- For both monopoly and monopsony in a labour market, firms is a monopsonist and wants to employ at Q2W2, but union may decide to set a min wage of W1. The wage that is set will depend on the relative bargaining strength of both, dependent on the size of the union and strength of economy. Stronger during YFE, weaker during recession (w3 or w1)