Labour Markets | A-Level Economics (AQA, Edexcel)
What is a labour market?
A place where workers and firms meet to exchange labour in return for a wage
What is demand for labour?
The number of workers that firms are willing and able to hire at each given wage.
Labour can either act as a complement to capital or a substitute to capital.
Why is demand for labour downward sloping?
Marginal productivity theory states that a firm will hire a worker if their wage is below their marginal revenue product (MRP).
MRP is the extra revenue a firm can make if they hire one additional worker.
As wages increase, there are fewer workers who are able to generate an MRP that is high enough, so demand for labour decreases.
What are the factors (other than wage) that affect demand for labour?
- price/ quality of capital
- demand for the final good/service (labour is a form of derived demand)
- productivity (MRP) of the workers
What is supply of labour?
The number of workers that are willing and able to work at each given wage.
Working can either act as a substitute to leisure or a complement.
- you can either spend your time leisurely or by working.
- you want more income to enjoy your leisure time.
Why is supply of labour upward sloping?
A worker can choose to spend their time for work or leisure.
At higher wages, the opportunity cost of not working increases, so workers are more willing and able to work. This is known as the substitution effect.
What are the factors (other than wage) that affect supply of labour?
- wages in substitute jobs
- barriers to entry
- population or migration
- non-monetary factors
- job satisfaction
- working conditions
- job security
- barriers to entry
What is PEDL?
% change in demand for labour/ % change in wages.
What factors affect PEDL?
- Labour costs as a % of total costs
- Substitutability of factors of production
- PED of the final product
- Time