The Labour Market

Content
• The Demand for Labour, The Marginal Productivity Theory
• Influences upon the Supply of Labour to Different Markets
• The determination of relative wage rates in competitive
markets
• The Influence of Trade Unions and Monopsonistic
Employers in Determining Wages and Levels of
Employment
• Discrimination in the Labour Market
• The Distribution of Income and Wealth
 The Demand for Labour
• Labour is one of the four factors of production
• The labour market is where employers are able to
find the employees they require
• Demand for labour generally falls as wages
increase – this is an inverse relationship
• This is based on the assumption that all firms aim to
maximise profits
 Demand for Labour – Derived Demand
• Demand for labour is derived from the demand for products
that labour makes and is therefore influenced by
productivity
• If the economy is in a boom there will be more demand for
goods and services and therefore more demand for labour
to produce them
• If the economy is in a recession there will be less demand
for goods and services and therefore less demand for the
labour to produce them
 The Marginal Productivity Theory
• Marginal revenue productivity of labour (MRPL) examines
the change in revenue for a business resulting from the
employment of an additional worker
• This theory assumes:
– All workers have the same abilities and productivity levels
– Industry supply of labour is perfectly elastic
– Trade unions don’t impact labour supply
– Productivity of workers can be accurately measured
 Productivity of Labour
• To calculate the productivity of labour:
• Total Output / Quantity of factor
• Productivity of labour influences the costs of a firm
and therefore has an influence on their profits
• It is sometimes difficult to measure productivity
 Marginal Productivity of Labour
• According to this theory if a firm was to maximise
profits they would continue to hire workers up to the
point where MC of employing an extra worker = MR
they produce
 Influences upon the Supply of Labour to
Different Markets
• Supply curve for labour slopes upwards – at higher
wage rates more people will work
• How many more people make themselves available
at higher wage rates is influenced by elasticity of
demand for labour
 Influences on Labour Supply – Monetary
• Influences on labour are:
• Financial:
– Wage rates – the higher these are generally the greater the
supply of labour
– Overtime – if overtime is available it helps to increase supply
– Wage rates in substitute jobs – if wage rates are higher than in
substitute jobs more labour tends to be supplied
– Barriers to entry – these can lead to a higher wage rate being
paid
– Opportunity cost of working
 Influences on Labour Supply– Non
monetary
• Increased mobility of labour – this could be occupational or
geographical
• Net labour migration – this is an increasing factor with more
countries joining the EU and migrating to the UK to find jobs
• Non monetary characteristics of jobs – these include factors
that influence motivation such as working in a team, training
and autonomy, employee benefits e.g. free gym
membership, canteens on site and job security
 Labour Supply of Specific Occupations
• The elasticity of the supply of labour for different
occupations depends on a number of factors
• Occupations where workers are highly specialised and
have to undergo extensive training such as medicine and
law are likely to have inelastic supply
• Occupations where there are pools of labour with the skills
and abilities to do the job tend to have elastic supply such
as cleaners and assembly line workers
The determination of relative wage rates in
competitive markets
• Wage rates are determined by the interaction of
supply and demand
• Additional workers are hired up to the point where
the wages for that worker are equal to the extra
revenue they generate
 Differences in wage levels
• There are a number of factors which result in
differences in wage rates in competitive markets
these include:
– Different skill levels – occupations which need higher
levels of skill / academic qualifications generally pay
more
– Differences in labour productivity and revenue
production – some workers are more efficient than
others so produce more therefore they should earn more
 Difference in wage levels
• Workers are often paid more if their job is risky or
involves working antisocial hours
• Trade unions can influence wage levels in some
markets
• Generally in markets where supply of labour is
limited due to specific skills, qualifications or
abilities than higher wages are demanded
Supply and Demand of Labour
• This model shows where
S1 and D1 intersect the
equilibrium wage rate is
W2
• If there are changes to the
factors that influence
supply or demand of
labour causing the curves
to shift equilibrium moves
and the wage rate changes
 Trade Unions
• Trade Unions work on behalf of workers through
collective bargaining, their aims include:
• Improve the pay of workers.
• Improve working conditions and secure longer
holidays.
• Protect members' jobs.
• Provide local, social and welfare facilities.
• Influence government policy
 and Monopsonistic Employers
in Determining Wages and
Levels of Employment
• The power of trade unions has decreased in the UK
over recent decades due to laws, increased
competition and the move towards a more flexible
workforce
 Unions and Wages
• Unions may try to use their collective bargaining
power to get higher wages for members
• For this to be effective then the union needs to have
a degree of control over the labour force and
therefore the total labour supply
• The extent to which unions can impact wages
depends on:
– The level of unemployment
– Competition
 Unions and Wages
• If demand for labour is elastic then unions can force
wages higher but quantity demanded will decrease
• If demand for labour is inelastic than unions will be
more effective at rising wage levels
• Many markets that have unions have more elastic
demand for labour therefore unions have less
influence on wage rates
 Monopsonistic Employers
• Monopsonistic markets are where the market is
dominated by one buyer who is able to set the price
for the whole market
• If this is the case in the labour market than this one
employer is able to set the wage rate
• In these markets employers may pay workers at a
rate below their marginal product
 Discrimination in the Labour
Market
• There are a number of ways that discrimination can
occur in the labour market
• Equal opportunities - everyone has the same chances
• Sex, Race, Age and Disability discrimination
• UK legislation and European legislation tries to prevent
discrimination
• Businesses operate ‘Equal Opportunities Policies’-firm
is committed to equality of opportunity for all
 Discrimination in the Labour Market
• Discrimination occurs in the labour market for a
number of reasons:
– Employer ignorance
– Occupational crowding effects – women and ethnic
minorities may be most concentrated in lower paying
jobs
– The taste model (gary Becker) Becker proposed that
people prefer to work with people of a similar ethnic
background to themselves
 Advantages of Equal Opportunity Policies
• Better workers as there is more competition in labour market (since
more workers are available)
• Increased flexibility where employers can benefit from flexible
female labour (60% of women workers are P/T)
• Wider skills and experience, otherwise unavailable
• Discrimination is costly for businesses in court proceedings
• Encourages better performance & higher morale, lower labour
turnover and decreased recruitment costs.
• Promotes a professional image and good PR
 The Race Relations Act 1976
• ‘A person discriminates against another if, on racial
grounds, he treats another less favourably than he
treats or would treat, another person.’
• Makes it unlawful to discriminate lawfully or
unlawfully on the grounds of race
 Sex Discrimination Act 1975
• ‘A person discriminates against a woman if, on the grounds
of her sex, he treats her less favourably than he treats a
man.’

