The Labour Market (Chapter 4- Micro)

What is a trade union?

A group of workers who have joined together to ensure their interests are protected

What is monopsony power?

The market power exercised in a market by the buyer of a good or the services of a factor of production like labour- though not a pure monopsonist. The NHS is a monopsony buyer of midwives

What is collective bargaining?

When TU's are strong and possess significant bargaining power, wage rates are determined through collective bargaining. This refers to a situation where unions bargain with employers, with unions negotiating collectively on behalf of their members

What are the causes of the shifts of the market supply curve for labour?

- Changes in non-monetary benefits-his can influence how much people prefer to work, and is linked to non monetary advantages. If the benefits of working are high, such as holiday entitlements and the potential to be promoted, the supply of labour is likely to increase. It also considers job satisfaction and how good the working conditions are. -Size of workforce- migration levels, number people staying for higher education, retirement age, school leaving ages -migration tends to affect the supply of labour at lower wage rates, as they are usually from economies with average wages lower than UK NMW -Changes in income; leisure is a normal good so higher rates of income usually increase demand for leisure so demand curve shifts left. Though may be inferior good for some and so cause some to supply more labour -Changes in expectations- pensions lower than expected so supply of labour rises -Changes in attitudes towards work and leisure; Leisure is a substitute for work, which is why part-time work and early retirements are attractive options for some people. People have to choose whether to spend their time on work or leisure. This is influence by age, the amount of taxes paid, how many dependent the worker has and income from not working. - Training: o If a lot of training or high qualifications are required for a job, then the supply of labour may fall. However, if the government subsidise training, it is easier For workers to gain the necessary skills for a job, so the supply of labour could increase

How can trade unions affect the supply of labour?

-Attract workers through benefit of becoming a member -Collective bargaining to influence wages and so unionised worker supply curve more inelastic than non-unionised -Restrict supply through closed shop or strikes

Benefits of trade unions in terms of welfare

-Balance monopsony power to restrict wages -Increase coordination between worker and employer through productivity deals -reduce inequality -can represent workers in disputes over health and safety ie -Efficient Wage Theory -AD consumption from higher wages

What causes the shifts of the demand curve for labour?

-Changes in productivity- higher productivity will increase worker's MRP and so shift the demand curve- may increase with ed/training -Changes in technology: This may increase the demand if technology makes workers more productive and so shifts the curve, or may increase demand if it lowers the cost of production of the good so demand increases and labour as a derived demand, also increases. However if the firm chooses to substitute labour for capital, due to automation progress, this can lead to shift left of the curve. It may also mean the reduced use of some labourers while some workers are in more demand- this reflects the impact of technical unemployment and the process of creative destruction -Changes in the demand for the good: Labour is a derived demand -Profitability of a firm: more profitable, the more labour they can afford to employ -the number of firms in the market- this determines how many buyers of labour there are. If only one like NHS the demand for lower is lower than that if there are many employers, ie supermarket industry. Lower demand for labour means wages are lower which can encourage TU's to bargain for higher wages

Do trade unions cause unemployment?

-Depends on employer- monopsony, raises employment which can counter-balance the monopsony power that restricts wages to a lower equilibrium usually -Efficient Wage Theory- higher wages increases productivity so MRP labour increases so demand curve shifts right and more employed -Productivity deals- bargain for higher wages in return for improving working practises

Why are wage differences substantial in imperfectly competitive labour markets?

-Disequilibrium trading: Economies subject to constant change like development of new goods/services and improved methods of production or tech progress so demand for goods changing and labour market often in disequilibrium and so though market forces tend to equalise wages in comp labour markets, disparities always exist -Imperfect market information: Workers sometimes lack accurate info on rates of pay, not only in other labour markets but also within industry that they're selling. Employers can similarly lack info about other labour markets. Imperfect market information can contribute to immobility of labour -Occupational immobility of labour: This whether workers are prevented, due to natural or man-made barriers, from moving between different types of job. This may be natural- ie natural ability since workers aren't homogenous, may prevent movement between jobs. But also 'man-made' barriers such as membership qualifications imposed by professional bodies like accountancy associations, and trade unions who restrict employment through closed shops, that restrict employment to union members. Often non-members struggle to join the TU- though closed shops are now illegal in UK -Geographical immobility of labour: Occurs when factors like ignorance of job oppurtunities, family or cultural ties or financial costs of moving/travel prevent workers filling a job vacancy at a distance from present place of residence. Seen currently with housing market, where during booms, unemployed/low-paid struggle to fill Southern job vacancies due to housing expenses- little available at affordable rents- similarly those in southwest unwilling to apply elsewhere for fears of being unable to afford to move back to the South -Discrimination: Racial, religious age and gender discrimination affect both the demand for and supply of labour. Demand side- employers unwilling to employ certain types. Supply side- workers refuse to work alongside those they perceive to be different

