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Labour Market

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Economics

Did you know that the size of the labour market in the UK is staggering? According to ONS estimates from 2018, the UK labour force numbered 33.8 million people out of a total population of 66.1 million. In December 2018, 32.48 million people were employed, while 1.38 million people were unemployed.

The labour market comprises two parts: home labour supply and firm labour demand. Wages are the cost of labour, which provides an income to people while also being a cost to businesses. Wages are determined by the unrestricted interaction of demand and supply in a hypothetical free-market economy. On the other hand, governments and trade unions can affect wage levels in real mixed economies.

The labour market, often known as the job market, is concerned with the supply and demand for labour. Employees provide the supply and employers provide the demand. The labour market is a fundamental part of a country's economy as it’s intertwined with capital, goods, and service markets.

Many factors affect supply and demand at a macroeconomic level. Some of these are domestic and foreign market dynamics, immigration, population age, and education levels. Other important indicators are unemployment, productivity, participation rates, total income, and gross domestic product (GDP.)

At the microeconomic level, individual enterprises interact with employees hiring, terminating, and increasing or decreasing their salaries and work hours. The link between supply and demand has an impact on the number of hours employees work and the earnings, salaries, and benefits they receive.

Differences and similarities between the labour market and the goods market

The labour and goods markets are similar in their general working mechanisms but they have several differences. The labour market is different from the product market when it comes to the function of supply and demand in setting price and quantity.

In a product market, high demand increases the number of goods produced until the demand is met. However, this is not the case in the labour market where labour cannot be manufactured. An increase in wages will not result in an increase in the supply of labour if we don’ take migration into account. The demand-supply mechanism in the labour market is not as straightforward and linear as in the product market.

Table 1 below provides a comparison between labour markets and commodity markets.

Criteria

Labour markets

Goods or commodity markets

Definition

A process by which supplies of a particular type of labour and demands for that type of labour are balanced, as an abstraction.

A physical place where buyers and sellers of a particular commodity gather for doing transactions.

Relationship between buyer and seller

The relationship between a seller and a buyer in is not temporary and thus personal issues can affect it.

The relationship between a seller and buyer ends when the transaction and transfer of goods are complete.

Perfect or imperfect

It’s primarily an imperfect market. There is no perfect mobility. This results in a wide range of compensation rates for the same sort of work and a lack of a normal wage rates toward which the market rate naturally trends.

Commodity markets are both perfect and imperfect market types. Each is characterised by different factors such as type of goods, price, number of buyers and sellers, etc.

Price setting

Wage fixing is a significant element of the labour market. In the absence of unions, the buyer of labour determines its price.

It is normally the seller who sets the price.

Price fluctuation

The price that is determined in the labour market tends to be fixed for a period of time. Employers do not want pay rates to shift in response to changes in demand and supply.

In a goods market, the price-setting depends on various factors and tends to fluctuate with every change in demand or supply conditions.

Complexity

It is significantly more complicated than the commodities market. Whatever a person’s employment or monetary reward, they believe that they are entitled to proper treatment and that their dignity must be respected.

It functions on the different factors of production and the forces of demand and supply. In that sense, it is less complex compared to the forces of the labour market.

Table 1. Comparisons between labour markets and commodity markets.

Characteristics of the labour market

The labour market is stable and it lacks mobility. It also lacks variation in wage rates for identical jobs. Employees of other businesses getting lower pay do not leave their positions to work for high-wage enterprises when the price of labour given by a single employer rises.

A labour market might be have a distinct geographical location. However, defining the borders of labour markets is difficult. For some employees, the labour market is national (or perhaps worldwide), whereas, for others, mobility is severely limited.

The size of a market is determined in part by the worker’s talent and education. Engineers and physicians with advanced degrees are likely to find acceptable employment in a variety of locations. Workers in this situation are more inclined to seek a higher-paying position.

Labourers without specialised skills, such as clerks and unskilled workers, find it challenging to get work in a variety of fields. Their labour marketplaces are likely to be limited to their immediate surroundings. In terms of labour mobility, age is also a significant influence. Young employees, on average, are more mobile than their elder colleagues in the workforce.

