Edexcel Economics - Labour Markets

Edexcel Economics (A-Level) - Theme 3: Business Behaviour and the Labour Market - Labour Markets

• Demand for Labour: The demand curve shows the quantity of labour employers want to hire at different wage rates. Demand is determined by marginal revenue product (MRP), which is the extra revenue generated by an individual worker.
• MRP = marginal output × price: This shows the value of employing one more worker.
• Derived Demand: Demand for labour is derived from the demand for the product the labour creates. If the product demand falls, labour demand falls.
• Factors Influencing Labour Demand:
  • Wage Rates: Higher wages reduce labour demand as it becomes more expensive to employ workers.
  • Demand for the Product: Increased product demand leads to increased labour demand.
  • Prices of Other Factors: Cheaper machinery or technology can reduce labour demand, whereas price increases make labour relatively cheaper thus increasing demand.
  • Wages in Other Countries: If wages are lower elsewhere, demand for labour in a higher wage country decreases.

Price Elasticity of Demand (PED) for Labour

• PED of labour is the responsiveness of the quantity demanded of labour to a change in wage rate.
• Factors Affecting PED of Labour:
  • PED of the Product: If the product's demand is elastic (sensitive to price changes), labour demand will also be more elastic.
  • Proportion of Wages to Total Costs: If wages form a large portion of a company's costs, a change in wages will significantly affect total costs and thus reduce labour demand making it more elastic.
  • Substitutes: Availability of substitutes (e.g., machinery or foreign labour) makes labour demand more elastic.
  • Time Period: Labour demand is more elastic in the long run compared to the short run.

Supply of Labour

• The supply curve shows the ability and willingness of people to work at different wage rates.
• Factors Influencing Labour Supply:
  • Wages: Higher wages generally lead to a higher supply of labour. However, there's a point called the "backward bending" where increasing wages will reduce working hours.
  • Population and Distribution of Age: A larger working-age population increases labour supply.
  • Non-monetary Benefits: Attractive working conditions, job security, and perks increase labour supply.
  • Education/Training/Qualifications: Higher skills and qualifications typically lead to greater labour supply.
  • Trade Unions and Barriers to Entry: Trade unions and entry restrictions reduce labour supply.
  • Wages/Conditions of Other Jobs: If other jobs offer better pay or conditions, supply of labour flows to those opportunities.
  • Legislation: Laws, like minimum wage and retirement ages, impact labour supply.

Market Failure in Labour Markets

• Immobility: Labour can be occupationally immobile (lack of transferable skills) or geographically immobile (high cost of relocation).
• Excess Supply/Demand: Immobility can lead to excess supply in one area/occupation and excess demand in others.
• Elasticity of Supply: Responsiveness of supply to a change in wage rates. Supply is more elastic in the long run than in the short run.

Wage Determination

• Perfect Competition: Wages are determined by the intersection of supply and demand curves. All workers are paid the same wage.
• Monopsony: Only one buyer of labor; the firm has market power and can control wages.
• Monopoly: Only one supplier of labor, like a labor union.
• Bilateral Monopoly: One buyer and one seller of labor; bargaining power determines the wage.

Labour Market Issues

• Skills Shortages: Lack of qualified workers in specific industries.
• Young Workers: Difficulties in getting jobs during economic downturns.
• Retirement: Increasing retirement-age population impacting job market.
• Wage Inequality: Widening gap between highest and lowest earners.
• Zero-Hour Contracts: Contracts offering no guaranteed hours.
• Gig Economy: Self-employment in short-term contracts.
• Government Intervention: Policies like national minimum wage to improve labour conditions and reduce inequality.

Public Sector Wage Setting

• Public sector wages are often influenced by political considerations, budget constraints and the need to maintain morale within the public sector