Demand for Labour and Price Elasticity

Demand for Labour

• The demand curve illustrates the quantity of labor employers are willing to hire at various wage rates.
• Labour demand is derived from the demand for the product it produces.
• Businesses hire labour as long as people are willing and able to buy their product.
• Key factors influencing demand include wage rates, product demand, prices of other production factors, wages in other countries, technology, and regulation.
• Demand falls as wage rates increase.
• Demand rises and falls with that of the products they produce
• Cheaper machinery leads to reduced labour demand.
• Lower wages in other countries shifts employment abroad.
• Technological advancements can displace labour, but increase demand in tech-related sectors.
• High labour market regulation can discourage hiring.
• By 2040, approximately 47% of jobs could be lost to technology

Price Elasticity of Demand (PED) for Labour

• PED measures the responsiveness of labour demand to wage rate changes.
• PED correlates directly with the price elasticity of demand for the final product, and the proportion of wages to total production costs.
• PED also depends on the availability of substitutes for labour, like machinery or overseas workers, and is more elastic in the long run than in the short run.
• If a good is elastic, a rise in wages will have a large impact on the quantity the businesses sells.
• Demand for labour is more elastic when wages are a huge of proportion of costs.
• High skilled jobs have a more inelastic demand than low skilled jobs, as labour cannot be easily replaced.

Supply of Labour

• The supply curve reflects people's willingness to work at different wage rates.
• Factors include wages, population size and age distribution, non-monetary benefits, education/training levels, trade union influence, conditions in other jobs, and legislation.
• For an individual, the labour supply curve is backward bending (increase in wage means a decrease in hours worked), but for a particular occupation the curve is upward sloping.
• Higher wages attract workers from other industries or the unemployed.
• A larger population increases the potential labour supply, as does migration.
• Non-monetary benefits like job satisfaction and perks boost labour supply.
• More educated workers increase the labour supply overall.
• Trade unions can restrict labour supply.
• Legislation such as school leaving and retirement ages affects labour supply.

Market Failure in Labour Markets

• Labour markets are not perfectly free due to immobility.
• Occupational immobility occurs when workers can’t switch jobs due to lacking transferable skills.
• Geographical immobility results from relocation costs, family ties, and housing issues.
• Immobility leads to excess labour supply in some areas/occupations and excess demand in others.
• The UK faces a skills shortage, potentially costing £90 billion a year post-Brexit.
• There are four million too few high skilled people but six million too many low skilled people.

Elasticity of Supply

• Responsiveness of labour supply to changes in wage rates.
• Supply elasticity depends on required qualifications/training, availability of workers in other industries, and the time frame.
• The more qualifications needed, the more inelastic the supply.
• It depends on time, as in the long run supply is more elastic because people have time to train.
• Vocational jobs have inelastic supply.

Wage Determination in Competitive Markets

• Wage rates vary within occupations due to factors like age, education, experience, skill, and sometimes, illegally, demographic factors.
• The lower the elasticity of supply/demand, the greater the change in the real wage rate.
• In perfect competition, wages are determined by supply and demand, with all workers paid the same.
• If workers were not paid the same, they would simply move somewhere else where the wage rate in the industry was higher.

Wage Determination in Non-Competitive Markets

• In imperfect competition, demand does not always equal supply.
• Monopsony: single buyer of labour.
• Monopsonies must increase wages for all workers to attract more labour, so their marginal cost (MC) curve is above the supply (average cost) curve.
• Compared to perfect competition, monopsonies employ fewer people at lower wages.
• Monopoly: trade unions operate as sole seller of labour and can restrict supply.
• Trade unions may introduce barriers to entry, or set wages at a specific wage.
• High wages and a fall in employment occur from the perfectly competitive equilibrium as a result of barriers of entry to the workforce.
• The government has reduced trade union power through legislation.

Bilateral Monopoly

• Exists when a monopsonist firm faces a monopoly union.
• There is a battle going on between the firm and the trade union.
• The final wage depends on each party's bargaining strength and economic conditions.
• Unions can positively impact wages and employment, potentially making the economy more efficient.

Labour Market Issues

• Skills shortages: Geographical and occupational immobility.
• Young workers: Suffer lower lifetime earnings if entering the market during recessions.
• Retirement: Rising life expectancy strains government budgets.
• Wage inequality: Higher earners' wages grow faster than those of lower earners, creating issues with relative poverty.
• Zero-hour contracts: Create income uncertainty for employees.
• Gig economy: Concerns arise over worker rights and pay stability.
• Migration: Debated impact on wages, but aids in filling skills gaps.

Government Intervention

• National Minimum Wage: Introduced to combat poverty and establish minimum standards.
• Introduced in April 1999.
• National Living Wage has been introduced for over 25 year olds.
• Failure to pay minimum wage can lead to firms being fined.
• Arguments for: Reduces poverty, narrows wage gaps, decreases labour turnover, motivates workers, prevents the unemployment trap, and ensures fair wages.
• Arguments against: Job losses, increased company costs, potential wage spirals, and ineffectiveness in addressing regional differences or poverty.
• Impact depends on where the minimum wage is set relative to the current wage, and the elasticity of supply and demand.

Maximum Wages

• Fewer places set maximum wages.
• Some suggest that there should be a maximum wage for chief executives.
• Can help reduce inequality and reduce spending.
• May lead to excess demand, loss of top workers, and reduced competitiveness.
• The UK may suffer from a loss of the best workers if maximum wages are implemented.
• Impact depends on the elasticities of supply and demand.

Public Sector Wage Setting

• Government can make wage decisions to improve budgets, especially with weak trade unions.
• From 2010-2015, public sector workers experienced a pay freeze.
• Wages of public and private sector workers tend to rise by the same percentage over a long period.

Tackling Immobility

• Improve geographical mobility by increasing housing supply, reducing property prices and rental costs, improving transport links, using national advertising, and offering subsidies in areas with labour shortages.
• Relocating public agencies outside of London can prevent excess labour demand in one area.
• Improving occupational mobility can be done through education, increased vocational training, encouraging further and higher education, and targeting skills shortages with specific training programs.
• Flexible work patterns will allow more parents to work.
• Reduces discrimination in the labour market by subsidising employers who employ individuals from groups with above average unemployment rates.

Explore the factors influencing the demand for labour, including wage rates, product demand, and technological advancements. Understand how the price elasticity of demand (PED) for labour measures the responsiveness of labour demand to wage rate changes. Also learn about impact of technology on job market.