The most important feature of a rising economy’s labour market is that the great majority of people work as workers, with just a tiny percentage working as employers or as employed managers of employing units. Because the great majority of the population is employed, they are concerned with short-term salary levels, working hours, and working conditions.

Labour demand is the number of people (or hours of work) that an employer is willing and able to hire (in a particular time period) at any given wage rate.

The labour demand curve is a typical downward sloping curve, indicating that employers will recruit more workers at lower wages and vice versa.

Key factors affecting the labour demand:

  • The wage rate: as the wage rate grows, the demand for labour rises as well. As a result, the labour demand curve begins to trend downward. Every market may use a downward-sloping demand curve to explain the income and substitution effects. When wages grow, businesses try to replace capital with labour, or less expensive labour with more expensive labour. Furthermore, if firms continue to use the same quantity of labour, their labour costs will rise while their income (profits) falls. For each of these factors, demand for labour will decrease as wages rise.
  • The demand for the products: labour demand is derived. This means that it is based on the demand for the product that labour creates. More firms will seek the people who create a given item or service if more customers want it.
  • Productivity of labour: productivity refers to the amount of labour that every worker produces. Those that are more productive will be in higher demand. Skill levels, education and training, and the use of technology all have an impact on productivity.
  • Profitability of firms: if a company is profitable, it can afford to hire additional people. Falling profitability, on the other hand, is likely to diminish labour demand.
  • Substitutes: the degree to which labour is required has an impact on demand. The demand curve for labour will change to the left or right if substitutes, such as capital machines, become cheaper or more costly. For example, if the cost of new technology decreases, demand for labour may decrease as well.
  • The number of 'buyers' of labour: the number of buyers in a market can have an impact on total demand. Monopsonists are sole buyers in a market, and they are quite frequent in labour markets. London Underground, for example, is the only company in the United Kingdom that employs underground tube drivers. In general, when one employer dominates a labour market, demand for labour is lower than when there are several companies. Furthermore, in such marketplaces, salaries have a tendency to be lower, which is one of the reasons why labour unions emerge and pressure for pay increases.

The Labour Market London Underground StudySmarterThe London Underground.

Supply of labour

Labour supply of labour is the number of hours that employees are willing and able to work in a specific period of time. This is not the same as the number of employees. A given number of employees might raise or decrease the labour supply by working more or fewer hours. As a result, rather than backward sloping at higher pay rates, the labour supply curve for the whole economy may be the usual upward sloping curve.

Key factors affecting labour supply:

  • The real wage rate on offer in the industry itself: increased factor incentives are likely to result from greater pay, which should increase the number of persons willing and able to work.
  • Overtime: overtime payments, productivity-related pay schemes, and share option plans are all ways to increase wages.
  • Substitute occupations: the salary and earnings disparity that exists between two or more occupations are influenced by the actual wage rate on offer in competing for employment. A rise in the pay offered to skilled plumbers and electricians, for example, may induce some people to change careers.
  • Barriers to entry: artificially limiting an industry’s labour supply (for example, by imposing minimum entrance requirements) can restrict labour supply and drive up wage levels. This is the case in professions like legal services and medicine, where severe ‘entry criteria’ apply.
  • Improvements in the occupational mobility of labour: if more people are trained in the skills required by the particular occupation, it will improve the overall mobility of labour.
  • Non-monetary characteristics of specific jobs: these include things like job security, working conditions, opportunities for advancement, and the chance to live and work abroad. Also employer-provided in-work training, employer-provided or subsidised health and leisure facilities, and other in-work benefits like occupational pension schemes.
  • The net migration of labour: labour migration is becoming more important in determining the supply of labour available to many industries. This is the result of a rising flow of people seeking work in the UK post-Brexit, whether to relieve skilled labour shortages in the NHS, education, or to meet seasonal demand for workers in agriculture and the construction industry.

The Labour Market NHS StudySmarterSign thanking the NHS for their work during the Covid-19 Pandemic.

Why are labour markets important?

Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels. When it comes to national economies, the high rate of unemployment is the most destructive problem in Europe, amid a slew of other labour-related issues.

For example, the unemployment rate in Japan is quite low, indicating that the country's labour market is performing well. Even in Japan, though, there may be hidden labour issues. The US economy has two significant labour market issues: poor real income growth, owing mostly to sluggish productivity growth, and rising wage disparities among employees. Technological advancements, automation, globalisation, and sustainable commerce are reshaping the global labour market and workforce.

