Labour Markets 2023

Platinum Business Academy
No 106, S D S Jayasingha Mawatha,
Kohuwala, Sri Lanka Advance Level Cambridge
Labour Markets
Product
Capital
Labour
Demand for Labour
• Demand for labour comes from the employer.

• Demand curve is downward sloping from left to right.
Wasim Imtiasz 1|Page
Postgraduate Diploma in Business Administration University of west London, 1st class BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in Business & Management + Business & Human Resources (UK)

Factors affecting demand for labour
• Changes in Technology
Technological changes can increase the demand for some workers and reduce
the demand for others. The production of a more powerful computer chip, for
example, may increase the demand for software engineers. It may also allow
other production processes to be computerized and thus reduce the demand for
workers who had been employed in those processes.
• Changes in Product Demand
A change in demand for a final product changes its price, at least in the short
run. An increase in the demand for a product increases its price and increases
the demand for factors that produce the product. A reduction in demand for a
product reduces its price and reduces the demand for the factors used in
producing it. Because the demand for factors that produce a product depends
on the demand for the product itself, factor demand is said to be derived
demand derived demand. Demand for a product that is derived from demand for
factors used in its production. That is, factor demand is derived from the
demand for the product that uses the factor in its production.
• Changes in the Number of Firms
We can determine the demand curve for any factor by adding the demand for
that factor by each of the firms using it. If more firms employ the factor, the
demand curve shifts to the right. A reduction in the number of firms shifts the
demand curve to the left. For example, if the number of restaurants in an area
increases, the demand for waiters and waitresses in the area goes up. We
expect to see local wages for these workers rise as a result.
Long run explanation for the downward slope of the demand curve:
Other things being equal in the long run, firms can vary all factors of production. Higher the
wage rate, the more likely it is that firms will substitute machines for workers and lower the
demand for labour. If the wage rates are low, firms will use les machinery and demand for
more workers.
Short run explanation for the downward slope of the demand curve:
Firms are likely to have a given stock of capital, when more workers are added to this fixed
stock of capital the less likely it is that the last worker employed will be as productive as
existing employees (Law of Diminishing Returns) Therefore, wage rate would have to fall to
encourage the employer to bare on an extra worker. This is because employer compares what
he pays to the worker with what the worker earns for the employer (MRP). This is called
Marginal Revenue Product Theory.

Example-
No of workers TP MPP Price (£) MRP(£)/MRPL
MRP: Additional income earned by an extra worker.

If wages paid is £70, the firm would recruit up to 4 workers (4th worker brings neither profit
nor loss). But if wages are reduced to £50, firm would recruit 6 workers. Therefore the MRP
theory states that lower the wage more workers will be employed.
If the market for the product is imperfect, then the price will fall as more units are sold, then
MRP will fall too, but not only because of Diminishing Returns but also because the price of
the product falls.
No of workers TP MPP Price MRP
The MRP Curve is downward sloping because, MRP declines as more workers are taken. The
MRP curve shows the number of workers that the firm will employee at a given wage rate.

This is the definition of the firm’s demand curve for labour. Therefore MRP curve is also the
firm’s demand curve for labour.
Whether the firm is perfectly or imperfectly competitive, the demand curve for labour is the
MRP curve for labour.
Note - It is easy to measure MRP of workers in the manufacturing sector, but difficult in the
tertiary sector. This is because ascertaining MP is difficult. However with the modern
technology and modern productivity measures this can be done
Derived Demand
The demand for labour is derived demand, because firms demand for labour only if there is a
demand for a product.
The MRP curve shows it is derived because it will shift whenever there is a change in the
price of the product or productivity of worker,
MRP = MPP X Price
Ex:
1. When the demand for a product increase, price increases thereby increasing MRP
shifts to the right.
2. Due to the use of advanced technology workers become productive thereby increasing
MPP of workers; this increases MRP shifting it to the right.
Factors that influence the demand for a product indirectly influence the demand for labour &
thereby causing a shit.
• A rise in the price of a substitute

• A rise in the price of a compliment
• Change in taste and fashion
• A rise in income
Note – these factors will not always affect the demand for labour
Changes in wages cause movement along the demand curve.

