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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

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  • 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Differences in wage levels markets

  • 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

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Difference in wage levels markets

  • 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

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Supply and Demand of Labour markets

  • 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

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Trade Unions markets

  • 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

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The Influence of Trade Unions marketsand Monopsonistic Employersin 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

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Unions and Wages markets

  • 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

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Unions and Wages markets

  • 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

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Monopsonistic Employers markets

  • 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

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Discrimination in the Labour marketsMarket

  • 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

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Discrimination in the Labour Market markets

  • 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

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Advantages of Equal Opportunity Policies markets

  • 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

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The Race Relations Act 1976 markets

  • ‘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

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Sex Discrimination Act 1975 markets

  • ‘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.

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Disability Discrimination Act 1995 markets

  • 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

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Equal Pay Act 1970 markets

  • 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.

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Discrimination in the Labour marketsMarket

  • 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

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Distribution of Income and Wealth markets

  • 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

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Distribution Of Wealth And Income markets

  • 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

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Wealth And Income Distribution markets

  • 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

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Income differences markets

  • 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

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Summary markets

  • 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