The Labour Market

Content

• The Demand for Labour, The Marginal Productivity Theory• Influences upon the Supply of Labour to Different Markets• The determination of relative wage rates in competitive

markets• The Influence of Trade Unions and Monopsonistic

Employers in Determining Wages and Levels of Employment

• Discrimination in the Labour Market• The Distribution of Income and Wealth

The Demand for Labour

• Labour is one of the four factors of production• The labour market is where employers are able to

find the employees they require• Demand for labour generally falls as wages

increase – this is an inverse relationship• This is based on the assumption that all firms aim to

maximise profits

Demand for Labour – Derived Demand

• Demand for labour is derived from the demand for products that labour makes and is therefore influenced by productivity

• If the economy is in a boom there will be more demand for goods and services and therefore more demand for labour to produce them

• If the economy is in a recession there will be less demand for goods and services and therefore less demand for the labour to produce them

The Marginal Productivity Theory

• Marginal revenue productivity of labour (MRPL) examines the change in revenue for a business resulting from the employment of an additional worker

• This theory assumes:– All workers have the same abilities and productivity levels– Industry supply of labour is perfectly elastic– Trade unions don’t impact labour supply– Productivity of workers can be accurately measured

Productivity of Labour

• To calculate the productivity of labour:• Total Output / Quantity of factor • Productivity of labour influences the costs of a firm

and therefore has an influence on their profits• It is sometimes difficult to measure productivity

Marginal Productivity of Labour

• According to this theory if a firm was to maximise profits they would continue to hire workers up to the point where MC of employing an extra worker = MR they produce

Influences upon the Supply of Labour to Different Markets

• Supply curve for labour slopes upwards – at higher wage rates more people will work

• How many more people make themselves available at higher wage rates is influenced by elasticity of demand for labour

Influences on Labour Supply – Monetary

• Influences on labour are:• Financial:

– Wage rates – the higher these are generally the greater the supply of labour

– Overtime – if overtime is available it helps to increase supply – Wage rates in substitute jobs – if wage rates are higher than in

substitute jobs more labour tends to be supplied – Barriers to entry – these can lead to a higher wage rate being

paid – Opportunity cost of working

Influences on Labour Supply– Non monetary

• Increased mobility of labour – this could be occupational or geographical

• Net labour migration – this is an increasing factor with more countries joining the EU and migrating to the UK to find jobs

• Non monetary characteristics of jobs – these include factors that influence motivation such as working in a team, training and autonomy, employee benefits e.g. free gym membership, canteens on site and job security

Labour Supply of Specific Occupations

• The elasticity of the supply of labour for different occupations depends on a number of factors

• Occupations where workers are highly specialised and have to undergo extensive training such as medicine and law are likely to have inelastic supply

• Occupations where there are pools of labour with the skills and abilities to do the job tend to have elastic supply such as cleaners and assembly line workers

The determination of relative wage rates in competitive markets

• Wage rates are determined by the interaction of supply and demand

• Additional workers are hired up to the point where the wages for that worker are equal to the extra revenue they generate

Differences in wage levels

• There are a number of factors which result in differences in wage rates in competitive markets these include:– Different skill levels – occupations which need higher

levels of skill / academic qualifications generally pay more

– Differences in labour productivity and revenue production – some workers are more efficient than others so produce more therefore they should earn more

Difference in wage levels

• Workers are often paid more if their job is risky or involves working antisocial hours

• Trade unions can influence wage levels in some markets

• Generally in markets where supply of labour is limited due to specific skills, qualifications or abilities than higher wages are demanded

Supply and Demand of Labour• This model shows where

S1 and D1 intersect the equilibrium wage rate is W2

• If there are changes to the factors that influence supply or demand of labour causing the curves to shift equilibrium moves and the wage rate changes

Trade Unions

• Trade Unions work on behalf of workers through collective bargaining, their aims include:

• Improve the pay of workers. • Improve working conditions and secure longer

holidays. • Protect members' jobs. • Provide local, social and welfare facilities. • Influence government policy

•The Influence of Trade Unionsand Monopsonistic Employers

in Determining Wages andLevels of Employment

• The power of trade unions has decreased in the UK over recent decades due to laws, increased competition and the move towards a more flexible workforce

Unions and Wages

• Unions may try to use their collective bargaining power to get higher wages for members

• For this to be effective then the union needs to have a degree of control over the labour force and therefore the total labour supply

• The extent to which unions can impact wages depends on:– The level of unemployment – Competition

Unions and Wages

• If demand for labour is elastic then unions can force wages higher but quantity demanded will decrease