How has the balance of power of the labour market shifted from employers to unions

-Employment Acts which restricted legal rights of unions -Impact of globalisation/international competition which means firms can be located elsewhere. Only in industries protected from international competition like London Transport, the rail industry and other areas of public sector employment do trade unions remain powerful -Impact of deindustrialisation -Decline of trade unions meant more rates of pay inc teachers, are 'employer determined' on a 'take it or leave it' basis

What are the determinants of the wage elasticity of demand for labour?

-Labour costs as a proportion of total costs; the importance of being unimportant -Availability of substitutes -Elasticity of demand of good in question -Time factor (in short term, workers may be bound to contracts so in long term demand is more elastic) Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate (P1 P3), than where there is a more elastic demand (P1 P2).

Why are lawyers paid more than McDonalds workers?

-Lawyers are paid more because their MRP is higher as they will obtain a lot of revenue from firms if they are successful -Supply is inelastic due to qualifications and skills required -McDonalds workers are paid less as the supply of workers is inelastic as there are many people who would qualify -The MRP of a worker is much lower as there is limited profit to be made by each worker in the job See diagrams to see that the wage rate of the lawyer is higher as their supply is more inelastic and demand for their labour is also higher

Costs of trade unions

-Less relevant in gig economy- harder to organise and have impact -Can create cost-push inflation and wage-spirals through wage demands -Can create unemployment in perfectly competitive labour markets -Does not reduce inequality if represents small working population- even more so when low incomes often in non-unionised jobs or unemployed -Time lost from strikes

What are the 7 imperfections in the labour market that causes wages to differ from the competitive equilibrium?

-Monopsony -Trade Union -Discrimination -G/O Immobilities of Labour -Difficulty to measure productivity -Firms not profit maximisers -Poor information

The evaluation of the National Minimum Wage

-Only effective when set above market-determined wage rate -State of economy; during strong growth, easier for firms to pay higher wages -Wage elasticity of demand for labour- for L-I industries, in service sectors labour costs are a big proportion of total costs so may lead to more unemployment if NMW rises -Nature of labour market -Regional wage rates- London specific? -In UK labour markets employers tend to have monopsony power, especially in part-time temporary work where workers have little union representation- here NMW may be needed

Disadvantages of the national minimum wage

-Possible unemployment especially in perfectly competitive labour markets: firms demand less labour and higher wages extend supply so real-wage unemployment -Firms in labour-intensive industries most affected ie hairdressers/cleaning companies -Firm may become noncompetitive especially if competing in global market and causes a rise in total costs -Can create cost-push inflation -only benefits the working poor and not those unemployed -Limited impact on relative poverty; many of those who benefit are second-income earners -Regional variation in wages; living costs in South much more than North and so NMW may not be enough for everyone -Disproportionately affect the young, unskilled, long-term unemployed and those in lower productivity regions. May replace youth with older more experienced workers -Arguably gap in 18-25 NMW may cause substitution of workers the other way -Can be a high proportion of total costs for l-i industries which are often small firms. Ie care homes for old paid NMW- can mean higher care for old

Benefits of a national minimum wage

-Reduces poverty- increases income of the lowest paid and reduces relative poverty -Efficiency Wage Theory- higher wages incentives workers to work harder so labour productivity rises -Increases incentive to accept job- bigger difference between benefit levels and salary so job participation rates rise -Can stop exploitation of low-paid workers in monopsony labour markets. As diagram. Works same as TU. If minimum wage NMW placed above W1, it increases employment to Q2, the competitive labour market outcome of wage and employment -by redistributing income from employers to low-wage workers, a NMW reduces income inequality as well as poverty

The effect of introducing a trade union into a monopsony labour market?

