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Little book of lists F583 The Economics of Work and Leisure


Labour General essential knowledge Economically active = people who are in work OR seeking work Economically inactive = people who are neither in work OR looking for a job Potential labour force = the size of the labour force if economically inactive people would join. Actual labour force = the employed and the unemployed. Employment rate = the proportion of working age people who are in work Unemployment rate = the proportion of working age people who are not in work but are seeking it Earnings = wages plus overtime or bonuses NB to be unemployed a person has to be looking for work. If they are not looking for work they are NOT in the labour force Unit labour costs = the labour costs per unit of output Productivity = output per worker

Primary Secondary Tertiary

Work force sectors 1 stage of production, extractive industries e.g. farming, fishing 2nd stage of production, manufacturing industries 3rd stage of production, services e.g. retail, financial services st


Section 1 – wage determination Factors affecting supply of labour – pick 4 main ones  The wage rate on offer  Substitute occupations  Barriers to entry e.g. quals required  Mobility e.g. occupational and geographical Short run supply of labour –  Income effect  Substitution effect = Backwards sloping supply curve Long run supply of labour – Pecuniary  Wages  Bonuses  overtime Non pecuniary 1. Holidays 2. Interest of the job itself 3. Perks and fringe benefits 4. Job security 5. Location 6. status Elasticity of supply of labour    

the quals and skills required the length of training the mobility of labour (geographical and occupational) time period

Factors affecting demand for labour     

Demand for the product Productivity Wage rate Complementary labour costs The price of other factors of production (ie can you substitute labour with capital) 3

MRP theory – How it is calculated?  Marginal physical product (MPP) x price 2 things it shows  How much labour to demand  Productivity and revenue from the products produced determines wages 5 criticisms o o o o

It assumes workers are homogenous – they are not It assumes firms do not have monopsony power – they do It assumes that there are no trade unions to affect the wage rate – there are It assumes that the productivity of each worker can be measured – not all jobs have output that can be measured o It assumes that the supply curve is perfectly elastic – it is not Elasticity of demand of labour    

Ease of factor substitution – labour for capital The proportion of wage costs in the total costs The price elasticity of demand for the product Time

Wage differentials    

Gender, male vs female Skilled vs unskilled workers Part time vs full time workers Ethnic grouping

Transfer earnings and economic rent – what is each of them? Transfer earnings The minimum amount that has to be paid to ensure a worker stays in their current occupation

Economic rent The amount received over and above transfer earnings

The proportion of economic rent and transfer earnings depends on the elasticity of supply for labour. Inelastic = more economic rent, elastic = more


Reasons for differences in pay  Male and female wage differences (perceived MRP)  Compensating differentials  Differences in accumulated human capital (education/training)  Different skills levels  Different MRP  Inelastic and elastic supply and demand

Section 2 – Labour Market Failure Labour market failure  Trade Unions  Minimum wage  Monopsony power  Net Migration (emigration – immigration)  Discrimination  EU Directives  Poverty and inequality  Labour market flexibility  Others - segmentation, unemployment, economic inactivity, information failure, immobility, ageing population, skills shortages  Government solutions to labour market failure

Trade unions problems  Create unemployment  Wage inflation (cause wages to rise)  Lost productivity evaluative points o Their numbers have declined in recent years so they don’t have as much power o Many things they campaigned for have become law now so they are not so needed to fight for workers’ rights e.g. minimum wage, laws and health and safety o They are more powerful in the public sector o When they interact with a monopsony they can increase the employment rate by increasing the wage rate so that more workers want to supply their labour.

Minimum wage 5

 Creates unemployment  Wage inflation (cause wages to rise)  Could increase incentive to work (this is not a failure) Evaluation points o Only affects people who are in work o Depends on the level it is set at (could be below the market rate) Unemployment 3 types  Frictional  Cyclical  Structural 4 solutions o Minimum wage o Government can employ people themselves (expand public sector) o Education and training o Provide more information about jobs Immobility of labour – 2 types  Geographical  Occupational Flexible labour markets – 5 types of flexibility  Numerical  Temporal  Locational  Functional  Wage 4 methods to achieve flexibility  Education and training  Cut benefits  Cut income tax rates  Remove employment protection legislation e.g. maternity leave, unfair dismissal


Poverty and inequality 2 types 1. Absolute 2. Relative 3 ways to measure it  Lorenz curve  Gini co-efficient  % of people below the median wage 3 solutions to it o Minimum wage o Cut the bottom rate of tax o Increase benefits to the poor Problem of ageing population – 3 solutions  Raise retirement age  Promote private pensions  Discourage early retirement Migration 2 benefits  Labour is more supply elastic  Increases labour supply

2 drawbacks  Could depress wages  Could increase unemployment EU Directives – 2 examples  Parental leave directive  Minimum wage directive


Competition 1 way of measuring market concentration  Concentration ratio Profits – 2 types  Abnormal  normal Economies of scale  Managerial  Selling  Buying  Financial  Technical Barriers to entry  Economies of scale  Branding  Advertising  Predatory pricing  Legal (patents) Monopoly  One firm dominates the market  Abnormal profits in long run  High barriers to entry  Economies of scale Oligopoly  A few firms dominate the market  Abnormal profits usually  High barriers to entry  Economies of scale Monopolistic  Many firms in the market  Normal profits only in the long run 8

 

Low barriers to entry No opportunity for economies of scale

Efficiency  Productive  Technical  Allocative  Dynamic Goals (objectives) of firms  Profit maximisation  Sales maximisation  Growth maximisation  Satisficing  Utility maximisation Regulation – 3 examples  Advertising standards agency - e.g. regulating Virgin Media’s advert with Usain Bolt  Competition Commission – making BAA sell of some London airports  FIFA – Financial fair play rules Contestability – 3 characteristics  Low barriers to entry/exit  Normal profit in the long run  Hit and run competition


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