Supply of Labour
Supply of labour refers to those who are willing to offer their services at different wage rates.
Factor affecting supply of labour

The long run supply of labour of an economy: The following factors cause an increase or
decrease in the supply of labour:
a. Changes in natural growth rate of population. Depends upon the agee structure of the
population- a developed economy faces the problem of an ageing population, (greater
portion of the population above the age of 65) this reduces the number in the working
age and thereby reduces the supply of labour. Long run supply of labour will shift to
the left.
A developing country has a high birth rate, therefore greater proportion enter
the workforce thereby increasing the supply of labour.
b. Participation Rate- refers to the proportion of the population of working age actually
in employment. Earlier retirement and an increase in the number of entering higher
education will reduce participation rate and thereby reduce supply of labour.
An increase in female participation will increase the supply of labour, shit to the right.
c. Tax and Benefits: high income tax and NIC payment creates disincentive to work and
thereby reduce supply of labour. Higher the welfare benefits the supply of labour will
fall. – Ex – unemployment benifit
d. Net migration - if the number immigrating is greater than the number of emigration,
supply of labour will increase and thereby shift it to the right.
e. Trade unions -

Individual Supply Curve of Labour
For an individual worker, the quantity supplied is the number of hours worked over a period
of time. The price of labour is the wage per time period. The wage rate that determines
supply is the real wage rate, which is money wage adjusted for inflation.
Backward bending supply curve
Individual supply curve is backward bending. Initially when wage rates are low people offer
less hours of work as wages increase in order to earn more workers would work more hours
& sacrifice leisure time. This is identified as positive Substitution Effect
However once workers start earning a substantial salary, income does not influence workers
to work more hours. Therefore they prefer leisure to work, therefore it is identified as
negative income effect.
Another reason for the backward bending curve is higher income tax rates, which creates a
disincentive to work.

Supply Curve of Labour for an Industry
An industry can increase supply by attracting labour from other industries or the unemployed.
Higher the wage more workers would want to enter the industry, therefore supply curve is
upward sloping.
Wages - no of workers
Wages - no of workers
Unskilled workers have an elastic supply curve. A slight increase in wages can increase the
number of workers by a large proportion.
Skilled workers have an inelastic supply curve. A large increase in wages will increase
supply only by a small proportion.

Labour Supply to a Firm
Perfect market competition

An industry is made up of similar firms. When there are many firms in the industry one firm
cannot make a significant influence on the market. It has to recruit additional workers at the
going market rate (Perfectly Competitive labour market) therefore supply curve of a firm in a
perfectly competitive labour market will be perfectly elastic.
Ex -
Labour Output MPP Price of MRPL Wage per Contribution

(no) the product worker
1 80 80 100 8000 7000
2 170 90 100 9000 7000
3 250 80 100 8000 7000
4 320 70 100 7000 7000
5 380 60 100 6000 7000
6 430 50 100 5000 7000
7
Note –
Wasim Imtiasz 10 | P a g e

Monopoly and Monopsony
If industries are monopolies, firms in these industries are likely to be significant employers of
a particular type of labour. If a firm is a monopsonist (single buyer of labour) then the supply
curve of labour to the firm and also to the industry would be the same. It will be upward
sloping, showing that the firm has to offer increased wages if it wishes to increase its labour
force.
No of workers Wages TC AC MC
1 10 10 10 10
2 20 40 20 30
3 30 90 30 50
4 40 160 40 70
5 50 250 50 90
Note - Marginal cost will be higher than the wage that the firm has to pay to the extra worker,
Why -
In the long-run supply of labour to a particular firm is influenced by the net- advantage of a
job. This depends upon wage and non-wage factor
Ex – JKH
Determination of wages and level of employment under market-forces
Firms employee workers by comparing their MRP with wages. Employment takes place
when MRP=wages, that is the equilibrium point. So the wages paid in the market must equal
the value of the MRP of labour.
Changes in demand and supply of labour (shift), changes equilibrium wage and the level of
employment