-Shows unlike in a PC labour market, adding a trade union to a monopsonistic labour market can raise wages and increase employment -Without trade union, wage is W1 and level of employment E1 -If a TU is introduced, it raises wages to WTU so the supply curve and AC curve is now kinked WtuXSl is the labour supply curve and the ACl curve. -But in monopsony, WtuXSl is NOT the MC curve- why? -As it is the same as the AC of labour upto E2, however if the firm wishes to employ more labour beyond L2, they have to offer a higher wage not just to the extra worker, and so wage costs rise significantly -This creates a discontinuity at E2, and a double-kinked MC curve WtuXZV -Now the new equilibrium position of W2, E2 is profit-maximising for the firm as MC=MRP, at point C of the diagram. -Thus the introduction of a TY into a monopsony labour market can raise wages to W2 and employment to Ez

`Debates about the use of a trade union in competitive labour markets

-Some economists thus believe trade unions create inefficiency, by increasing wages for members but creating unemployment. So they argue that if unions want to reduce unemployment, they should accept wage cuts -Keynesian economists dispute this, arguing if workers accept technical progress/new production methods/new training, they can increase their MRP, shifting the demand for labour curve to the right. See diagram. So increased productivity provides scope for higher wages and employment- BUT -Depends on unions resisting changes in working practises that lead to higher productivity -Also rising wages can increase aggregate demand through consumption so increase demand for goods and services across the economy- as labour is a derived demand, then demand for labour also shifts right increasing employment

2 examples of monopsonys in product markets

-Supermarkets- monopsony power in buying farmer food -Amazon.com- biggest purchaser of book- if publishers don't offer discounted price, they miss selling to one of the biggest distributors of books

What determines the success of a TU?

-The density- % of workforce in TU -Economic climate- firm struggling or profitable -Nature of labour market -Legislation in place -Bargaining power of workers- ie nuclear power plant worker > leverage than supermarket shelf stacker

What are the problems with monopsonys in labour markets?

-They restrict wage rates and employment levels increasing inequality -As only buyers of labour, may implement harsher working conditions -Workers paid less than their MRP

What are the functions of trade unions

-To represent workers with regard to pay and working conditions -Bargain for higher wages through collective bargaining -Coordinate with firms to implement new working practises and negotiations with workers

How is there no wage differentials in a PC labour market?

-Train drivers and lawyers- if a difference in wages between both, both profession are PC labour markets. If lawyer's wages rose, then train drivers have the ability to change job due to homogenous skills and perfectly mobile workers (no O/F immobility of labour). This means the supply of train drivers would decrease so price rises and for lawyers' price falls due to excess surplus. Thus eliminating any wage differentials This shows that in a PC labour market there are no wage differentials but in real world there are wage differentials, showing that our markets must not be PC and must be labour market imperfections.

What are the determinants of the elasticity of the supply of labour?

-Training skills and qualifications -Length of training period -Unskilled pool of labour greater than skilled labour and skilled reserved to few in population with inate ability and training period of unskilled shorter -Time period- long run, supply more elastic -The higher the occupational and geographical mobility of labour, the more elastic the labour supply curve will be -Availability of available labour- ie full employment means supply of labour is much more inelastic

What does expected net advantage include?

-Welfare derived from wage -Welfare from non-monetary considerations (inc job satisfaction/dissatisfaction)

What are other strategies a trade union may be implement, especially when there is a breakdown in employer-worker relations?

-Work-to-rule -Overtime bans -Withdrawal of good will

Evaluation of trade unions

-depend on employer- monopsony, can counterbalance employers market power -Union too powerful can create inflation and unemployment -Depends on TU- worker relationship: if friendly, can lead to productivity deals and better firm. If confrontational, may lead to fall in productivity and destructive partnership that creates long term job insecurity

Impact of a monopsony on a labour market

A monopsony is the sole employer of labour in a given profession; teachers, nurses (uk) • The state is the dominant employer in professions like teachers • As they have buying power over wokrers, they are wage takers • They will amximise revenue up to where MRP = MC2 • Supply is equal to AC curve • The upwards slope shows how the Monop is constricted by the labour supply curve. If they want to employ more workers, they have to increase wages. But doing so itsnt just for the additional worker but each worker before hand, implying that the MC rises more steeply than the AC curve • The profit maximisnig point is where mrp= mc so demand Qm of workers but the wage is at Wl the lower wage rate o In comparison to the PC labour market outocmes, they reduce the output of workers so employment reduced and wages are also reduced! o Also the workers employed are being paid a wage much lower then their MRP so unfortunate in a monopsonistic labour market o The lower the wages are compared to the MRP of workers, the higher the degree of monopsonstic power the firm has- EVALUATION- if we can measure monopsony power o Distorting efficient labour market outcomes

