|Occurs when the demand for a factor of production arises from the demand for the output it produces. For example, rising demand for goods and services will lead to a rise in the demand for labour.
|Aggregate demand for labour
|It depends in the current level of economic activity. If the economy is growing it's likely that demand will rise as firms are confident it will continue to grow. However, if RNO falls or grows slower then demand in the future and employment levels will fall
|Individual firm's demand for labour
|These are factors which affect the demand for labour in addition to changes in demand for goods and services. Price of labour Productivity Price of other factors of production Supplementary labour costs
|Price of labour
|A rise in wage rates which exceeds any rise in labour productivity will lead to a contraction in the demand for labour
|If workers become more productive (output per worker increases) then the more attractive labour becomes
|The price of other factors of production
|If capital becomes cheaper firms may seek to substitute some of their workers with machine Labour intensive to Capital intensive
|Supplementary labour costs
|Costs that are additional to wage rates. For example, a rise in NIC will lead to a fall in demand for labour
|The theory of marginal productivity
|Demand for workers depends on their Marginal revenue product. This is where the marginal cost of taking on an additional unit of labour equals its marginal revenue product and the equilibrium quantity of labour employed will be established
|Marginal revenue product MRP = MP x MR
|The value of the physical addition to output arising from hiring one extra unit of a factor of production
|Marginal product of labour
|The change in total output arising from hiring one more worker
|Perfect competition in the product market=labour market
|This means that the firm is a price taker so P=MR. It works the same way in the labour market where firms can recruit workers at a constant wage rate
|The MRP shows the demand for labour at a given wage rate. A firm will demand labour where MRP=MC (This will be the wage rate) At W1 the firm demands Q1 of labour. If wages increase W1-W2 the demand for labour will fall Q1-Q2
|If MRP increases the demand for labour will shift to the right D1-D2. This could be as a result of an increase in training schemes or demand for the goods produced rising.
|Criticisms for the theory of marginal productivity?
|difficult to measure MRP as work can be carried out in teams so it's difficult to measure output from individual workers. It is only true under the assumptions of perfect competition and full employment. Assumes all factors of production are homogeneous.
|Elasticity of demand for labour % change in QL demanded % change in Wage rate
|The responsiveness of quantity demanded of labour to a change in the wage rate E.g. if elasticity of demand for labour was 5 and there was a 10% increase in the wage rate then demand for labour would fall by 50%
|What determines the Elasticity of demand for labour?
|Time Availability of Substitutes Elasticity of demand for the product The proportion of labour to total costs
|Time Period Elasticity of demand will be higher in the long run as firm could buy labour saving capital equipment
|In the long run it is easier to substitute labour for other factors of production In the short run firms may not have time to reorganise their operations and will have to employ the same number of workers even if wage rate increases
|Availability of Substitutes
|The easier it is to replace labour with other factors of production the more replaceable labour becomes if there is an increase in the wage rate because firms rather invest in capital than labour. Therefore elasticity of demand for labour will tend to be high
|Elasticity of demand for the product
|Labour is derived demand. This means that if there is a collapse in the demand for the good e.g. cars then there will be a collapse in the demand for engineers. If demand for the good is low then a reduction in demand for it will have little effect on employment.
|The proportion of labour costs to total costs
|The larger the proportion of labour costs to total costs, the higher the elasticity of demand for labour. An increase in the wage bill will have an impact in total costs. E.g. if firm was labour intensive and workers gained a 20% pay rise and this accounted for 70% of costs it would lead to a large fall in employment
|The supply of labour Economically Active
|The supply of labour refers to those who are economically active. Individuals who are currently in work or are actively seeking work. (Those who are not in work but seeking work are known as unemployed)
|Individuals who are not in employment nor seeking it. They are not part of the labour supply and includes those of working age 16-65 for men and 16-60 for women, disabled, full time students and prisoners.
|Participation rate or activity rate
|Is the % of the population of working age who are economically active. UK has one of the highest participation rates in the world at around 75%
|Supply of labour to a particular occupation
|Supply of labour for a particular occupation is influenced by monetary and non monetary factors.
|Financial rewards to a particular occupation. E.g. wage, commission or bonus.
|Non monetary factors
|Example of these rewards are promotion prospects, job security, working conditions, perks and fringe benefits and job satisfaction.
|Individuals may be prepared to work for relatively low wages in their careers if they have prospects of high paid jobs in the long term. E.g. Media jobs
|Individuals will be more attracted to secure jobs. Teaching has a high level of job security which encourages individuals to enter the profession regardless of the average pay
|More workers will be attracted to jobs with pleasant working conditions. E.g. The supply of refuse collectors is low as it is not a pleasant job
|Perks and fringe benefits
|Workers are attracted to firms that offer company cars, expense accounts, free private health care or discounted goods.
