Theme 3 Topic 5

Question 1

Derived demand

Answer 1

The demand for labour is a derived demand

This means that it depends on the demand for goods/services

If demand for goods/services increases then the demand for labour will increase

Question 2

Labour market

Answer 2

The labour market is composed of sellers of labour (households) and buyers of labour (firms)

Workers supply their labour and firms demand labour

Question 3

Factor influencing demand for labour - The price of the product being produced

Answer 3

If the selling price of the product increases, it increases the marginal revenue product of labour and the firm will demand more labour

Higher priced products incentivise firms to supply more (law of supply) and demand for labour will continually increase with increasing prices

Question 4

Marginal Revenue Product of Labour

Answer 4

Is the extra revenue generated when an additional worker is employed

Question 5

Factor influencing demand for labour -The demand for the final product

Answer 5

As demand for labour is a derived demand, when an economy is booming, then demand for normal goods/services will be high, and the demand for labour will be high.

Conversely, when an economy is in a recession demand for normal goods/services will be lower, and the demand for labour will be lower

Question 6

Factor influencing demand for labour - The ability to substitute capital (machinery) for labour

Answer 6

Firms will regularly evaluate whether it is more cost-effective to switch production from using labour to capital (machinery).

If it is more cost-effective, then demand for labour will fall

Question 7

Factor influencing demand for labour - The productivity of labour

Answer 7

If the productivity of labour increases (possibly through training), this will lower average costs, and firms will likely demand more labour.

Question 8

Supply of labour

Answer 8

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

Different factors are present in different markets e.g. in the labour market for doctors, the length of time it takes to study to become a doctor limits the supply of doctors.

However, in the nursing labour market, the low wages paid to nurses limit the amount of workers who offer their labour as nurses

Question 9

Market failure

Answer 9

occurs in the labour market when workers are unable to easily move between jobs

Question 10

What is market failure caused by ?

Answer 10

1. Geographical immobility of labour: this occurs when 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, and the challenges in securing/affording accommodation in an unknown location and weak transport infrastructure
2. Occupational mobility of labour: this refers to the ability of a worker to change occupations when they lose a job. If their skill base is transferable between different occupations, then their occupational mobility is high. In reality, many workers are not able to easily transfer between occupations and this is a particular issue when an economy is faced with structural unemployment

Question 11

Factors Influencing The Supply Of Labour - Training period

Answer 11

Long training periods act as a barrier to entry and exclude many households from offering labour in certain markets

Question 12

Factors Influencing The Supply Of Labour - Wages in other occupations

Answer 12

Comparative wage rates in substitute labour markets strongly influence the supply of labour e.g. it is getting harder to recruit economics teachers as the private sector offers higher wages for their skills

Question 13

Factors Influencing The Supply Of Labour - Changes in migration policy

Answer 13

Policies that increase the net migration rate increase the supply of labour to certain industries

e.g. Brexit revealed the extent of foreign labour in the hotel industry in the UK and the withdrawal created a shortage of workers

Question 14

Factors Influencing The Supply Of Labour - Income tax levels

Answer 14

At a certain level, income taxes become a disincentive to households offering their labour.

The assumption is that as income tax increases, labour supply decreases

Question 15

Factors Influencing The Supply Of Labour - Working conditions

Answer 15

The working conditions and non-pay benefits can act as strong incentive in certain industries

e.g. tech companies are well known for their laid-back work environment and wide range of benefits e.g. on-site childcare and restaurants

Question 16

Factors Influencing The Supply Of Labour - trade union power

Answer 16

Trade unions can increase the supply of labour to certain industries as workers consider the benefits of belonging to the union e.g higher wages and a safer working environment

Question 17

Trade union

Answer 17

An organisation that represents the interests of the workers in a particular industry

Question 18

Factors Influencing The Supply Of Labour - Level of welfare benefits

Answer 18

The higher the level of welfare benefits, the lower the incentive for low-skilled labour to offer their labour

Question 19

Factors Influencing The Supply Of Labour - social trends

Answer 19

Social trends include any major changes within society and can influence the supply of labour to certain industries.

