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Tutor2u - Labour Market Economics


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In this section we focus on some aspects of the factor market for labour resources. It is a good chance to revisit the conditions of supply and demand by looking at labour supply and demand factors in different industries and occupations. A common error among students is to discuss “the demand for labour” as coming from individuals looking for work! In fact, labour demand focuses on how many people an employer is willing and able to take on at a given wage rate. Ensure you understand that factors influencing the supply of labour including population migration, income tax and benefits, the national minimum wage) and also the roles played by trade unions.

Published in: Economy & Finance
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Tutor2u - Labour Market Economics

  1. 1. Labour Market Economics
  2. 2. How Markets Work The Labour Market
  3. 3. The Demand for Labour • There is an inverse relationship between demand for labour & the wage rate • If the wage rate is high - more costly to hire extra employees • When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might create a substitution effect and lead to an expansion in labour demand The demand for labour shows how many workers an employer is willing and able to hire at a given wage rate in a given time period Wage Rate Employment Labour Demand W1 W2 W3 E2 E1 E3 Higher wages – contraction of demand Lower wages – expansion of demand
  4. 4. Elasticity of Labour Demand 1. Labour costs as a % of total costs: When labour expenses are a high % of total costs, then labour demand is more elastic. 2. Ease and cost of factor substitution: Labour demand is more elastic when a firm can substitute easily between labour and capital inputs. 3. Price elasticity of demand for the final output: This determines whether a firm can pass on higher labour costs to consumers in the form of increased prices. Elasticity of labour demand measures the responsiveness of demand when there is a change in the wage rate. It depends on …… Wage Rate Employment LD1 LD2 W1 W2 W3 E1E3E2 LD2 is inelastic – i.e. a large rise in wages causes only a small fall in employment LD1 is elastic – i.e. employment is sensitive to a changing wages
  5. 5. Shifts in Labour Demand • The labour demand curve shifts when there is a change in the conditions of demand in the jobs market. • A rise in consumer demand which means that a business needs to take on more workers • An increase in the productivity of labour which makes labour more cost efficient than capital • A government employment subsidy which allows a business to employ more workers • The labour demand curve would shift inwards during a recession as businesses shed labour Wage Rate Employment LD1 LD2LD3 W1 E1E3 E2 Shifts in labour demand are caused by factors other than the wage rate
  6. 6. Labour Supply to an Industry / Occupation • The labour supply curve for any industry or occupation will be upward sloping. • As wages rise, other workers enter this industry attracted by the incentive of higher rewards. • The extent to which a rise in the prevailing wage or salary in an occupation leads to an expansion in the supply of labour depends on the elasticity of labour supply The labour supply is the number of hours people are willing and able to supply at a given wage rate Wage Rate Employment Labour supply W1 W2 W0 E1 E2 W0 – reflects the minimum pay rate at which people are willing to work in an occupation
  7. 7. Key Factors: Industry / Occupational Labour Supply 1. Real wage rate on offer in the industry itself 2. Extra pay – e.g. overtime payments, productivity pay, share options 3. Wages in substitute occupations: e.g. increase in the earnings for plumbers and electricians may cause people to switch their jobs 4. Barriers to entry: Artificial limits to an industry’s labour supply (e.g. minimum entry requirements) can restrict supply and increase wages 5. Improvements in the occupational mobility of labour e.g. as result of expansion of apprenticeships and other forms of work experience 6. Non-monetary characteristics of specific jobs – e.g. risk, requirement to work anti-social hours, job security, working conditions, opportunities for promotion, chance to live and work overseas, employer-provided in-work training, occupational pension schemes. 7. Net migration of labour – e.g. net inward migration boosts the active / available labour supply in many occupations such as skilled professionals working in the National Health Service
