A-Level Economics Notes on The Labour Market

Definitions

1. Labour Market: The arena in which workers and employers interact to negotiate and exchange labour for wages.
2. Demand for Labour: The total number of workers that employers are willing and able to hire at a given wage rate in a given time period.
3. Supply of Labour: The total number of hours that workers are willing and able to work at a given wage rate in a given time period.
4. Derived Demand: The demand for labour is ‘derived’ from the demand for the goods and services that labour can produce.
5. Marginal Product of Labour (MPL): The additional output that results from employing one more unit of labour.
6. Wage Rate: The payment to labour for a unit of time or output which can be expressed hourly, weekly, or per unit of output.
7. Substitution Effect: When the wage rate changes, the opportunity cost of leisure changes, causing workers to substitute between labour and leisure.
8. Income Effect: When higher wages make workers wealthier, potentially leading them to work fewer hours.
9. Elasticity of Labour Demand: A measure of the responsiveness of the quantity of labour demanded to a change in the wage rate.
10. Elasticity of Labour Supply: A measure of the responsiveness of the quantity of labour supplied to a change in the wage rate.
11. Equilibrium Wage: The wage rate at which the quantity of labour supplied equals the quantity of labour demanded.
12. Wage Differentials: The differences in wage rates due to the skills required, the location of the job, the risks involved, and other factors.
13. Human Capital: The stock of skills, knowledge, experience, and attributes that affect a worker’s ability to perform work that produces economic value.
14. Compensating Wage Differentials: Higher wages paid to compensate workers for unpleasant aspects of a job.
15. Labour Mobility: The extent to which workers are willing and able to move to different jobs or geographical areas for employment.
16. Trade Union: An organization of workers that aims to protect and advance the interests of its members by negotiating with employers on pay and conditions of work.
17. Collective Bargaining: The process by which trade unions negotiate with employers on behalf of their members.
18. Minimum Wage: The lowest legal wage that can be paid to workers, set by government legislation.
19. Unemployment: The situation where people who are willing and able to work are not employed.
20. Frictional Unemployment: Short-term unemployment that occurs when workers are in between jobs or are entering the workforce for the first time.
21. Structural Unemployment: Unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.
22. Cyclical Unemployment: Unemployment that results from business cycle recessions and corresponds with the cyclical trends in growth and production within an economy.
23. Natural Rate of Unemployment: The level of unemployment consistent with a stable rate of inflation. It is the sum of frictional and structural unemployment.
24. Labour Market Flexibility: The degree to which labour markets adapt to changes in the economy and to changes in the conditions of labour demand and supply.
25. Active Labour Market Policies: Government policies aimed at improving the functioning of the labour market and reducing unemployment, such as training programs.
26. Passive Labour Market Policies: Government policies that provide income support to the unemployed without improving their chances of finding work.
27. Jobseeker’s Allowance: A benefit for those who are unemployed and actively seeking work.
28. Employment Protection Legislation: Laws that provide protection to workers, particularly with respect to job security and redundancy.

The Labour Market Overview

Definition and Role:

• The labour market refers to the supply and demand for labour, where employees provide the supply and employers create the demand.
• It is a factor market since labour is one of the four factors of production.
• The main function of the labour market is to coordinate the provision of labour services and the demand for labour as a factor of production.

Demand for Labour:

• Derived Demand: Labour demand is derived from the demand for the goods and services that labour can produce.
• Marginal Productivity Theory: Employers consider the marginal product of labour (the additional output generated by an additional unit of labour) when deciding how much labour to hire.
• Wage Determination: The demand for labour is inversely related to the wage rate; as wages increase, the quantity of labour demanded decreases, ceteris paribus.

Supply of Labour:

• The supply of labour is the number of hours that workers or employees are willing and able to work at a given wage rate.
• Influencing Factors: Non-monetary aspects, such as working conditions, social factors, and individual preferences, can affect labour supply.
• Elasticity of Supply: The responsiveness of the quantity of labour supplied to a change in wage rate.

Wage Determination

Wage Theories:

• Classical View: Wages are determined by the intersection of supply and demand for labour.
• Bargaining Theory: Wages are determined through the bargaining power of workers’ unions and the negotiation process with employers.
• Efficiency Wage Theory: Employers may pay above the equilibrium wage to increase productivity and efficiency.

Wage Differentials:

• Reasons for differences in wages include education and training, experience, working conditions, discrimination, and government intervention.
• Regional Wage Differentials: Variations in wages in different parts of a country due to cost of living, demand and supply of labour, and industrial structure.

Labour Market Equilibrium

Equilibrium Wage:

• The wage rate at which the quantity of labour supplied equals the quantity of labour demanded.
• Shifts in Demand and Supply: Changes in the labour market, such as technological advancements or changes in the educational level of the workforce, can shift demand and supply curves, affecting equilibrium wages.

Labour Market Flexibility and Regulation

Flexibility:

• Labour market flexibility refers to how quickly and easily the labour market can adapt to changes, such as fluctuations in the economy, technology, and government policies.
• Types of Flexibility: Wage flexibility, numerical flexibility (ease of hiring and firing), and functional flexibility (ability to switch roles).

Regulation:

• Minimum Wage Laws: Set the lowest legal wage that can be paid to workers.
• Employment Protection Legislation: Includes laws related to dismissal, temporary employment, and working hours.
• The Role of Trade Unions: Trade unions can influence wages and working conditions through collective bargaining.

Unemployment

Types of Unemployment:

• Frictional Unemployment: Short-term unemployment as individuals search for jobs.
• Structural Unemployment: Caused by changes in the economy that result in a mismatch of skills.
• Cyclical Unemployment: Associated with the business cycle, where unemployment correlates with the economic downturns.

Measuring Unemployment:

• The unemployment rate is the percentage of the labour force that is unemployed and actively seeking employment.

Labour Market Policies

Active Labour Market Policies:

• Aim to reduce unemployment and increase labour market participation.
• Includes job placement services, training programs, and subsidies for employment.

Passive Labour Market Policies:

• Provide support for the unemployed, such as unemployment benefits.
• Can sometimes lead to the unemployment trap, where individuals are discouraged from seeking work due to the attractiveness of benefits.