Work from home during Covid resulted in significant changes to the labour market once economies opened up again

e.g many restaurant workers did not feel safe returning to the jobs they previously had

Question 20

Labour market equilibrium

Answer 20

Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)

The DL is the demand by firms for workers
The SL is the supply of labour by workers

Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry

If they offer a lower wage, they will likely struggle to recruit workers
If they offer a higher wage there will be a large number of workers applying to work there

No excess supply nor demand.

Question 21

Current labour market issues

Answer 21

The labour market is extremely important as jobs provide income to households, which directly impacts the standard of living in an economy

Changes to conditions in the labour market can be traumatic as they may result in changes to wage rates, working conditions and/or the benefits associated with a particular job

These changes can possibly decrease the standard of living for many people

Question 22

6 current labour market issues

Answer 22

1. Skills shortages
2. Youth unemployment
3. Changes to retirement ages
4. School leaving age
5. ZHC
6. Flexible working

Question 23

Skills shortages

Answer 23

In December 2021 more than 50% of firms surveyed reported difficulties in finding skilled workers

A shortage of skilled labour means that firms are having to increase wage rates to attract labour

Firms are effectively poaching skilled labour from each other and there is a shortage of new skilled labour entering the market

Some of the many labour markets experiencing shortages include nursing, engineering, pharmacies, secondary teaching, and graphic design

Question 24

Youth unemployment

Answer 24

Unemployment for 16-24 year olds in April 2022 was at 10.8% compared to the general unemployment rate of 3.8%

This means that it is nearly three times as likely for a young person to be unemployed

Where possible employers prefer to hire workers with more experience as it can lead to higher productivity

The education or skills gap is another reason for youth unemployment. Young people leave school without the skills that employers require

Question 25

Changes to retirement ages

Answer 25

In 1995 the state retirement age was 60 for women and 65 for men In recent years, State Pension reform has been ongoing and the retirement age is gradually being increased to 68 for both men and women This means that workers are expected to remain in the workforce for longer With too many pensioners in the system, it is difficult for the government to fund monthly pension payments An improvement to life expectancy has meant there are more pensioners in the system

Question 26

School leaving age

Answer 26

The earlier a student leaves school the lower their skill level Different policies are in place in England as compared with Scotland, Northern Ireland and Wales In the latter three the school leaving age is 16 and there are no further conditions in place In England, students can leave school at 16 but have to do one of the following until they are 18 Stay in full-time education, e.g. at a college Start an apprenticeship or traineeship Spend 20 hours or more a week working or volunteering, while in part-time education or training This aims to increase the skill level but also puts increased pressure on training providers There are not enough apprenticeships to match the demand

Question 27

ZHC

Answer 27

In 2022, nearly 1 million workers were on zero-hour contracts which is more than five times the number in 2000 These contracts are extremely beneficial to employers Workers are not guaranteed work and only get paid for the work they do Workers do not receive many of the benefits that full-time employees receive - this reduces costs for the firm Some workers do enjoy the flexibility this provides as they can sign contracts with several firms and sometimes enjoy a wider variety of work These contracts change unemployment figures as workers may not end up receiving much work, but are no longer counted as unemployed

Question 28

Flexible working

Answer 28

Flexible working is working in such a way that it meets the employee's needs Covid19 has driven changes in thinking around where work happens Many workers now want to work from home Some employers prefer this as it lowers company costs Other employers are insisting on a return to the workplace as it is required, or they want more control over their workforce There is an increasing focus on well-being and more people are opting to work part-time jobs or jobs that offer more flexibility

Question 29

Maximum wage

Answer 29

A maximum wage is a government imposed price ceiling below the market price and is rarely used There has been some discussion recently to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full-time employees If CEOs were paid less then the average pay per worker may increase

Question 30

Minimum wage

Answer 30

A minimum wage is a legally imposed wage level that employers must pay their workers It is set above the market rate This varies based on age

Question 31

National minimum wage diagram analysis

Answer 31

The market equilibrium wage and quantity for truck drivers in the UK is seen at WeQe The UK government imposes a national minimum wage (NMW) at W1 Incentivised by higher wages, the supply of labour increases from Qe to Qs Facing higher production costs, the demand for labour by firms decreases from Qe to Qd This means that at a wage rate of W1 there is excess supply of labour and the potential for real wage unemployment equal to QdQs

Question 32

NMW evaluation point

Answer 32

Higher NMW doesn’t always mean higher unemployment. Higher wages, higher consumption, higher AD, higher demand for labour, eradicates potential real wage unemployment.