Explain the model of wage determination in a perfectly competitive labour market

A perfectly competitive labour market would contain a large number of buyers and sellers, each unable to influence the ruling market wage rate, and operating on conditions of perfect market condition. A firm employing workers in a PC labour market can buy as much as labour as it wants at the ruling market wage. So the employer faces a perfectly elastic supply of labour curve in a PC labour market. In a PC labour market, each employer passively accepts the ruling market wage, which, determined by market demand and supply, is also the perfectly elastic supply of labour facing each of the firms in the labour market. The means it is also the average cost of labour (ACl) and the marginal cost of labour )(MCl). At the ruling market wage, each firm would be a passive price taker, able to hire as many workers at the ruling market rule but unable to influence the ruling wage but its own actions. To maximise profit when selling the output produced by labour, each firm would have to demand labour up to the point at which the addition to sales revenue resulting from employment of an extra worker= the addition to production costs resulting from the employment of an extra worker (MRP=MCl). But as the marginal cost of labour in a PC labour market equals the wage paid to workers, the demand for labour at each wage rate is where MRPl=W.

What does the MRP and W relationship say about demand?

As the MRP curve shows each firm's demand for labour at each possible wage rate, the MRP curve facing each firm would in fact be the firm's demand curve for labour

What causes a movement along the labour demand curve?

Changes in the wage rate. The income/substitution effect will impact this; ie at higher wages firms will substitute labour for capital and VV The downward sloping demand curve shows he inverse relationship betwee how much the worker is paid and the number of workers employed. When wages get higher, firms may consider switching production to capital which may be cheaper and more productive than labour

Impact of dual discrimination

Dual discrimination - employers and consumers Market for private maths tuition: Companies may discriminate against female maths tutors and be less willing to employ women and/or pay lower wages so the pay for female tutors would be lower than male tutors and relatively higher for male tutors. For a firm who didn't discriminate, there would be an opportunity to gain lower costs by employing female maths tutors; profit incentive to avoid discrimination However, IF the prejudice against female maths tutors was also prevalent amongst customers. In this case, a firm employing female maths tutors may have difficulty selling their services - so the cost benefits of lower wages are lost. In this case, the market fails to end the discrimination because the racism/sexism isn't just amongst employers but also consumers!- effect of dual discriminatio

Evaluation of TU in a labour market

Evaluate- • If TU is impacting in monopsony, trade unions may help to make things better by being a wages setter and able to increase wage and employment. So trade uions can increae employment • Question stregnthn of trae union, fepedns on powr; while a closed shop union has been assumed, in the real world they are illegal nad thus unions may not have the same stenght. The union density needs to be measured- the greater the percenrage the great the trade union power is the greater the bargaining power of the Tu and more they have to fight ofr higher wages to gain greater control pof thr anormal profits the lower it is the less power the TU has • Theloer the power the lesss the distortion of the labour market of the TU • The union-market- dif in wage between workers given being part of a TU compared to workers not part of the trade union. The biggest the difference or bigger the union mark p, the greater the difference in the labour market beteen wages of worke and those in tV's cimoares • Real world evience- o Tellus that trae union power is sifnficicantly les since 1970s- o Closed shop trade unions now illegal- one anti trade union legislation- thus reducing the power of each trade union. Also limits the union density because how workers have to be spreadarrange different trade unions o Other 3 main lewgislations involve links to striking which is one of biggest weapons that Tus have to ight against workers Ballots done in secret for strike activity Also only happened in 75% members agreed to strike otherweise illgal Also ponly alloed to strike against your own employwr- if another set of workers are organising a strike against their employr, you being employd by iffereny employers are not allowed to take part AL Means trade union membership from 1970s is lower reucing pwer of trade unions; real world evidence contradicts much theory asince the less the power of trade unions the less they can do according to the theory in terms of collective bargaining UK economy- reconstructed- limited TU How have we changed -moved form manufacutrin to service, where workeers will work for many different employers so organising trade union acitivty is very hard when youre not fighting against one big firm who offer ifferent wags and conditions Also part time work in UK is more prevalent and given that again its hard to organise TU activity- so restructuring of UK economy has limited TU impact and trade union involvement Since globaliation and world has become one marketplace, overseas competiton has made firms face comp pressure so firms have more power now to reject whatever TYs demand esp higher wages knowing doing so can make them bankrupt on a global economy with such global competitiveness; limits power of trade unions in fighting for higher wages so Evalusation points • TU in monopsony labour market • Strength of trade union power- union density • Success determined by union mark up • Eeal world evidnce proves limited power of trade unions o Legislation against strikes and one against closed shops now illegal o Restructuring of uk economy (more service so harder for TU org) o Competitive pressures overseas (cant face bankruptcy from higher wage demands of workers) • Thus limiting power of trade unions in fighting for hhigher wages

How do different types of work yield different rates of job satisfaction?