The macroeconomic environment serves as a valuable indication of labour market activity, which in turn defines the scope of how businesses attract, retain, and develop their employees in accordance with their overall business plan. People experts may better monitor potential developments and adjust to changes if they are aware of the different linked components that make up this dynamic.

The labour market is where human resources that contribute to GDP are purchased and sold. The higher the potential level of GDP, the larger the volume or quality of human resources available to the market. However, this potential will only be realised if there is adequate demand for these resources, derived from consumer demand. We use the number of individuals working (employment), how long they work (hours), and the number of unfilled job vacancies to calculate the market demand for labour. To calculate supply (unemployment) we use employment plus the number of persons seeking work.

The level of wages and salaries reflects the balance of demand and supply in the labour market (earnings). Earnings will grow if demand is higher than supply. This will raise the cost of hiring people (assuming no change in productivity), lowering demand for human resources, and alleviating wage pressure. If, on the other hand, supply exceeds demand, we may anticipate employment costs to decline and, as a result, labour demand to rise.

The labour market is ‘tight’ during periods of relatively strong demand. Unemployment will be low, and job openings will be plentiful. When labour supply is plentiful the market has few openings and a large number of job searchers.

The labour market in the UK

Until 2020, the unemployment rate in the United Kingdom was at an all-time low. Pay growth did not occur despite the steady tightening of the labour market, throughout the same time period, owing in large part to the UK’s low productivity. Employers did not appear to be under much pressure from employees to boost salaries, which might be explained in part by the relatively high labour supply fueled by welfare claims, older workers, and EU nationals.

Following a period of high employment and low unemployment, the employment rate has declined and the unemployment rate has risen since the outbreak of the Coronavirus pandemic. However, both have shown indications of improvement since the end of 2020. According to the most recent Labour Force estimates, the employment rate improved by 0.5 percentage points from June to August 2021, to 75.3% as the unemployment rate fell to 4.5%, down 0.4 percentage points. The rate of economic inactivity has dropped 0.2 percentage points to 21.1 % from the previous quarter.

According to the most recent Labour Force Survey figures, the employment rate climbed by 0.2 percentage points from August to October 2021, to 75.5%. The number of part-time employees fell sharply during the Coronavirus pandemic but has been steadily growing from April to June 2021, contributing to the employment gain. The unemployment rate fell 0.4 percentage points to 4.2% in the third quarter, but the rate of inactivity rose 0.1 percentage points to 21.2%.

The Coronavirus pandemic has had a particularly negative impact on young people (aged 16 to 24 years), with employment rates declining and unemployment and economic inactivity rates rising faster than for those aged 25 and up. However, over the last quarter of 2021, the employment rate has risen and the unemployment rate has fallen below pre-Coronavirus levels.

The number of job openings increased to a new high of 1,219,000 from September to November 2021, up 434,500 from the pre-Coronavirus January to March 2020 figure, with 13 of the 18 industry sectors posting new highs. However, the rate of increase in vacancies slowed in the third quarter, and the experimental single-month vacancy estimates revealed the first decrease in vacancy numbers since February 2021.

From August to October 2021, average total pay (including bonuses) increased by 4.9%, while regular pay (excluding bonuses) increased by 4.3%. Base and compositional effects pushed up previous months' strong growth rates. These transitory variables have mostly worked their way out of the latest growth rates, although a tiny amount of base impact for particular sectors may still be there.

Labour Market - Key takeaways

  • The labour market is the supply and demand for labour. The employees provide the supply and the employers provide the demand.
  • The labour market must be examined and analysed at both microeconomic and macroeconomic levels.
  • The demand for labour is the willingness of the employer to employ an individual at any given time. The real wage companies are willing to pay for this labour as well as the number of employees ready to supply it at the given rate constitutes this demand.
  • The number of hours individuals are willing and able to work at a certain wage rate is the labour supply. It is the number of people willing and able to work at a certain salary in a specific job or sector.
  • Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels.

Labour Market

The wage rate, productivity of labour, firm profitability, the number of 'buyers' of labour, and net migration.

The labour market is the supply and demand for labour in an economy. The employees provide the supply and the employers provide the demand. 

