Role of labour markets

Discuss labour markets

1. Define labour.
o Answer

Human effort (physical and mental) used to produce goods and services

Income return for labour’s contribution is wages

2. Define labour market.

o Answer

Factor market where individuals seeking employment interact with

employers who want to obtain the most appropriate skills for their production
process

Firms demand labour and employees supply it

3. Define wages.
o Answer

Fixed regular payments earned for labour's contribution to the production

process, typically paid on a daily or weekly basis

Factor income return for labour

4. List the reasons for government intervention in the labour market.

o Answer

The government may intervene in the labour market to:

 Establish minimum wage levels

 Resolve industrial disputes
 Set minimum conditions for work (working hours)
 Remove unnecessary laws and regulations to make the market more
efficient

E.g. Job Keeper for COVID

Demand for labour

Discuss the demand for labour

1. Define the demand for labour.

o Answer

Derived from the demand for goods and services

 As the price of labour (wage) falls, an individual firm will employ more labour

Downward sloping like demand curves

2. Explain why the demand for labour is a ‘derived demand’.

o Answer

Demand for goods and services by consumers will impact the demand for
labour (amount of workers a firm needs)

List the factors affecting demand for labour at the microeconomic and macroeconomic level

1. List the main factors affecting the demand for labour at the microeconomic level.
o Answer

Output of the firm

Nature and size of the industry

Productivity of labour

Wage rate

Rate of capital and labour substitution

2. List the main factors affecting the demand for labour at the macroeconomic level.
o Answer

Changes in the level of economic activity

Productivity of labour

General wage rate

Government industrial relation policies

Discuss the factors that affect the demand for labour

1. Explain how the output of the firm affects the demand for labour.
o Answer

Firms need factors of production in order to produce

The higher the level of output the more staff needed, influenced by;

 Aggregate demand
 Conditions in the firm’s industry
  Demand for the firm’s products

i.e. a derived demand

2. Explain how the productivity of labour affects the demand for labour.
o Answer

Productive staff will be hired more as they may be more productive than
capital

Total output per unit of labour input

3. Explain how the costs of other inputs affects the demand for labour.
o Answer

If cost rises then less staff can be afforded

Increased on-costs of labour

4. When will demand for labour be more elastic?

o Answer

Demand for labour will be more elastic when:

 It is easy to substitute labour and capital

 Labour is high proportion of total costs
5. Explain how capital substitution, economic activity and foreign labour affects the
demand for labour.
o Answer

Capital substitution

If the price of capital falls or becomes more productive relative to labour, it

will be substituted for labour

Economic activity

If AD is changing in the economy then more labour is needed

Cost and productivity of foreign labour

Shift its production overseas if labour there is cheaper (unethical)

Other

1. Explain how the productivity of labour in the short run affects the demand for labour.
o Answer

In the short run, labour productivity depends on the level of aggregate

demand:
 AD is rising faster than labour productivity

 Demand for labour will increase to meet the increased consumer

demand

AD is unchanged but labour productivity is rising

 Demand for labour will decrease as the firm would be operating with
excess capacity

AD is falling but labour productivity is rising

 Demand for labour will decrease even more

2. Explain how the productivity of labour in the long run affects the demand for labour.
o Answer

Labour productivity should increase demand for labour as firms substitute

labour for other factors of production (capital)

Supply of labour

Discuss the factors that affect the supply of labour

1. Define the supply of labour.

o Answer

The economic idea that individuals supply labour when they are ready and
willing to work in the labour market, especially when the wage is higher

Upward sloping like supply curves

2. List the main factors affecting the supply of labour.

o Answer

Pay and remuneration

Labour market institutions

Working conditions

Skills, experience and education required by employers

Occupational and geographic mobility of labour

Population size

Age distribution
 Participation rate

3. Explain how pay and remuneration affects the supply of labour.

o Answer

The higher the wages the more labour will be supplied

Workers will be attracted to those jobs that pay the most

Wage + Superannuation + Fringe Benefits = Remuneration package

E.g. company car

4. Explain how working conditions affects the supply of labour.

o Answer

Firms that offer employees:

 More flexible working hours

 Opportunity to work from home
 Holiday leave entitlements
 Pleasant and safe working environment

Will tend to attract more labour than those who do not

5. Explain how skills, experience and education affects the supply of labour.
o Answer

Human capital that contributes to the production process

If high skills are required, than supply will fall

Reflects the quality of the labour force

Main influence on productivity growth

6. Explain how the occupational and geographical mobility of labour affects the supply
of labour.
o Answer

Occupational mobility

Ability of labour to move between different occupations in response to wage

and employment opportunities

Depends on the education, skills and time required for a particular occupation

Doctors - low occupational mobility

Geographical mobility
 Ability of labour to move between different locations in response to
improved wage and employment opportunities

Occupations that require workers to relocate to locations, with fewer

educational and entertainment opportunities, will receive a lower supply of
labour

Employers must offer higher wages to attract workers

7. What is the formula for labour force participation rate.

o Answer

Wage rate and equilibrium

Explain how demand and supply of labour affects wage rate and equilibrium

1. Discuss the result of any changes in a labour market via a diagram.

o Answer

Change in wage causes movement along the curve

Change in non-wage factors causes shift in the curve

2. Explain the wage rate is determined.

o Answer

Intersection of the demand and supply labour curves

3. Explain how a shortage of labour and unemployment occurs in the labour market.
o Answer

At wage rates above the equilibrium price there will be an excess supply of
labour (unemployment)

Government can set a minimum wage (price floor) for an industry to cause
more workers to be unemployed in this industry and lead them to seek
employment in other industries

4. Outline factors that shift the demand of labour.

o Answer
 Increase (rightwards shift)

 Rise in consumer demand for the firm’s product

 Rise in the productivity of labour
 Higher rate of economic growth

Decrease (leftwards shift)

 Fall in the productivity of labour

 Cheaper capital
 Cheaper foreign labour
 Fall in level of economic activity
5. Outline factors that shift the supply for labour.
o Answer

Increase (rightwards shift)

 Improvements in employment conditions

 Favourable working conditions
 Rise in the participation rate

Decrease (leftwards shift)

 Unfavourable working conditions

 Higher skills required by employer
 Low occupational or geographical mobility
 Fall in the participation rate

Australian Labour Force

Expand on the labour force and factors that affect it

1. Define labour force.

o Answer

Includes employed and unemployed people

Aged 15 and over


Employed at least one hour per week

On paid leave or strikes

People actively seeking work and available to start work

2. Define employed and unemployed persons.
o Answer

Employed

Employed at least one hour per week

On paid leave or strike

 Unemployed

Not currently working

Actively seeking work and available to start work but unable to find it

3. Who are excluded from the labour force?

o Answer
 Retired
 Aged under 15
 Performing full-time domestic duties
 Full-time students
 Not actively seeking work or not available to start work (illness)
4. What are some problems with the labour force equation.
o Answer
 Doesn't take into account hours of work
 Takes into account those not working
 Underemployment
 Casual workers are factored in but their hours/wages per week differ
5. Explain human capital.
o Answer

Knowledge, skills, experience, training, health and education of labour

Investment in these qualities increases the productive potential of the labour

force

May depreciate, leading to lower productivity, especially if unemployed for

long periods of time

6. Explain participation rate and the factors that influence it.

o Answer

Percentage of the working age population in the workforce

Influenced by:

 Level of economic activity and employment opportunities

 School retention rates
 Age of retirement
 Job opportunities for women and young people

Define unemployment

1. Define unemployment.
o Answer
 Percentage of the workforce who are actively seeking work but unable to find
it

2. How is unemployment rate measured?

o Answer

3. Summarise the main types of unemployment.

o Answer

SSFCHLH

Structural: skills mismatch, e.g. new technology

Seasonal: time of year e.g fruit pickers

Frictional: moving between jobs

Cyclical: downturn in the business cycle

Hard-core: nobody wants them, e.g. drug addiction, criminal record

Long-term: unemployed for 12+ months

Hidden: given up looking for work

4. What can unemployment be caused by?

o Answer

Strict regulations by the government causing higher costs to hire workers or an

increase in wage costs

Drop in AD can also cause lower spending and less need for workers

Structural changes to the economy with new technologies while workers get
retrained with new skills