|The overall rewards to a particular occupation, taking into account both monetary and non monetary factors. Adam Smith believes both monetary and non monetary factors should be kept equal across industries.
|Occupations with high non monetary factors will have a higher supply of labour (S advantage) meaning that workers are prepared to work for a lower wage W1. Jobs with less satisfying non monetary factors will have lower supply (S disadvantage). Firm has to therefore increase monetary rewards
|Supply of labour to a particular firm
|Factors that affect the supply of labour to a particular firm are Availability of training Location Level of unemployment Overtime opportunities
|Availability of training
|If a firm offers a higher quantity of training than others it will attract more workers
|Firms based in cities will have a greater amount of labour to choose from. Or firms that are located in areas with good infrastructure
|Level of unemployment
|If unemployment levels are low then there might be a skills shortage which makes it difficult for firm to fill spaces
|Opportunities for overtime work
|Availability of overtime hours paid at higher rates attract people who wish to increase their incomes.
|Labour supply curve
|A change in the wage level will cause a movement along its labour supply curve This is the industry labour supply
|Elasticity of supply of labour % change in Q of labour supplied % change in wage rate
|The responsiveness of quantity of labour supplied to a change in wage rate
|What determines the elasticity of supply for labour?
|Skills and qualifications required for the job The length of the training period Sense of vocation Time period
|The skills and qualifications needed in the job
|Jobs that require specific skills and higher level qualifications will find it more difficult to attract workers when the real wage rises Elasticity of supply tends to be lower for skilled jobs than for unskilled jobs
|The length of training period
|Jobs with long training periods will have low elasticities of labour supply because workers can be put off by the time it takes even if a high wage is offered.
|Sense of vocation
|For teachers and nurses the reward for the work is not always financially for example. This could mean that supply may not necessarily change with a change in wage Jobs with a sense of vocation then to be inelastic
|In the long run the supply of labour will tend to be more elastic. Certain occupations require a notice period before leaving as well as training for some jobs
|The individual supply of labour
|The individual supply of labour is determined by the trade off between working time and leisure time
|The backward bending curve
|This curve suggests that at a high wage level an increase in the wage will lead to a reduction in the hours of labour supplied. This is because an individual will need to work less hours to meet their income target. This is normally the point where income level secures the standard of living.
|Income effect (Wage increase)
|Depending upon an individual's target level of income, the individual can work fewer hours for the same overall pay
|Substitution effect (Wage increase)
|Individuals tend to choose to work more hours, as the opportunity cost of leisure increases
|If wages rise, leisure will have a higher opportunity cost. Beyond W1 L1 the negative income effect begins to offset the positive substitution effect. Beyond W2 L2 the overall effect is negative because the negative income effect becomes strong to outweigh the positive substitution effect
|Explains how and why different groups earn different amounts
|Demand and Supply (Wage determination)
|The wage paid to an occupation will rise following a rise in the demand for their service or a decrease in supply. E.g. Wages of a website designer have risen as increase internet use has increased demand for services.
|Economic rent Transfer earnings
|The payment received by a factor of production over and above that which is needed to keep it in its present occupation The minimum payment needed to keep a factor of production in its present use
|E.g. a top football player earns £5000 a week, if the next best paid job he is willing to take is an £800 job then his economic rent is £4200 and transfer earnings £800 Total wage received = 0WBQ First worker taken would have taken the same job for a lower wage rate
|What does the economic rent depend on?
|It depends on the elasticity of supply for labour. Economic rent will be greater when supply is inelastic. E.g. Hollywood stars are thought to earn substantial economic rents.
|Trade union Trade union mark-up
|An organisation of workers who join together to further their own interests. E.g. better working conditions or pay rise The addition to wages secured by members of a trade union in comparison to wage rate without the trade union
|A monopoly under the labour market to increase wages. Trade unions will want to raise wages, E.g. We-Wt which creates a new supply curve of WtS and since no workers will be prepared to work below Wt employment will fall from Le-L1
|Criticisms of Trade unions?
|If unions wish to reduce unemployment they should accept wage cuts or they could increase the productivity of their membership through new working methods and new skills for employees to ensure higher wages. Because a shift in MRP creates more employment and higher wages too
|A single, dominant buyer
|Employers with labour market power
|Firms who can employ a high percentage of workers in the labour market can influence the wage rate. A monopsonist is a price maker and they dictate the wage rate. In order to increase labour supply they have to increase the wage rate, MC>AC of labour
|Monopsony in a market without trade unions
|Without a trade union the firm's average cost will increase after employing each extra unit of output, therefore MC for labour will be greater as all previous employees will demand a rise in wages. Without TU wage rate is W2 Q2 whilst the competitive market is W1 Q1
|Monopsony in a market with Trade unions
|TU sets the wage at W2 the kinked line W2AB is the supply curve and the ACL. MC is W2ABE (double kink). If monopsony employs less than or Q2 the MC of taking an extra worker equals the AC and W2 as set by TU. Beyond Q2 higher wages need to be offered to attract workers.