The labour market is characterised by stability, lack of mobility, and a lack of variation in wage rates for identical jobs. Employees of other businesses getting lower pay do not leave their positions to work for high-wage enterprises when the price of labour given by a single employer rises. 

Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels. 

Final Labour Market Quiz

Question

 What is the definition of trade unions?

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Answer

Trade unions are groups of people (employees/workers) coming together to fight in the best interest of the workers.

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Question

What are the characteristics of trade unions in brief?

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Answer

The following are the characteristics of trade unions:

  • Employees association

  • Unity in bargaining

  • Reduced economic inequality 

  • Communal interest 

  • Legal and permanent bodies

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Question

What are the two types of bargaining power of trade unions?

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Answer

Collective bargaining and productivity bargaining.

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Question

What are the advantages of trade unions?

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Answer

The following are the advantages of trade unions:

  • Right pay demands
  • Improved working conditions
  • Guaranteed job security
  • Grievance handling
  • Reduced economic inequality

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Question

What are the disadvantages of trade unions?

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Answer

The following are the disadvantages of trade unions:

  • Unemployment

  • Creates lethargic attitude in employees 

  • Productive hours may be lost

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Question

Can trade unions lead to unemployment situations?

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Answer

Sometimes demanding higher wages leads to a higher supply of labour, creating a wider gap between demand and supply, which can lead to unemployment.

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Question

Is a trade union a legal body?

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Answer

Yes, trade unions are legal bodies.

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Question

Is a trade union an individual entity or group of people?

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Answer

Group of people.

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Question

Name a few non-monetary benefits trade unions can demand for.

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Answer

Better working conditions, holiday, pension plan and insurance policies, etc.

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What are trade unions associations of?

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Answer

Usually, trade unions are associations of workers.

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What does collective bargaining power refer to?

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Answer

Collective bargaining means the power of trade unions to come together and demand for the rights of workers.

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Question

What does the productivity bargaining power of a trade union mean?

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Answer

Productivity bargaining is when a trade union bargains on behalf of its members in return to improve productivity for the employer.

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Question

What can employers lose during trade union strikes or rallies?

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Answer

Employers can lose the productive time of employees during trade union strikes.

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Question

Do trade unions demand for pay below equilibrium or above equilibrium?

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Answer

Trade unions demand pay above equilibrium.

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What is the flip side of a trade union apart from employees’ trade unions?

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Answer

The flip side is the industrialist side that works for the betterment of their industrial segment with the government for various reforms.

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Question

What are the five factors that can influence demand for labour?

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Answer

  • Changes in technology
  • Labour productivity
  • Changes in demand 
  • Changes in the number of firms 
  • Profitability of a firm

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Question

What are the factor markets?

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Answer

The factor markets provide a way for firms or other forms of employers to help find the employees they need.

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Question

What does the demand for labour illustrate?

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Answer

The demand for labour shows how many workers the firms are willing and able to hire at a given wage rate at a given time.


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Question

What is derived demand?

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Answer

Derived demand is the demand for a factor of production that results from the demand for another intermediate good. In case of labour demand, it is derived from the demand for a product or a service that labour produces.


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Question

What is the supply of labour?

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Answer

The supply of labour refers to the number of hours a worker is willing and able to work in a given period.

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Question

What is the national minimum wage and why was it introduced?

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Answer

The national minimum wage is the legal minimum wage an employer can pay. Its aim was to protect low-income workers.

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Question

What is the impact of a minimum wage in an unskilled labour market?

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Answer

It can ensure that workers are paid fairly and not exploited by their employers, but results in job vacancies in the market as a whole.

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What is the impact of a minimum wage in a skilled labour market?

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Answer

It won't have an effect,  because firms are happy to operate above the national minimum wage.

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Question

What does the Efficiency wage theory state?

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Answer

It states that increasing wages can lead to higher productivity levels because workers are motivated by higher pay.

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Give an example of the Efficiency wage theory.

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Answer

Henry Ford implemented higher wages in his company, the Ford Motor Company, which led to an increase in labour productivity and job applications.

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Question

What must an effective minimum wage consider?

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Answer

Economic climate.

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Question

The UK’s national minimum wage has impacted unemployment.

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Answer

True

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The national minimum wage is the same as the living wage.

