Labour Markets | 4.1.6 | Microeconomics | AQA A-Level Economics Notes

Last updated on Mar 7, 2024

4.1.6.1 The Demand for Labour, Marginal Productivity Theory

The demand for a factor is derived demand from the product.
Demand for labour is the number of workers that employers are willing and able to hire at any given wage.
MRP = MPP x MR
Marginal physical product of labour is the addition to a firm’s total output brought by employing one additional worker.
Marginal revenue product of labour is the money value of the addition to a firm’s total output brought about by employing one additional worker.
Marginal productivity theory states that there is diminishing marginal productivity as the number of workers employed increases.
The demand curve shows the relationship between the wage rate and the number of workers employed.
The MRP is the demand curve for firms and the MC is the wage rate.
As wages increase, the quantity of workers demanded decrease. There is an inverse relationship between the two.
The demand curve is downward sloping in the short run due to the law of diminishing marginal returns of labour, and also in the long run due to the substitutability of labour with capital.
MRP theory is limited as it is difficult to measure individual productivity in large firms.
Shifts of the demand curve are caused by changes in: demand for the good, productivity of the workers, and prices of capital.
PED_L is the degree of responsiveness of demand for labour following an initial change in wage rate. Elasticity is determined by (SECT): substitutability of capital, elasticity of the product, and cost of labour out of total costs.

4.1.6.2 Influences upon the Supply of Labour to Different Markets

Supply of labour: the number of workers willing and able to work at any given wage.
The supply of labour to a particular occupation is influenced by monetary and non-monetary considerations.
Non-monetary considerations include job satisfaction and dissatisfaction.
The supply curve for labour shows the relationship between the wage rate and the number of workers willing to work in an occupation.
Supply is determined by: wages in substitute jobs, barriers to entry, non-monetary considerations, occupational mobility, working population, value of leisure, expectations.
The elasticity of labour supply is determined by: the nature of skills required, vocational elements, length of training period, time.
An individual’s supply curve is backward bending.
The substitution effect shows that as wages increase, the opportunity cost of leisure rises, causing the supply of labour to increase.
The income effect shows that as wage rates rise, real incomes rise, causing an increase in the demand for leisure and therefore the supply of labour decreases.

4.1.6.3 The Determination of Relative Wage Rates and Levels on Employment in Perfectly Competitive Labour Markets

All real-world markets are imperfectly competitive to a greater or lesser extent.
A perfectly competitive labour market consists of many buyers and sellers, each unable to influence the wage rate, free entry and exit and perfect market information.
In a perfectly competitive outcome, workers are homogenous, so they are all offered the same wage rate. This makes the wage rate equal to the average cost of labour and the marginal cost of labour.
Employers are profit maximisers and hire workers up until the point MRP = MC.

4.1.6.4 The Determination of Relative Wage Rates and Levels of Employment in Imperfectly Competitive Labour Markets

A monopsony is a sole employer of labour in a market.
Monopsony power is the market power exercised by an employer of factors of production such as labour, in a market.
Various factors such as monopsony power, trade unions, imperfect information, government regulation, and immobility contributes to imperfections in a labour market.
In a monopsony labour market, the employer can use market power to reduce both the relative wage rate and the level of employment below those that would exist in a perfectly competitive labour market.
The power of a monopsony can be judged by the difference between the wage rates they offer, and the workers’ marginal revenue product.

4.1.6.5 The Influence of Trade Unions in Determining Wages and Levels of Employment

A trade union is a group of workers who join together to maintain and improve their conditions of employment, using collective bargaining.
The power of trade unions has been affected by factors such as a series of Employment Acts, such as the legal rights of trade unions. Also, globalisation and migration have increased the supply of labour and allowed employers to determine wages on a ‘take-it-or-leave-it- basis. ‘Closed shop’ trade unions are where all labour supply is controlled by one trade union. This is now illegal. It is also more difficult to organise a strike (e.g. 75% of workers must be willing).
On the other hand, it is quite likely for trade unions to bargain higher wages in return for better productivity through training etc. This means that firms’ unit costs do not change and will not lead to unemployment.
In a perfectly competitive market, trade unions are able to increase wage rates.
They also create unemployment seen by the excess supply of labour L₃L₂, as well as increasing costs of production. Often, trade union intervention can lead to inefficient outcomes.
In a monopsony market, trade unions can intervene and bargain for an increase in wages and employment.

4.1.6.6 The National Minimum Wage

The NMW is a minimum wage that must by law be paid to employees.
The national living wage is an adult wage rate, set by the UK government, which all employers must pay from 2016 onwards (£7.50/hr).
Pros: alleviates poverty, reduced wage differentials, more equal distribution of income and wealth, reduced voluntary unemployment, revenue generated from income tax, morale boost can lead to productivity gains, incentive for companies to invest in capital, counters monopsonies
Cons: unemployment in more competitive markets, youth lose out the most, those not on NMW may ask for wage rises to maintain differential, costs to business, leads to inefficiencies/ higher prices, loss of competitiveness, often government are monopsony employer, higher government spending.

4.1.6.7 Discrimination in the Labour Market

Wage discrimination occurs when different workers earn different wage rates when doing the same job e.g. because of gender, ethnicity.
Wage differentials are differences in wages between workers with different skills in the same industry, or comparable skills in different industries.
This is caused by labour market imperfections. For example, workers are not homogeneous; they have different MRPs, different individual supply curves, discrimination, non-monetary conditions, monopsony and wage-setting ability of employers, and immobility of workers.
Common wage differentials are seen in terms of gender, job types, region and ethnicity.
Gender: women are economically inactive at their peak, they often take part time jobs, and in some cases there is discrimination.
Footballers vs. teachers: the supply of footballers is low and inelastic (lack of homogeneous footballers), the MRP of footballers is high, teachers are hired by monopsonist state, there is a vocational element to teaching.
North-south divide: labour is derived demand, occupational immobility in North, more migration and supply in London, productive workers move to area of higher wages (domino effect). More demand in London because more firms so higher wages.
Ethnicity: language barriers, less qualified/ low MRP.
Pros: incentives to gain skills and improve MRP, trickledown effect (jobs > spending > tax revenue > goes back to lower earners through welfare payments), encourages enterprise, substitution effect (work incentives).
Cons: income inequality, relative poverty, dangerous if government do not manage employment or welfare payments.