5. Define underemployment.
o Answer

Individuals who work part time or casual but want to work more hours per
week

Differences in incomes from work

Discuss the factors that cause differences in incomes

1. Explain wage and non-wage outcomes.

 o Answer

Wage outcomes

Monetary income (wages and salaries)

Non-wage outcomes

Non-monetary benefits that employees receives

 Sick leave
 Superannuation
 Fringe benefits
2. Outline the wage differentials according to occupation.
o Answer

Different occupation

People receive higher wages for working in occupations that:

 Require a higher level of skill

 Longer period of training
 Unpleasant working conditions
 Low occupational mobility (doctors)
 Are more valued

Same occupation

 More experienced
 More productive
 Higher qualifications
 Higher geographical mobility
3. Outline the wage differentials according to age.
o Answer

Income is highest between the ages of 35 and 55

Labour market trends

Explain the labour market trends

1. Explain NAIRU.
o Answer

Non-Accelerating Inflation Rate of Unemployment

If unemployment is at the NAIRU level, inflation is constant

Level of unemployment below which inflation would be expected to rise

2. Explain the casualisation of the labour force.
o Answer

Casual employment occurs when employees have occasional working hours

that not follow any set pattern

3. List the advantages and disadvantages of casualisation.

o Answer

Advantages

 Flexibility for employers and employees

 Employers may avoid paying some non-wage costs

Disadvantages

 Less job security

 More difficult to plan for the future
 Less staff loyalty and development of skills
 Employees do not get the same benefits
4. Explain the outsourcing of labour.
o Answer

Firms hiring other businesses to do something that it does not regard as a core
part of its business focus

E.g. cleaning, accounting, security

 Saves time and money

 Creates shorter-term employment contracts (less stable work)
5. Distinguish between contractors and sub-contracting.
o Answer

Contractors

Firms pay contractors to provide a specific service for the business

 Specialised consulting advice or a role that is generally not intended to

be full-time over an extended period of time

Sub-contracting

When part of a contract is passed on to a second firm

 Contractor still has responsibility

 Lack of specialised skill
6. What are individual contracts and why do many employers favour these over award
agreements?
o Answer
 Government awards are used to set minimum wages and working conditions
for an industry

Individuals now use enterprise agreements (negotiated for employees) and

Australian Workplace Agreements (AWAs) to directly negotiate terms with
employers

Done due to changes to industrial relation laws and:

Employers prefer flexibility and want to help make arrangements

about working conditions that suit them
 Helps employees maintain a work/life balance and in turn, helps
employers improve the productivity of their business
7. What is an AWA and why do they no longer exist?
o Answer

Australian Workplace Agreement was between employers and employees

where employers could offer a 'take it or leave it' contract (enterprise
bargaining)

 AWA was unethical

 Minimum wages and work conditions are now determined by Fair
Work Australia
8. Explain the difference between a individual agreements and an collective agreement.
o Answer

Individual agreements

Negotiated between an individual and their employer

Collective agreements

Negotiated between a registered union and a employer

Labour market institutions

Discuss the labour market institutions

1. Distinguish between trade unions and employer associations.

o Answer

Trade unions

 Represent employee interests (association of workers)

 Improve wages and working conditions
 Exercise their bargaining power in negotiations with employers
 Restrict the supply of labour (immigrants)

Employer associations
  Represent business/employer interests (lobby groups)
 Seek wage moderation to maintain profitability and competitiveness
 Negotiate wages with employees
 Provide advice, training and direct assistance to employers

Natural conflict between trade unions and employer associations in wage

negotiations

2. What has caused a fall in trade union membership?

o Answer

Casualisation of the workforce

Move to enterprise bargaining

Privatisation of government-owed businesses

Industries with low trade unions have the greatest growth

 Business, domestic services and retail trade

3. What is the Fair Work Act 2009?
o Answer

Industrial relations system

Determine the pay and working conditions of employees through:

 Industrial awards
 Collective agreements
 Individual employment contracts

Overseen by the Fair Work Commission, which sets the minimum wage, and
helps resolve disputes