For work such as assembly-line manufacturing, this yields more job dissatisfaction, being more dangerous also, and so a higher hourly wage rate compensates for -ve non-m benefit

How does Keynes argue wages aren't flexible- The determination of relative wage rates and levels of employment in perfectly competitive labour market

However, in the real labour market, wages are not this flexible. Keynes coined the phrase 'sticky wages'. Wages in an economy do not adjust to changes in demand. The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead.

Explain the determination of relative wage rates and levels of employment in a monopsony labour market- How in a monopsony labour market, can the employer 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?

If there is only one employer of labour, they are 'wage-setters' and have market power in setting wages. As the firm is the only buyer of labour, then the supply curve for labour of that industry must be the firm's supply curve for labour. When there is only one buyer of labour in the market, there is said to be monopsony power. It means the firm has the ability to set wages. The marginal cost of adding an extra worker is more than the average cost. This is because in order to employ another employee the firm has to pay all of their workers more. At MC = MRP, the firm profit maximises. This means they employ Q2 workers. This makes the wage W2, lower than the market equilibrium competitive wage. The employment rate and the wage rate are below those that would exist in a perfectly competitive labour market This is also the average cost of labour curve, which shows the wage that has to be paid to all employers at each level of employment for them to supply their services. But this is NOT the firm's marginal cost of labour curve. This is because, to persuade an extra worker to supply their labour, the firm has to offer a higher wage rate to all the previous workers as well. So the MC is the change in the total amount by which the wage bill rises and not the just the extra wage rate paid to the additional worker. This means the MCl curve is above the ACl curve (unlike monopolistic product markets). The monopsonists level of employment is determined where MRPl=MC. at point Em. But the firm will not pay the higher wage where MRP=MC for it has no need to do so- it is the only buyer of labour so workers cannot find alternative employment if a lower wage rate is given. So a wage of Wm is given, which allows the monopsonist to maximise profits and reduce the wage rate provided. Unlike a competitive labour market where the firm would be a wage taker; if they tried to pay Wm, the lower price, workers would go to other firms willing to pay the market ruling price. So in a monopsony labour market, the employer can use market power to reduce both the relative wage rate and employment level below those that would exist in a PC labour market. (refer to diagram to show difference)

Why is the MRP curve the demand curve for labour? (In PC)

In a competitive labour market, this means wages are constant. This means wages form the marginal fixed cost of production. As firms aim to profit maximise (in the goods market where MC=MR, they will maximise employment when the marginal revenue from the last unit of worker employed equals the cost of employing the worker. Ie they will employ to the equilibrium where MFC=MRP. This means (refer to diagram with different wage rates) at W1, E1 are employed and at W2 a greater amount E2 are employed. This shows that the MRP curve shows that, at each given wage rate, the firm reads their demand for labour from the curve. This is the same definition as the demand curve and so the MRP curve is the demand curve for labour

What is the supply of labour influenced by?

It is influenced by monetary and non-monetary considerations.

Why is it important that perfectly competitive labour markets don't exist?

It shows that all real world labour markets are imperfectly competitive to a lesser or greater degree

What does the demand curve for labour show?

It shows the relationship between wage rate and the number of workers employed

What do non-monetary considerations include?

Job security, holiday entitlements, promotion prospects, good working conditions

What is the demand for labour?

Labour is a derived demand and is only demanded as an input into the production process so if the demand for the good in question changes, so will the demand for labour

What is marginal revenue product theory?

MPP is the extra physical output produced by one extra worker. Assuming a perfectly competitive product and labour market, the price of the good in question stays the same so the MR is also the same. MRP is thus MR X MPP. MRP is derived from MPP and MPP is derived like in the product market, from, in the short run, the law of diminishing marginal returns where after a quantity of workers has been employed, there is a decline of their individual MPP as they become a constraint on the fixed factor of production. Refer to diagrams of 3 curves. The MRP is the same shape as the MPP just the scales are different to account for revenue

What is wage discrimination?

Paying different workers different wage rates for doing the same job. Occurs in imperfectly competitive labour markets

What does the supply curve for labour show?