Question 33

Public sector wage setting

Answer 33

The UK government is the largest employer in the nation In April 2022 there were 5.74 million public sector workers out of a total of 29.6 million employed workers (19.39%) In many industries, the UK Government is the dominant employer and so is able to exercise monopsony power in setting the wage rates

Question 34

Public sector wage setting implications

Answer 34

If the government increases the NMW, they are significantly increasing their own wage bill The private sector often uses public sector wages as a benchmark for their own wage calculations If public sector wages increase and private sector ones do not, it can create tension between workers in the different sectors Increases to public sector pay often have to be paid for by increases in tax rates for the entire working population Worker's wages were frozen from 2010 to 2015 after the 2008 global financial crisis This was followed by uncontrolled inflation and wage increases well below the level of inflation In June 2022, public sector workers were striking due to issues with the pay increases offered by the Government

Question 35

Policies to tackle labour market immobility

Answer 35

1. Improved education + training 2. Targeting skills shortages 3. Subsidising employees 4. Relocation subsidies 5. Reducing information asymmetry 6. Reducing discrimination

Question 36

Reducing discrimination

Answer 36

Helps some workers improve occupational mobility

Question 37

Reducing information asymmetry

Answer 37

Setting up job centres and improving the flow of information between employers and the unemployed helps workers to quickly identify new opportunities

Question 38

Relocation subsidies

Answer 38

Providing relocation subsidies to workers reduces both geographical and occupational immobility

Question 39

Subsidising employees

Answer 39

A per hire subsidy from the government provides an incentive for employers to take on workers without the necessary skills (and train them) - or workers from a specific demographic (e.g. disabled workers) and this improves occupational mobility

Question 40

Targeting skills shortages

Answer 40

Identifying markets with specific skills shortages and training workers in those skills provides some opportunity for workers to switch between occupations

Question 41

Improved education/training

Answer 41

Education improves skills and a wider skill base allows workers to move more easily between jobs which are not 100% identical

Question 42

Elasticity of DoL

Answer 42

This refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate) If the demand for labour is elastic, then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firms If demand is elastic firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise

Question 43

Elasticity of SoL

Answer 43

This refers to how responsive the supply of labour is to a change in the price of labour (wage rate) If the supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in the quantity of labour supplied In low skilled occupations the quantity of labour supplied is very responsive to a change in wage rates i.e. supply of labour is elastic Occupations which require a longer and higher level of training tend to have an inelastic supply of labour i.e even if wage rates increased significantly, there would be a less than proportional increase in the supply of labour in the short run

Question 44

4 factors that influence PED of labour

Answer 44

1. The proportion of labour costs to total costs 2. Ease + cost of factor substitution 3. PED of final product 4. Time period

Question 45

The proportion of labour costs to total costs

Answer 45

The higher these are then the more elastic the demand for labour will be; the lower these are then the more inelastic the demand for labour will be

Question 46

Ease + cost of factor substitution

Answer 46

If substituting capital for labour is easy and the cost is comparable to the increase in wages, the demand for labour will be more elastic - and vice versa

Question 47

PED of final product

Answer 47

If the product being produced is price inelastic in demand, then the demand for labour is likely to be more inelastic i.e if wages rise, firms will pass on the increased costs of production to the final consumers

Question 48

Time period

Answer 48

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 the quantity demanded. However, in the medium to long-term firms can research alternative methods of production and the demand for labour becomes more price elastic

Question 49

Real wage unemployment

Answer 49

Occurs when wages are set above the equilibrium level creating imperfections (excess supply) in the labour market