  8. 8. Elasticity of Labour Supply Elasticity of labour supply measures the extent to which labour supply responds to a change in the wage rate in a given time period Wage Rate Employment LS1 W1 W2 E1 E2 Wage Rate Employment LS2 W1 W2 E1 E2 In lower-skilled jobs, the labour supply is elastic because a pool of labour is available at a fairly constant market wage rate Where jobs require specific skills and training, the labour supply will be more inelastic
  9. 9. Equilibrium Wages in the Labour Market 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. Wage Rate Employment LS1 W1 E1 Wage Rate Employment LS1 W1 W2 E1 E2 LD1 LD1 LD2 An outward shift of labour demand
  10. 10. High and Low Pay in the UK Labour Market Median full time gross weekly pay for different UK occupations, April 2014 Highest paid occupations in 2014 £s Lowest paid occupations in 2014 £s Aircraft pilots and flight engineers 1,746 Bar staff 254 Air traffic controllers 1,549 Waiters and waitresses 258 Chief executives and senior officials 1,533 Dry cleaners and pressers 259 Marketing and sales directors 1,298 Hairdressers and barbers 269 Advertising and public relations directors 1,289 Kitchen and catering assistants 268 Information technology and telecommunications directors 1,226 Leisure and theme park attendants 273 Legal professionals 1,217 Retail cashiers and check-out operators 279 Medical practitioners 1,167 Other elementary services occupations 280 Brokers 1,149 Nursery nurses and assistants 285 Financial managers and directors 1,143 Cleaners and domestics 286
  11. 11. Key Causes of Pay Differentials in the Labour Market 1. Compensating wage differentials – a reward for risk-taking, working in poor conditions and during unsocial hours. 2. Reward for human capital – differentials compensate workers for (opportunity and direct) costs of human capital acquisition. 3. Different skill levels – market demand for skilled labour (with inelastic supply) grows more quickly than for semi-skilled workers. 4. Differences in labour productivity and revenue creation - workers whose efficiency is highest and ability to generate revenue for a firm often rewarded with higher pay. 5. Trade unions who might use their collective bargaining power – to achieve a mark-up on wages compared to non-union members 6. Other artificial barriers to labour supply e.g. professional exams 7. Employer discrimination - a factor that cannot be ignored despite over twenty years of equal pay legislation in place
  12. 12. Trade Unions in the Labour Market • Trade unions use collective bargaining with employers to protect their members • Most unions belong to the Trades Union Congress • Examples: Amicus, Unison, Unite and the National Union of Teachers • The % of employees that were members of a trade union in the UK fell from 32% in 1995 to 25% in 2013 • In 2013, just over 7 million people were registered as members of a trade union • Key roles for trade unions 1. Protecting and improving the real living standards of their members 2. Protecting workers against unfair dismissal (upholding employment rights) 3. Promoting improvements in working conditions, workload & health and safety issues 4. Workplace training and education, i.e. the accumulation of human capital 5. Protection of pension rights for union members
  13. 13. Some Key Causes of Labour Market Failure Markets fail when they fail to reach a socially efficient/equitable outcome. • Occupational immobility - barriers to moving easily between jobs • Geographical immobility – barriers to changing location to find a new job Labour Immobility • The unemployment trap – where economic incentives to take a job are poor • The poverty trap – where there are disincentives to earn extra income Disincentives to find / take work • This is a part explanation of the gender gap in pay and women in senior roles • Discrimination badly affects wages and employment for affected groups Discrimination by employers • They can use their “buying power” in labour market to drive down wages Monopsony power of employers
  14. 14. Government Policies to address Labour Market Failure Policies seek to improve incentives, skills and labour flexibility • Targeted employment subsidies / apprenticeships / internship opportunities • Reforms to the housing market to improve affordability / lower travel costs Labour Immobility • Reforms to incomes taxes (lower rates) & benefit reforms (e.g. benefit cap) • Increase in the national minimum wage / expansion of the living wage Disincentives to find / take work • Tougher laws on equality and penalties for businesses flouting the law • Laws on unfair dismissal / min wage + other measures to cut poverty pay Discrimination by employers • Encourage business start-ups / small businesses as new employers Monopsony power of employers
  15. 15. Get help from fellow students, teachers and tutor2u on Twitter: @tutor2u_econ
  16. 16. Tutor2u Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.