F583 Labour Demand, Supply, and Wage Determination
F583 Labour Demand, Supply, and Wage Determination
F583 Labour Demand, Supply, and Wage Determination
Derived Demand
The demand for labour is a derived for demand - labour is not wanted for its own sake, but for what can be produced with it o Therefore, the number of workers a firm wishes to employ depends principally on the revenue that can be earned from what is produced. If demand rises or the price of the products made increases, a firm will usually seek to employ more workers.
Wage Rate
MCL
MRP
MRP curve and MCL curve based on a constant wage rate (W) MRP is downward sloping, as if MRP = MCL at two points, the higher output is chosen This is for a firm, not the whole industry
Wage Rate
W1 W
MCL1 MCL
MRP
A firm will employ Q3 amount of labour at wage rate W, and Q2 at wage rate W1 The MRP and demand curve for labour will shift to the right if the MPL and/or MR increase This if for a firm, not the whole industry
Q Q1
Q2
In practise, it can be difficult to measure MRP o This is because its difficult to isolate and quantitatively assess the contribution one worker makes to output, as workers often work in teams, or their work depends on others. It is also difficult to measure the marginal product of workers in the tertiary sector o For example, is one doctor who performs 10 operations on varicose veins in a day more productive than a doctor who does one brain surgery?
Wage Rate
If it is easy to obtain more of the factors that are used alongside labour, demand for labour will be elastic The time period Demand for labour is more elastic in the long run, when there is time for firms to reorganise their production methods.
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However, at a certain point, the offer of higher wages will cause a worker to work less hours (contraction in the supply of labour) o This is because the worker thinks that their current income level meets their financial needs, S and may be keen to have more hours for leisure. For example, a worker may currently work 40 hours at 30 per hour. A rise in the wage rate to 40 would enable the worker to earn the same amount by working 30 hours, giving the worker more leisure time This is called the backward-sloping labour supply curve o This is the supply curve showing the substitution effect dominating at low wages and the income effect dominating at high wages Quantity of Labour (hours)
Wage Rate
The income effect is to reduce the number of hours people work The substitution effect increases the number of hours worked, as a higher wage rate increases the return on working, and so increases the opportunity cost of leisure, so the worker chooses to work. It is the income and substitution effects that the number of hours the worker wishes to work depends on the number of hours on offer and the relative importance that the worker attaches to income and leisure. Many workers, however, are not able to change how many hours they work, but as the labour market becomes more flexible, this choice is available to more workers
Pecuniary Factors
Wage rate o The higher the wage rate, the more people are likely to want to do the job The opportunity to work overtime and bonuses o People who are keen to raise their incomes by working extra hours, or people who are highly productive will be attracted to occupations that offer overtime work and bonuses.
Non-Pecuniary Factors
These are the non-pecuniary advantages and disadvantages of jobs that impact on the supply of labour, and they are: The convenience and flexibility of hours Status Promotion chances Flexibility of location Qualifications and skills o Highly skilled workforce required = less demand Job security o More secure job = more demand Pleasantness of the job Holidays Perks and fringe benefits The quantity and quality of training Location o Close location to a worker will increase demand The recent performance of the firm
Wage Determination
In a competitive labour market, the demand for and the supply of labour play the key roles in determining wages. Wages are likely to be high when demand is high and inelastic, and supply is low and inelastic
Conversely, wages are likely to be low where supply is high relative to demand and both demand and supply are elastic o E.g. brain surgeons are paid more than waiters, as the supply of brain surgeons is low relative to demand, and due to the high qualifications and long period of training required, supply is also highly inelastic o Demand is also inelastic in the short-run, as a rise in the wage rate wont attract many new brain surgeons. o Also, brain surgeons have a very high MRP, and there is no substitute for brain surgeons in an operating team. o To contrast, the supply of waiters is high and elastic, as no qualifications are needed, and so theres a large number of people capable of doing the job o Due to this, a rise in the wage rate will attract an extension in supply o MRP of waiters is low, so demand is low.
D S W
The government is a major employer, and passes legislation that affects the bargaining power of workers and employers (trade union reform), and directly affects wage rates (national minimum wage) Public opinion has an influences on wages also o It values sacrifice undergoing long periods of training and study. The more respected a job is, the more wages are influenced by the amount workers ask for and employers offer.
Wage Differentials
Wage differentials are differences in wages such as that between brain surgeons and waiters o They occur between occupations, industries, firms, regions, and within these categories Wage differentials can be explain by supply and demand, bargaining power, the impact of government policy and public opinion Over time, wage differentials between groups can change o E.g. the gap in wages between premier league players and division 2 players has widened over the last 2 decades, as the premierships revenue has increased greatly.
Male and Female Workers: Men are paid more than women, despite equal pay legislation This could be due to women working more part-time than men When hourly pay-rates are examined, men still earn more; but this gap is narrowing On average, the MRP of women is lower than that of men o One reason was because in the past, men were better educated than women. However, that is not the case anymore, with more women than men studying at university. o This could be due to the fact that women are disproportionately concentrated in low-paid occupations, like car work, or cleaning Also, some women lose out on promotions, due to leaving the labour market for things like raising children
Discrimination does still occur to some extent, with some employers undervaluing the services of female workers.
Part-time and Full-time Workers: Part-time workers on average receive lower hourly earnings than full-time o One reason for this could be due to the supply of people wanting to work part-time is high relative to demand, as part-time work is convenient for students, and people bringing up children. The productivity of part-time workers tends to be lower, as theyre less likely to receive training A smaller proportion of part-time workers belong to trade unions, and a higher proportion are women.
Ethnic Minorities: People from ethnic minorities tend to be lower paid than white workers This could be due to the fact that they work in unskilled professions, such as catering or cleaning Also, discrimination takes a part, resulting in a contraction of demand (If the examiners ask you a question about this theyre racist)
W Economic Rent
Transfer earnings
Quantity of labour
The total wage received by the workers is OWXQ o YWX is economic rent o OYXQ is transfer earnings Economic rent is the area above the supply curve and below wage rate The amount of economic rent earned by workers will vary o The first worker to be employed Y would have worked for significantly less than the wage rate actually paid, so a relatively high proportion of his wage will be economic rent o The last worker employed (X) will earn no economic rent, as they would only be prepared to work for the going wage rate.
The proportion of earnings that constitute economic rent and transfer earnings depends on the elasticity of supply of labour o When supply is inelastic (steep gradient), economic rent will form a large proportion of earnings E.g. premiership footballers are said to have high economic rent, as they enjoy playing football, and would continue to play if their pay was cut. o When supply is elastic (shallow gradient), a greater proportion of earnings is taken up by transfer earnings E.g. a high number of bar staff may only just be prepared to work for the going wage rate if it were to fall, then a lot of them would switch to other unskilled work However, if one were to take non-pecuniary factors into account, some people could be earning less than they could earn in another population o Effectively, these people receive negative economic rent.