Shows how much labour in an industry workers are prepared to supply at different wage rates

Reasons for wage discrimination

Sometimes, even in the same job, workers can be paid different amounts. This is due to: o Formal education. On average, those with a degree earn more over their lifetime than those who gain just A Levels. o Skills, qualifications and training. Jobs which require more training and education offer higher wages. Training workers is expensive for firms, so they compensate for this by offering workers, who have already undergone education and training, higher wages. o Pay gaps. The wage gap between skilled and unskilled workers has increased in the UK recently. This is due to technological change and globalisation, which has shifted production abroad. o Wages and skills. Skilled workers produce higher outputs than unskilled workers because they are more productive, so the demand for their labour is higher. This means they can demand higher wages. o Gender. Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or parttime jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. There are inequalities with paternity and maternity leave. 26% of 1500 workers felt that they had been held back from a promotion because they had children. Although a wage gap still exists, it is narrowing, albeit slowly. This article highlights the issue of women missing out on top jobs ] o Discrimination. Workers might be discriminated against due to age, disabilities, gender and ethnicity. Workers from ethnic minorities have faced prejudice and discrimination.

Assumptions about a trade union

That they are able to keep non-union members out of the market and that it can keep members from supply their labour below union wage rate

What would it mean if you had a workforce below the equilibrium level of L1?

The MRP of the last worker is greater than the wage and the total profit would increase more if more workers are employed

What is an individual's supply curve for labour showed by and explain the theory

The backwards bending supply curve of labour. Upto W2, the substitution effect takes place, where as wages rise, firms supply more labour as leisure has a higher opportunity cost and work is attractive. However after W2, the income effect takes precedence and workers realise they can work less to achieve their target income and so see leisure, assuming it is a normal good, to be more attractive so an individual's supply falls. So at the margin, to maximise personal welfare, a worker must supply labour upto the point where the welfare from the last unit of money earned equals the welfare from the last unit of leisure time sacrificed

What is another way trade unions can increase pay?

The first showed how TU can increase pay by preventing union members supply labour at wage rates below the rates set by union Other method is TU increasing pay through closed shop thus keeping non-unionised workers out of labour force The union-controlled entry barrier shifts the supply curve of labour left and increases the in elasticity of the curve (also achieved by professional associations who may prologue training periods so worker is paid very low wages). Employment falls to L2 and wages thus rise to W2. This benefit workers in union especially since there is no pool of unemployed workers who are willing to work for lower wages

What does the relationship of the supply curve for labour show?

The proportional relationship between the wage rate and the number of workers willing and able to work in a given occupation

(Wage) elasticity of demand for labour

The responsiveness of the quantity of labour demanded by firms to a change in the wage rate

What is the wage elasticity of the supply of labour?

The responsiveness of the supply of labour to changes in the wage rate

What is net advantage in regards to the supply of labour?

The shape of the labour supply curve is explained by the assumption that a worker supplies more labour to increase personal economic welfare to maximise private benefit. The welfare a worker derived from the supply of labour divides into net advantage- this is what an individual's choice to supply labour depends on

The marginal productivity theory of the demand for labour

This theory states that the demand for labour is dependent on the marginal revenue product (MRP). MRP is calculated by marginal product multiplied by marginal revenue. MRP = MP x MR. The marginal product of labour is the additional output each unit of labour can produce. The marginal revenue of labour is the additional revenue derived per extra unit of labour. Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour. The demand curve shows the MRP.

How do trade unions in labour markets distort efficient competitive outcomes/

Trade unions adopt 'collective bargainig' on behalf of all workers for higher wage Here we assume trade union is a 'closed shop', so in a given profession, all workers are part of only one trade union So the trade union becomes a monopoly supplier of labour Trade unions involved want wages above the competitive equilibtium. However there is a limit, the number of workers happy at this wage rate (as supply curve shows q of workers willing and able to work at theis wage rate). So the supply curve becomes horizontal upto this point on the Sl firm, and to attract any workers past this wage mans the firm must have to provide a higher wage to get more workers to join, thus reverting back to the OG supply This is the effective Stu curve due to TU's bargaining power, which exists as with many workers invovlvement can threaten strike Thus it means wages are now higher (as wages have risen compared to competitive outcome) However the demand for workers at the higher wage rate is at Qtu which is much less htan comp outcome. Thus the trade union is causing real wage unemplomynet from the excess supply of workers This is because there were Qpc workers being employed while those employed in comp equilibrium have lost their jobs. Thus not everyone benefits= those upto Qtu there happy but the Qc lost their job, Distoritng labour market outcomes and a significant amount of people are losing out- inefficient outcome. Also raising costs for th firm cuaisng bankruptcy or poor conditions in girm which msy had long trm issues

What is the impact of a trade union on a perfectly competitive labour market?