|Difference in wages arising between individuals, occupations, firms, industries and regions It exists when labour markets are not perfectly competitive
|Demand and Supply (Wage differential)
|Economic theory predicts that wages will be high when demand is high and inelastic and supply is low and inelastic Wages will be low when supply is high compared to demand and both are elastic. E.g. wages for a surgeon are higher than a cleaner
|Supply of surgeons is low compared to demand this could be due to the lengthy training needed. Therefore supply is inelastic. Increasing the wage rate won't lead to a rise in supply. Supply for cleaners works the opposite way because its elastic.
|Relative bargaining strength
|Surgeons working in the UK tend to be members of the BMA which is an organisation with significant bargaining power. Taking industrial action would have major consequences because of the little scope to replace surgeons. However, Cleaners have little bargaining power and can easily be replaced
|Introduction of the NMW had a positive impact on the pay of cleaners. Similarly an increase on healthcare spending has lead to increasing demand for surgeons due to the large ageing population in the UK. This increases the MRP of surgeons
|Many occupations are held in high public esteem such as barristers or vets. This is because they are perceived as providing an important service and the people who do are well qualified. This helps boost their MRP and could be seen as a form of positive discrimination with other jobs who are important but not cared of
|Wage differentials between particular groups
|Differences in wages can arise between individuals with specific characteristics. For example, Male/Female or Ethnicity.
|Skilled and Unskilled workers
|Skilled workers receive higher wages than unskilled workers because the demand is higher and supply is lower. MRP of skilled labour is high because their skills generate high output per worker and it is more difficult to be replaced with capital
|Male and Female workers
|Men still receive higher pay than women, despite equal pay legislation. This is explained by the fact that more women take part-time than men. Even if hourly rates are compared men still earn more. This is because the MRP of women is less than that of men
|Male and Female workers (2)
|Less female workers are part of a trade union so they have less bargaining power. Many women miss out on promotions or higher paid jobs because of children. Negative discrimination also exists when employers undervalue the MRP of a female worker
|Part time - Full time workers
|Part time workers tend to receive a lower hourly wage than full time workers. Supply of part timers is high compared to demand. It can be convenient for certain individuals but their MRP will be lower because of the training given. Only few part timers are part of a trade union.
|Workers from minority groups tend to receive lower wages than white employees. E.g. Pakistani workers receive relatively low paid because of the high proportion of them that work in the catering industry which is low paid. Also qualifications are lower (Especially females) than the rest
|Where groups of workers are treated differently to other workers in the same job regarding pay and employment
|Labour market failure
|Where the free market fails to achieve an efficient allocation of resources in the labour market
|When a group of workers is treated less favourably than others
|When a group of workers are treated more favourably than others
|Discrimination in the labour market
|This is a cause of labour market failure. It can be either positive or negative
|Costs of negative discrimination
|If individuals are discriminated against for certain jobs this would mean that firms have less choice to choose from and with a fall in supply wage rate will be higher so production costs will rise and the firm will become less competitive as the costs may be passed onto the consumer
|Wealth Marketable wealth Non marketable wealth Distribution of wealth
|Stock of valuable assets Assets that can be transferred to others Assets that can't be transferred How wealth is distributed between the population
|UK's distribution of wealth
|It has become more unequal since 1986 and 2003. The richest 1% owns 10% of the country's wealth
|Wealth distribution between groups
|Wealth tends to be skewed towards older people because they have had more time to build up savings and wealth. White adults are also wealthier than those from minority groups.
|Sources of Wealth
|Inheritance Saving Entrepreneurship Chance
|Assets, including property can be accumulated over generation and be passed on to coming generations.
|Wealth can be accumulated through saving, though this is easier for high income earners.
|People who take risks and successfully build themselves up. E.g. Richard Branson and James Dyson
|Instant Millionaires who want the national lottery
|Inheritance Marriage Income Inequality Chance
|Wealthy people tend to marry other wealthy people which reinforces the concentration of wealth to a small percentage of the population
|High earners have greater access to high interest savings accounts as they have a higher propensity to save
|A flow of money to a factor of production. An individual's income may include wages and state benefits
|Distribution of income
|How income is shared out between the factors of production
|How is the distribution of income measured? (Lorenz Curve)
|A statistical measure of the degree of inequality of income and wealth. Ratio tends to lie between 0 and 1 Perfect equality = 0 UK's gini coefficient is = 0.33
|Lorenz Curve (a / a+b)
|This diagram shows that if there was perfect equality then 50% of income would be earned by 50% of the population The Lorenz curve shows how income/wealth are distributed. E.g. 10% of income to 20% of the population
|Distribution of household income in the UK has become more unequal
|This could be due to the reduction in the top rates of income tax which benefits higher earners. A rise in privatisation also lead to a rise in executive pay. In comparison to those in JSA whose allowance decreased
|What causes income inequality between households?
