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The Labour Market

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The Labour Market

• The market for a factor of
production - labour
• Refers to the demand for labour
– by employers and the supply
of labour (provided by potential
employees)
• Demand for labour is a derived
demand - not wanted for its own
sake but for what it can
contribute to production
The demand for labour is dependent on the
demand for the final product that labour
produces.The greater the demand for office
space the higher the demand for construction
workers.
Copyright: Bo de Visser, stock.xchng

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The Labour Market

• Demand for Labour
• Influenced by:
– Cost of hiring labour
– Wages/salaries
– National Insurance contributions
– Pension contributions
– Administration costs associated with tax
payments and adhering to employment laws
and regulations

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The Labour Market

• Demand closely linked with the value of the product
produced by labour

– e.g. 1 person produces 50 mugs per week, each mug sells for £2
each. Total value of output = £100

– To be profitable the wage rate must not therefore exceed £100

per week

• Marginal Revenue Product – the addition to total revenue

from the sale of one additional unit of output produced by the
worker
MRP = MPP x P
• MPP = Marginal Physical Product – the addition to total output
produced by employing one extra or one fewer unit of labour

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The Labour Market

The demand for labour will shift
Wage Rate (£ per week)
if: At The a relatively
demand for high wage
labour
At a
rate lower wage
of £250 per
is downward rate the
week,
sloping
•Productivity
firm
the
from can
value
left of
afford labour
added
to to by
right take
theon
£250 increases
more
worker workers.
must be The demand
greater
•Newfor labour
to machinery is
cover the costinversely
of which
is used
increases productivity rate
related
hiring to
thatthe wage
labour.
Demand is likely to be
•If there
lower.is an increase in the
demand for the good/service
itself
•If the price of the good/service
increases

£100
DL1

DL

Q1 Q3 Q2 Q4
Quantity of labour employed

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The Labour Market

• Productivity:
• A measure of output per person
per time period
Total Output
Productivity = --------------------
Quantity of Factor

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The Labour Market

• Productivity
– Not always easy
to measure
– Influences costs –
output = potential
revenue
counterbalanced
by wage costs Measuring productivity in service
industries, especially the public sector
– Indicates efficiency can be difficult. How would you
measure the productivity of a
– Competitive teacher?
advantage Copyright: Jeramey Jannene, stock.xchng

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The Labour Market

• Supply of Labour determined by:
– Size and structure of the population – age, gender,
etc.
– Skill levels required
– Education and training
• Number in higher education
• School leaving age
• Qualification types
– Fashion
– Time period
– Opportunity cost of work – income and substitution
effects

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The Labour Market

Wage Rate (£ per hour) SL In the Sshort
In
Thethe long run,
shortage causesas
run, theL1supply The
As businesses
demand tofor
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wage
Assume rate train
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is
of internet developers
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at aper
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become
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per
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alsoskills
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become
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increases
more employment.
to comeelastic. from
onto the The DA
shortage
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wage
market rate develops.
will
because fall
of the
30 training
back to atimelowerneeded.
level.

DL DL1

Q1 Q3 Q2
Number Employed
Shortage

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The Labour Market

• The relative demand and supply of
labour can help to explain differences
in wage rates for different occupations
– e.g. Supply of those able to train as
nurses higher than those with the talent
to be successful professional footballers,
hence the higher wage rate
of footballers!
Nurses help care for people and save
lives, footballers entertain. One earns
£90,000 per week, the other £350.

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The Labour Market

• Other factors influencing wage
differentials:
– Status attached to the job
– Discrimination
– Race
– Gender
– Monopsony – a dominant buyer in
the market
– Sector – public or private
– Trade Union power or influence
– Length of career
– Risk or danger involved
– Social or unsocial hours Some jobs might attract a premium
– Shift patterns because of the danger or risk
associated with carrying it out!
– Productivity Copyright: Dria Peterson, stock.xchng

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