Use diagram Without a trade union in a perfectly competitive labour market, wages are W1 at a level of employment L1. The market supply curve is Sl=ACl. When workers join a trade union, through collective bargaining, a wage of W2 is negotiated which is acceptable to members of the union. So the supply of labour becomes the kinked line W2XS- it is perfectly elastic upto L3 as the firm is a wage taker, and if it wants to employ more workers beyond L3, it has to offer a wage higher than W2 to attract more workers. At the wage level set by the union, the employer only wishes to hire L2 workers as demand has contracted but L3 workers are willing to work at this wage rate as supply extended. So there is an excess supply of labour and real-wage unemployment from L3-L2. The higher wage rate has reduced demand and increased supply of labour but fall in employment compared to the competitive equilibruim

What is a monopsony?

a market situation in which there is only one buyer. Workers cannot choose between alternate employers as there is only one available to hire their services

Evaluation of wage differentials

• How much inewuality- costs vs benefits (how big is it? Small- more beneifts, but if out of control, much more disadvantages) and in LR, if they persist, income inequality occurs • Risks of government failure (because of w differentials, there is rational for gov intervention, but if BIG risk of gov failure, let these wage differentials even if major issues with them) ie if going to intervene thorugh raising taxes, MWs, higher employment benefits and make it worst, it may distort the incentives (laffer curve, individual losing jobs from higher minimum wages) this may justify allwing wage differenitals to exist • SR vs LR (income inequality but long run trhough t-d effect, enterpirse, may reduce costs and increase wages for ordinary individuals from t-d effect and incentives to educate themselves) LR- better beenfits, allow wage differenitals exist • Though sr in come inquality may exacerbate long run issues

Advantages of wage differentials

• Incentive- incentivise workers to gain skills, qualifications and training to raise MRP and get jobs in other areas where wages are higher. This also has a positive effect on the economy increasing productivity of labour and making the economy more competitive internationally by reducing the cost of production for businesses- LRAS shifting so sustainable growth from wage differentials • Free market economists, Trickle down effect- higher waged will spend their money and create the mutplier effect throughout the economy in their consumption thus demand in industries and greater employment as a result and wages. Also those who earn a lot have high MRP may create jobs for those on the lower end (ie working for them. Also these higher incomes can be progressively taxed and redistributed to the poor in the form of welfare benefits consequently- from government intervention • Encouraging enterprise- E's know if they can find labour to boost MRP, they know they can earn a lot, but this encouraged long run growth through innovation and technology, but also affect those of the low income through job creation. It also may drive down prices in the long run and the goods and services they create may help individuals in the long run; innovative new products • Encourage work not welfare; if all labour markets were PC, living in welfare means there is no incentive to get of it. As you only get the opportunity to earn what everyone else is. Thus through education, growth and training you could boost MRP and get a higher wage instead of beneifts. Also good for spending on government and benefit taxpayers • Promotes efficient allocation resource; productivity increases, wages singlaling people to move into profesions, without wage differentials people may not be able to end up with the right allocations for them

Disadvantage of wage differentials

• Income inequality- those on low income with low LS and relative epovety- gov finances and unemployment benefits/welfare spending; large I inequalities can reduce growth in L-R as poor have largest MPC thus restraining their income growth restrains spending. While rich have largest MPS. Social costs (crime, divorce, protests, anxiety, depression) leading to negative externaltiies ie police services, courts to deal with issues of crime, health rate services • Trickle down effect; may not happen ie high income earners may save their money due to MPS thus multiplier effect doesn't occur; may send money abroad ie to gain a rate of return in another economy; not creating jobs, higher wages etc. Also if tax evasion is taking place, the redistributive effects may not occur • Gov solutions may be limited if they are the monopsonist employer; theyre the cause of the problem, reducing wages in nursing, hosptials education etc; question the cause!; lt wage differential is likely to exacerbate