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Answer

False

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Question

What are some advantages of a minimum wage?

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Answer

Increases labour productivity.

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What are some disadvantages of a minimum wage?

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Answer

Increases labour costs.

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Question

What is labour market?

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Answer

The labour market is the supply and demand for labour. The employees provide the supply and the employers provide the demand.

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Question

What are the characteristics of labour market?


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Answer

The labour market is characterised by stability, lack of mobility, and a lack of variation in wage rates for identical jobs. Employees of other businesses getting lower pay do not leave their positions to work for high-wage enterprises when the price of labour given by a single employer rises.

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Question

Why is the labour market important?


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Answer

Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels.

Show question

Question

What are the two main parts of the labour market?


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Answer

The labour market is made up of two parts: home labour supply and firm labour demand.

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Question

What are the key factors affecting the demand for labour?


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Answer

  • Wage rate
  • Demand for the products
  • Productivity of labour
  • Profitability of firms
  • Substitutes
  • Number of buyers of labour

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Question

What are the key factors affecting the supply of labour?


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Answer

Key factors affecting the supply of labour are:

  • Real wage rate on offer in the industry itself
  • Overtime
  • Substitute occupations
  • Barriers to entry
  • Improvements in the occupational mobility of labour
  • Non-monetary characteristics of specific jobs
  • Net migration of labour

Show question

Question

What is labour demand?


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Answer

It is the number of people (or hours of work) that an employer is willing and able to hire (in a particular time period) at any given wage rate.

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Question

What is the labour supply?


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Answer

The number of hours that employees are willing and able to work in a specific period of time.

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Question

Is the labour supply the same as the number of employees?


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Answer

 No. It is not the same as the number of employees as a given number of employees might raise or decrease the labour supply by working more or fewer hours.

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Question

The human resources in the labour market contribute to national GDP.


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Answer

True

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Question

Is the labour supply the same as the number of employees?


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Answer

 No. It is not the same as the number of employees as a given number of employees might raise or decrease the labour supply by working more or fewer hours.

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Question

Explain the macroeconomic impacts of a national minimum wage on the UK economy.

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Answer

A minimum wage allows the poorest in society to earn more. As they have a high marginal propensity to consume (MPC), consumption will increase, causing the aggregate demand (AD) curve to shift outward. This leads to economic growth and higher levels of employment. However, labour costs for firms increase, and this will lead to UK domestic firms see a decrease in competitiveness. This negatively affects the trade balance. In the short run, the aggregate supply (AS) curve will increase causing higher inflation rates.


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Question

What is the UK’s current minimum wage for those aged 23 and over?

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Answer

As of January 2022, the UK’s minimum wage is £8.91 for those aged 23 and over.


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What is the trend of the UK’s national minimum wage?

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Answer

The UK’s national minimum wage increases annually to keep up with rising inflation rates and higher costs of living. It also rises faster than average wages.

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Question

Explain how a national minimum wage can help reduce relative poverty.

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Answer

A minimum wage provides an appropriate income level especially for the lowest paid. These workers will have more income to improve their standard of living and thus reduce relative poverty.

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Question

Explain how a national minimum wage can increase unemployment in an economy.

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Answer

Labour costs are one of the major costs for firms, so a minimum wage would result in higher labour costs. In order to keep profits, firms could cut jobs. This would increase unemployment in a country and place a burden on the welfare state.

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Question

What is the elasticity of demand for labour?

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Answer

The elasticity of demand for labour measures the responsiveness of labour demand to a change in the wage rate.

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Question

How much will the employment level be affected by a wage rate change if the demand is elastic?

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Answer

If  the demand for labour is elastic, we can assume that a slight change in wage rates could lead to greater changes in employment levels.

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Question

How much will the employment level be affected by a wage rate change if the demand is inelastic?

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Answer

If the demand for labour is inelastic, we can assume that a big change in wage rates will lead to a smaller and less effective change in employment levels.

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Question

What are the factors that make demand for labour inelastic?

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Answer

  •  Relative wage costs are only a part of the total production costs of a firm. 
  •  The demand for the good or service produced by the labour is inelastic. 
  •  It becomes difficult to replace the factors of production or the current labour force that is employed producing the firm's goods and services. 

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