• This applies equally to men and women.

• There are exceptions.

 Disability Discrimination Act 1995
• A disability is:
‘a physical or mental impairment which has a substantial and
long term (at least 12 months) adverse effect on people’s
ability to carry out normal day to day activities.’
• Unlawful for employers to discriminate against a person in:
• The recruitment process
• Promotional opportunities
• Dismissal
 Equal Pay Act 1970
• If an employee doing the same or ‘broadly similar’
work as the member of staff of the opposite sex is
entitled to equal rates of pay and conditions

• Aimed to eliminate discrimination in wages and

other conditions of work – holidays, overtime, hours
and duties.
 •
Discrimination in the Labour
Market
• Despite legislation there still exists a gap between sexes in
the UK
• This gap can be seen in wage and salary levels
• There have been a number of reasons suggested for this
gap including:
– Women are more likely to work part time then men
– Employer discrimination favours men
– Women spend less time travelling so have less choice of roles
– Men tend to have a higher level of academic qualifications and
work experience – especially if they are married
– Women tend to work in different jobs which tend to be poorly paid
e.g. catering, cleaning, clerical
 Distribution of Income and Wealth
• Income looks at consumers annual inflows of
money including salaries and wages
• Wealth is the value of a consumers assets such as
housing, savings and pensions
• Large wealth disparities - In the UK 94% of wealth
is owned by 50% of the population, the most
wealthy 1% of the population have 23% of the
wealth
 Distribution Of Wealth And Income
• Income inequality also exists in the UK but this is
not as marked as wealth inequality
• The median UK household income in 2004 was
£335.7, the 10th percentile was £171.1 and the 90th
percentile was £673.9
• This evidence shows that there are large
differentials between the income of the poorest and
richest households
 Wealth And Income Distribution
• There are a number of factors which influence the
distribution of wealth and income including:
• Differences in pay rates in different jobs and industries
• Unemployment
• Changes to taxation
• Changes to the benefits system
• Falling relative incomes to those who depend on benefits
• These factors result in income differentials
 Income differences
• Income differences between households may also
be related to social changes:
– There has been a movement away from the nuclear
family – two adults and children
– There is a rise of single parents
– There is an increase of two adults living together with no
children and both working
• These social changes may result in higher incomes
per household for single cohabiting couples
 Summary
• The Demand for Labour is influenced by how productive labour is
• The Marginal Productivity Theory looks at how much an extra worker
contributes to total revenue
• Supply of labour is influenced by monetary and non monetary factors
including wage rates, overtime, benefits and team working
• Wage rates are determined by a number of factors including the skills
and experience needed for the role
• Trade unions can influence wage levels through collective bargaining
however their influence is decreasing
• Discrimination occurs in the Labour Market there have been laws to
reduce this however there are still wage differentials between
genders
• The Distribution of Income and Wealth is uneven in the UK