|Impact of the state Wealth inequality Household composition Level of skills and qualifications Differences in earnings
|Impact of the state
|A pure free market system would not provide any welfare benefits. Government intervention should narrow income differentials
|Wealth Inequality (Cause of income inequality)
|Wealthier households will be able to earn more income such as dividends and interests from their assets
|Households with less members, E.g. single mother will be more unequal to a household with a couple
|Level of skills and qualifications
|Individuals with skills or qualifications that are high demanded will earn more.
|Differences in earnings
|Some workers earn more income than others. E.g. Full timers than part timers
|Geographical distribution of income
|The UK has an uneven distribution of income between the regions. Average disposable income per head is higher in London than Northern England. Income inequality in regions is more pronounced in Germany (East and West)
|Reasons for unequal geographical distribution of income
|Industrial structure, unemployment rates and the proportion of the population claiming benefits links to inequality. The North east are more dependent on manufacturing and it has suffered high rates of structural unemployment as individuals don't have the skills
|Reasons for unequal geographical distribution of income (2)
|Differences in regional living costs also makes the distribution of income unequal because individuals could earn the high wages in London and live in the outside where living costs are lower
|Government policies to redistribute income
|The degree of government intervention to influence the distribution of income and wealth depends whether the distribution would arise if it were left to free market forces
|Methods of government intervention
|Taxation Monetary benefits Direct provision of goods and services Legislation and labour market policy
|Progressive - Less from the poor more from the rich (Income tax) Regressive - More from the poor less from the rich (VAT). It takes more income from the poor Proportional - Equal amount from the poor and the rich
|Monetary benefits Means tested Universal
|Means tested benefits are those available to individuals with a low income. For example, Tax credits Universal benefits are available to everyone in a particular group. For example, Child Benefit
|Direct provision of goods and services
|This includes the provision of health care, education and school meals to give all citizens equality of opportunity. However, they are funded through taxation
|Legislation and labour market policy
|The introduction of a NMW in 1999. Anti discrimination legislation Subsidising training to reduce unemployment
|Absolute Poverty Relative Poverty
|When an individuals income is not enough to afford basic shelter, food and clothing When people are poor in comparison to others
|There will always be relative poverty in society. A rise in a country's income will cause absolute poverty to fall. However, relative poverty may rise if those in high incomes benefit more
|There is no official measure of poverty. However, it is said that if an individual's income is less than 60% of UK's median then they are relatively poor
|What causes poverty?
|Unemployment Low wages Sickness and disability Old age Poverty trap Imperfect information
|Workless households are especially prone to poverty
|Workers in unskilled, casual employment tend to earn low wages due to their low MRP
|Sickness and disability
|Dependency on sickness and disability benefits gives individuals relatively low incomes
|State benefits are still the major source of income for the elderly. E.g. pensions However this is becoming less important due to the rise in occupational pensions and investment income
|The poverty trap
|When individuals are no better off following a pay increase because tax paid increases and benefits are withdrawn This reduces the incentive for those in low wages to earn extra income
|Some people are unaware they are eligible for certain benefits states or do not claim because of fear of social stigma
|Government policy measures (Poverty)
|National Minimum Wage Cutting income tax for low earners Tackling unemployment Training and Education Exploiting "Trickle down" effects Increasing benefits
|National minimum wage
|A statutory minimum wage introduced to boost the earnings of the low paid
|Cutting the bottom rates of income tax
|By making income taxes less regressive it will reduce the extent of the poverty trap as it incentivises more individuals to work
|Training and education
|This will help tackle unemployment in the long term and it should increase MRP per worker so they are likely to have access to better paid jobs
|Exploiting "Trickle down" effects
|It can be argued that higher spending by the rich stimulates the economy which therefore benefits society as a whole including the relatively poor. Cutting corporation tax and income tax will create incentives for entrepreneurs and therefore create more jobs. However, it is unlikely all groups would benefit
|It can be argued that increasing benefits will lead to voluntary unemployment as individuals will prefer to be on benefits than working. However, increased G stimulates AD and therefore creates jobs. However, some people do seriously depend on state benefits
|Setting a NMW of Wmin could mean that firms costs will rise and therefore create unemployment of Q2Q3. This could be seen as an example of government failure. The extent of the unemployment created depends in the elasticities of demand and supply
|Evaluation for NMW
|The introduction of a NMW could lead to higher employment, especially if employer is a monopsonist. If NMW increased wages it would mean that demand for goods would rise and therefore increase employment as demand for labour is derived.