5 imperfections in labour markets which occur

• Labour is not homogenous like PC labour market theory o Different MRPs- wages varied o Different supplies of labour- some professions where workers aren't suitable to take the job so supply of labour is different, thus affecting the wage rate and emphasising wage differentials o Discrimination- age, sex, race occurs despite legislation; can cause different pay to workers • Non-monetary considerations (assumed in PC that workers base their decision to work based on wages alone) o Pension plan, holidays, promotion potential, breaks, flexibility in working hours; determines also why they may take a job o While if tough working conditions and bad unsocial relations, there will be a lower labour supply and higher wager rates o Compensating wage differentials; in professions where it isn't as attractive to work, wages tend to be higher • Labour isn't perfectly mobile o Labour is often occupationally mobile (not same skills) and qualifications can exclude workers. I.e. as a doctor, thus restricting the supply of labour pushing up the wages of workers. o Geographical immobility causing regional difference to persist. Ie moving south to gain a higher price o Lack of Perfect knowledge- consumers may not know about wages in different wages and • Trade Unions o They bargain for higher wages on behalf of a group of workers in an industry, thus distorting PC market conditions and raising wages o In professions where are many members of a TU, and strong unions, wages can be distorted and pushed up leading to wage differentials • Monopsonies and wage setting power o Monophonies' may use their wage setting power to drive down wages and so create wage differentials from industries in which monopsonies don't exist In the real world, some of the assumptions OF PC labour markets may not hold and market imperfections may exist in the labour market. Where it does is where there may be wage differentials Apply these conditons to markets with different wage differentials

Why do some ethnic groups earn more than others?

• Minority groups on average are less qualified and so have less MRP- earning potential and job prospects low • Lack of language proficiency reduces productivity and employability, especially in higher paid occupations • Concentration of such workers in low pay sectors; similar professions to the manual labour jobs they had from their low-paid countries • Living in poorer areas of the country- whee demand for labour is low, employment prospects are low • Reluctance to migrate to earn more- ie cultural groups to stop close to family thus accepting a lower wage • Discrimination

Why do Londoners get paid more than northerners?- wage differentials; regional variances in wages; 'north-south divide' in UK

• Restructuring of uk economy since 1970s where moving away from heavy industry and pecialisation through financial services which are in London. So if the economy is restructuring away from manufacturing, the MRP and thus wages up north are going to be much higher than the south= demand for workers in services is much higher • Negative multiplier effect; ie fall in decline in manufacutirng, hravy industry means they may be unemployed. Thus these industries dpeendnant on that spending, and o workers in the industries dependant on wokres in OG industry, become redundant due to lack of demand. So as labour is a dervided dmand there are ripples in the economy affecint other inudstires • Also neg accelerator effect- investors unwilling to invest if knoeing growth ate of regional economy is falling, so regional economy falls quicer redcuing wage growth .but in servce sector areas, in thse regions, there is positive investment making job creation higher wages and prosperity- regionlal variations • Geographical and occupational mobility o People won't just migrate - many wokrers innort are occ immobile so don't have skills.quailifcations in service scector or geo ie moving south to north o Migration of labour but more prosperious productive workers moving to seek high wages, this often more wage differential of men an women

Why do footabller get paid more than teachers- example of wage differenitals

• The MRP of premiere league footballers is very high (gain revenue lots from league positon, advertising, merchandise, television) • Low supply of footballers, inelastic supply (loads of skills, long training periods, length of time) and high demand for workers (from clubs ie) • Monopsonist state employer of teachers (gov keep wages for teachers minimised as don't want to lose control of inflation targets); in comparison to limited football clubs • Vocational element to teaching- compensating wage differential (anytime any n-m benefits to a job (pensions holidays flexibility) so a negative compensating wage differenitall just keeping wageslow • Though TU, there is reluctance to strike unless it wont impact pupils, thus reducing trade union power to bargain for teachers • Lack of homogenous footballers

Why do men get paid more than women?

• Women move in and out of the labour force o Often due to childbearing and maternity leave; time where they lose skills and experience so MRP is reducing/not increasing very fast o Means its difficult for females to gain the higher pays o Males however are more attached to work itself, don't tend to leave labour force thus their earnings are higher than females o Women that are low skilled are most impacted as they are getting back into work they find difficult • Though women who stay in the labour force still remain with lower wages often • Women's age at which they leave the labour force is the age at which people gain promotions, earn higher wages; thus limits wage prospects later on; • Differences in education/qualifications (more in developing countries) o Equality of opportunity doesn't occur, so women don't gain the same MRP as males, thus males can bargain for higher wages while females cannot • Women tend to end up in low-paid occupations o Part-time work (flexibility), pays less hourly o Service sector work (demands aren't as high and skills aren't a shigh ie retail so lowering esrning potential) o Public sector work (in favour of females than males and pay less since gov want to control inflationary pressure. Thus limits earning potential) o Vocational work (wages low due to vocational progessiosn) o Lack of trade union presence; especially with part time and service sector work, thus meaning TU impact of bargaining power is limited • Increase in the supply of female workers o Drive down wages (due to increased tolerance etc) • Discrimination o Despite legislation, an element in real world labour market who favour males and pay women less