• If demand for labour is inelastic than unions will be more effective at rising wage levels

• Many markets that have unions have more elastic demand for labour therefore unions have less influence on wage rates

Monopsonistic Employers

• Monopsonistic markets are where the market is dominated by one buyer who is able to set the price for the whole market

• If this is the case in the labour market than this one employer is able to set the wage rate

• In these markets employers may pay workers at a rate below their marginal product

Discrimination in the LabourMarket

• There are a number of ways that discrimination can occur in the labour market

• Equal opportunities - everyone has the same chances

• Sex, Race, Age and Disability discrimination

• UK legislation and European legislation tries to prevent discrimination

• Businesses operate ‘Equal Opportunities Policies’-firm is committed to equality of opportunity for all

Discrimination in the Labour Market

• Discrimination occurs in the labour market for a number of reasons:– Employer ignorance– Occupational crowding effects – women and ethnic

minorities may be most concentrated in lower paying jobs

– The taste model (gary Becker) Becker proposed that people prefer to work with people of a similar ethnic background to themselves

Advantages of Equal Opportunity PoliciesAdvantages of Equal Opportunity Policies

• Better workers as there is more competition in labour market (since more workers are available)

• Increased flexibility where employers can benefit from flexible female labour (60% of women workers are P/T)

• Wider skills and experience, otherwise unavailable• Discrimination is costly for businesses in court proceedings

• Encourages better performance & higher morale, lower labour turnover and decreased recruitment costs.

• Promotes a professional image and good PR

The Race Relations Act 1976

• ‘A person discriminates against another if, on racial grounds, he treats another less favourably than he treats or would treat, another person.’

• Makes it unlawful to discriminate lawfully or unlawfully on the grounds of race

Sex Discrimination Act 1975

• ‘A person discriminates against a woman if, on the grounds of her sex, he treats her less favourably than he treats a man.’

• This applies equally to men and women.

• There are exceptions.

Disability Discrimination Act 1995• A disability is:‘a physical or mental impairment which has a substantial and

long term (at least 12 months) adverse effect on people’s ability to carry out normal day to day activities.’

• Unlawful for employers to discriminate against a person in:• The recruitment process• Promotional opportunities• Dismissal

Equal Pay Act 1970

• If an employee doing the same or ‘broadly similar’ work as the member of staff of the opposite sex is entitled to equal rates of pay and conditions

• Aimed to eliminate discrimination in wages and other conditions of work – holidays, overtime, hours and duties.

•Discrimination in the Labour

Market• Despite legislation there still exists a gap between sexes in

the UK• This gap can be seen in wage and salary levels• There have been a number of reasons suggested for this

gap including:– Women are more likely to work part time then men– Employer discrimination favours men– Women spend less time travelling so have less choice of roles– Men tend to have a higher level of academic qualifications and

work experience – especially if they are married– Women tend to work in different jobs which tend to be poorly paid

e.g. catering, cleaning, clerical

Distribution of Income and Wealth

• Income looks at consumers annual inflows of money including salaries and wages

• Wealth is the value of a consumers assets such as housing, savings and pensions

• Large wealth disparities - In the UK 94% of wealth is owned by 50% of the population, the most wealthy 1% of the population have 23% of the wealth

Distribution Of Wealth And Income

• Income inequality also exists in the UK but this is not as marked as wealth inequality

• The median UK household income in 2004 was £335.7, the 10th percentile was £171.1 and the 90th percentile was £673.9

• This evidence shows that there are large differentials between the income of the poorest and richest households

Wealth And Income Distribution

• There are a number of factors which influence the distribution of wealth and income including:

• Differences in pay rates in different jobs and industries• Unemployment • Changes to taxation• Changes to the benefits system• Falling relative incomes to those who depend on benefits• These factors result in income differentials

Income differences

• Income differences between households may also be related to social changes:– There has been a movement away from the nuclear

family – two adults and children– There is a rise of single parents– There is an increase of two adults living together with no

children and both working • These social changes may result in higher incomes

per household for single cohabiting couples

Summary • The Demand for Labour is influenced by how productive labour is• The Marginal Productivity Theory looks at how much an extra worker

contributes to total revenue • Supply of labour is influenced by monetary and non monetary factors

including wage rates, overtime, benefits and team working • Wage rates are determined by a number of factors including the skills

and experience needed for the role • Trade unions can influence wage levels through collective bargaining

however their influence is decreasing • Discrimination occurs in the Labour Market there have been laws to

reduce this however there are still wage differentials between genders

• The Distribution of Income and Wealth is uneven in the UK