The Labour Market - Economics Unit 1 Revision

The labour market is a factor market.

The demand for labour is derived. This means that the demand is a consequence of demand for something else

The wage rate is seen as the price of labour. If the price of labour is low then firms tend to demand more than when it is high. This is what gives the demand for labour the downward sloping direction.

Apart from the wage rate there are other factors that affect the demand for labour, these will shift the demand curve inwards and outwards. They include:

• Productivity of labour - if they become more productive through new technology this will lead to an increased demand for labour and shift the demand curve to the right
• The demand for its final product - if the demand for the final product decreases then the demand for labour is also going to decrease and the demand curve will shift to the left.

The elasticity of demand of labour can affect the shape of the demand curve. Factors include:

• Extent to which other factors such as technology can be substituted for labour. If it is easily substituted then the demand will be elastic.
• share of labour costs to firms total cost - in service activity firms the wage costs are relatively high so the firm is more responsive to changes in price of labour so demand will be elastic.
• In the short run demand for labour will tend to be inelastic but in the long run it will be more elastic as firms are able to change the factors of production being used.
• It will also depend on the PED for the final product

Labour Supply

The supply of labour will be upward sloping as more people will offer themselves for work as the wage rate increases. 

A number of factors can influence the position of the supply curve, these include:

• rate of unemployment benefits payable - if people are more able to receive benefits then the supply may shift to the left.
• the participation rate (proportion of working age looking for a job or already in employment) - if there is a higher rate then the supply will increase.
• An increase in geographical mobility of labour will increase supply
• other factors such as job security and perks may also have an effect on the supply of labour.

Labour market Equilibrium

Found at where supply meets demand and determines the wage rate for an industry.

If the wage is lower than equilibrium then the firm will offer higher wage to fill vacancies and if the wage is higher than equilibrium then there is excess supply of labour, causing a decrease in wage rate.

Effects of Migration 

With the closer integration of the EU migration is increasing, this will increase the supply of labour. 

Effects of government intervention

• Minimum wage - A NMW above market equilibrium creates excess supply of labour as firms find it too expensive to employ aas many workers as before. This creates unemployment. However the NMW is there to stop exploitation, provide an incentive and alleviate poverty. The affect on unemployment depends whether the NMW is above of below the equilibrium wage rate. 
• Unemployment benefits - if benefits are high then it will reduce the supply of labour as it acts as a disincentive.
• Taxation - if taxes are too high then reduces incentive and therefore supply of labour.

Trade Unions

A trade union is an association of workers that negotiates with employers on behalf of the workers. The three main objectives of trade unions include wage bargaining, improving working conditions and providing job security. It is important to evaluate whether the trade union is in a position to affect any of these in a market.

One of the main criticisms of trade unions are that they have created barriers to entering industires for workers as existing workers have better access to information about how a firm is operating or about vacancies. This greatly affects the flexibility of the labour market by making it harder to firms to adapt to changing market conditions.