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19 Cards in this Set
- Front
- Back
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Demand for labour is...
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A derived demand from the production of a good or service.
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Firms hire workers until
or Firms maximise profits when |
Value of Marginal Product of Labour= The market wage.
VMPL = w* - If VMPL < w*, the firm loses money on the last worker - If VMPL > w*, the firm can hire more labour and increase output |
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Key: the VMPL diminishes (is downward sloping) as more workers are added to the production process.
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What shifts the labour demand curve?
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- Change in demand for a product
- Change in labour productivity - Change in cost of employment; i.e. wages |
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Basic labour market theory:
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Supply and demand for different types of labour determine the wages.
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Determinants of equilibrium wages
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1. Compensating differentials
2. Human capital theory (knowledge/ability/social) 3. Ability, effort and chance 4. Signalling 5. Superstar phenomenon 6. Unions (market power) 7. Efficiency wages 8. Discrimination |
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Compensating differential
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Difference in wages that arises from non-monetary
characteristics of different jobs |
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Human capital:
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Represents the accumulation of investments in people.
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Why does education lead to higher wages?
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Educated workers have a higher VMPL (i.e. they are
more productive), so firms are happy to pay them a higher wage. |
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Human capital view of education:
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Schooling makes workers more productive, and therefore they earn higher wages.
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Alternative view of education:
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Firms use education as a way to differentiate between high-ability and low-ability workers.
eg. Uni is a signal of high ability to employers |
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A Union creating unemployment
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If unions push up wages to W2, the supply of labour (Q3) is greater than the demand for labour (Q2) this creates unemployment.
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Benefits of a Union
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- Improve working conditions
- Antidote to market power, e.g. to balance a power of a monopoly |
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Union negotiations are difficult because:
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higher wages = transfer from company’s shareholders to employees.
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Labour force =
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number of employed + number of unemployed
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Unemployment rate =
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(Number of unemployed/ labour force) x 100
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Costs of unemployment
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• Economic costs:
– Lost wages and production – Decreased taxes and increased transfers • Psychological costs: – Individual self-esteem, adverse effects on health • Social costs: – Potential increases in crimes and social problems – Resources spent to address these |
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Frictional unemployment
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It takes time for workers to search for and find jobs in
new sectors. (Usually short-term) |
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Structural unemployment
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Unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.
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