THE MARKET FOR LABOUR

The demand for labour Factors affecting the position of the demand for labour curve Elasticity of the demand for labour The supply of labour Individual supply of labour Industry labour supply Factors affecting the supply of labour Labour market equilibrium Trade unions Explaining wage differentials

 Is a factor market Price of labour is wage rate The price of labour is determined

by

DD and SS Who demands labour? Who supplies labour? Why is labour needed?
Labour intensive Capital intensive

 Demand

for labour is a derived demand.

Firms do not demand labour for their

own sake. Demand labour to produce goods and services that generate revenue.

1.

Wage rate
What happens to the demand for labour if the wage rate increases?

The higher the price of labour, the lower the quantity demanded of labour.

Why? 2 main reasons: a. Firms will opt to substitute capital for labour (assuming the price of machines remain the same). b. With higher labour costs, cost of production also increases thus causing a decrease in profit

 What

does this tell you about the demand curve?

Upward sloping? Downward sloping?

Movement along the DD curve or shift in the DD curve?

2. Increased efficiency/productivity
Productivity, DD labour More labour will be demanded because output per labourer is higher at the same wage rate. Movement along the DD curve or shift in the DD curve?

Productivity = output/input

2. Capital stock
Higher capital stock reduces the demand

for labour. Machines are assumed to be more productive than labourers and are able to function at a cheaper cost Mainly applies to capital intensive industries Does not apply to industries such as hospitality and coal mining Movement along the DD curve or shift in the DD curve?

3.

Demand for the product

Demand for labour is a derived demand Firms will only demand for labour if there is a demand for the product produced Is there a movement along the DD curve or a shift in the DD curve?

 Apart

from the position of the DD curve, it is important to know the shape of the demand curve Will be looking at what factors affect the firms elasticity of demand for labour with respect to changes in wage rates

1. 2. 3.

Availability of substitutes Relative size of expenditure Time period

1.

Substitutability for labour in the production process

If labour is easily substitutable, an increase in wage would cause a decrease in quantity of labour demanded. Would the DD curve be elastic or inelastic?

2.

The share of labour cost in the firms total cost

When there is a high share of TC, firms are sensitive towards changes in the cost of labour. Is the DD curve elastic or inelastic?

3.

The price elasticity of demand for the product produced

The more price elastic the product (very sensitive to price), the more sensitive firms will be to the change in wage rate.

4. SR/LR effects In the SR capital tends to be inflexible What does this say about the SR

elasticity? What happens in the LR?

+
DLA Q Firm A Firm B DLB

=
D Q Industry demand Q

 Wage

rate also affects the supply of labour What is the relationship between wage rate and supply of labour? Shape of the supply curve of labour?

 Lower

wage, higher value of working

time.
Will work more hours Substitution effect

When

you reach a certain stage, you have a higher value for leisure.
Will choose to work fewer hours Income effect

Factors affecting the supply of labour

1.

Natural population changes

In countries where the birthrate is high i.e. more population, the supply of labour is also high. These countries also have a lower wage rate

2.

Migration
Workers from low wage nations such as Pakistan and Eastern European countries (Poland) are moving to the UK where wage rates are higher This has a negative effect on the home country as labour is leaving the country

Referred to as brain drain Positive effect: remittance

This causes a downward pressure on wage rates

 Philippines
Overseas Filipinos are usually doctors,

nurses, accountants, military servicemen and domestic helpers Remittance makes up about 10 to 13% of the countrys GDP
India

is another nation with high levels of remittance. Highest in the world in 2008.

3.

Income tax and National Insurance Contributions (Incentive effects)

Taxes reduces wage E.g. If you earn RM10 per hour and the tax rate is 10%, your disposable income is RM9. Higher tax rates, reduces willingness to

work. The key tax rate for a worker is the marginal tax rate

 Marginal

tax rate

The rate on the last dollar of income

earned How much will the wage rate after tax be if an extra hour/day/week is worked Lower marginal tax rates gives incentive to workers to participate in the economy

4.

Welfare benefits/unemployment benefits

If the unemployment benefit is too high, workers from low wage income may choose to live on welfare benefits instead of working. In the UK unemployment benefit is called Jobseeker's Allowance E.g. nations such as Italy, New Zealand, Ireland have unemployment benefits

5.

Minimum Wage

Imposed to raise very low incomes to a minimum level Objectives:

Alleviate poverty by raising living standards in a country Improve incentives to work Protect workers against exploitation by employers

Graph for minimum wage 5.80 per hour for workers aged 22

 Minimum

wage is 0F, an increase

from 0E Employers will reduce their demand for labour Workers will want to work more because of the higher wage rate Problem of unemployment
More inelastic the demand and supply

for labour, lower unemployment

 Definition:

an organization of workers that negotiates with employers on behalf of its workers Became legal in the UK in 1824 3 main objectives:
Wage bargaining Improvement of working conditions Security of employment for their

members

ways in which trade unions can affect labour market equilibrium:

Restricting labour supply Successfully negotiating higher wages

Restricting

labour supply

Done through a closed shop firms can

only hire workers who are members of the union Problems Extent of trade off depends on elasticity

 Negotiating

wages

Kinked supply curve Unemployment depends on elasticity of

D
Job

security

Workers become less likely to lose their

jobs as unions protect their interest. May increase productivity of a worker

Labour

market flexibility

Insider-outsider phenomenon

 Surgeons
Supply is relatively inelastic in the SR Expensive education and specialized

skills are required Implies that supply of surgeons are limited

 Butchers
Does not require much training More people are able to do this job Labour supply is relatively elastic

Importance

of demand

Interactions between DD and SS would

determine the wage rate Strong demand for surgeons would lead to high wage rates