Wages and level of employment for a firm in a perfectly competitive labour market
In a perfectly competitive labour market there is large number of small firms hiring a large
number of workers.
Firm will recruit workers at the point where marginal cost of labour (same as wages) is equal
to MRP of labour. Therefore Q workers will be employed. Firm will not employ Q1 number
of workers as it would bring a loss (MC>MRP) at point A firm would continue to hire more
workers. As they generate a profit. A firm in a perfectly competitive market pays a wage
equal to MRP.
Level of employment and wages in a Perfectly Competitive Market
The level of employment is Q and the wage paid W is equal to MRP.

Level of employment and wage determination in an imperfectly competitive market
Imperfect market is one:
• Either the firm is a single buyer of labour- Monopsonist, ex: in UK government

employees over 90% of teachers.
• Or the firm is faced by a single supplier of labour-trade union.
A monopsonist will hire labour at the point where MC=MRP and then pay the lowest wage
rate as possible. Therefore firm employees Q workers as MRP=MC, but pays W wage rate.
This wage is below the wage that should be paid if the firm was paying the full value of
MRP, i.e. “WMRP” Monopsonist use this power and depress wages.

Comparison of a Monopsonist with a Perfectly Competitive Market
A monopsonist drives down wages and reduce employment levels compared to a competitive
market.
• Monopsonist’s wage=W, employment= Q

• Perfectly Competitive Market wage=W1, employment=Q1

Government intervention in labour market
To protect the rights of the employees,
To control monopoly and monopsony power in the labour market
To raise the wages of low paid workers
To stop discrimination and reduce unemployment

Minimum wage
Government intervenes by introducing national minimum wage in a monopsonist market to
protect the employees.
It’s introduced as an hourly rate and applicable for those above the age of 21(depends).
The aim of the national minimum wage is to reduce poverty and thereby increase the standard
of living and prevent exploitation of workers who have little or no bargaining power. In UK
minimum wage applies to women working in shops, small businesses and low skilled jobs.
Minimum wage is above equilibrium wage rate. At the minimum wage rate Q2 workers are
willing to offer their service but only Q1 workers are demanded.
The difference between Q1&Q2 is unemployment. The level of unemployment depends on
the elasticity of demand and supply and the difference between minimum wage and
equilibrium wage. Greater the difference, higher the unemployment (when the demand and
supply is inelastic, unemployment is less than when it is elastic)
The effect of national minimum wage in a perfect and imperfect market is the same diagram
as trade union intervention.

Trade union intervention in perfect market
Trade union intervention in imperfect market

Transfer Earnings and Economic Rent in Labour Market
Transfer earning is the minimum payment required to keep a worker in its present job,
whereas economic rent is anything earned over and above transfer earnings.
Supply curve reflects wages at which workers are willing to offer their services. Therefore
area below the supply curve is Transfer Earnings and anything above it is Economic Rent.
People with scarce and unique talent have a perfectly inelastic supply. They don’t have a
minimum payment. Therefore all their earnings will be Economic Rent.
Perfectly elastic supply is for unskilled workers. Employer can recruit an infinite number of
workers at the wage rate “W” Therefore the entire earnings will be Transfer Earnings.
Imperfection in the Labour Market
1. Geographical and Occupational Immobility

If a person possesses job specific skills it results in occupational immobility (ex-
Division of Labour)
2. Unemployment due to trade union and government intervention.
3. Discrimination
This is when male and female workers, white and ethnic minority (coloured people)
are treated differently in the wages and obtaining jobs.

Wage Differentials
There is a difference in wage rate for different groups of workers.
➢ Between different industries: industries with a strong trade union may pay
more than an industry with a weak trade union. Industries that involve high
risk may pay more than the other type of manufacturing industries. Jobs
that are unpleasant such as sewage cleaning are also paid more. Capital
intensive industries pay more than labour intensive industries as workers are
more productive (higher MRP)
➢ Between male and female: many females engage in in part-time jobs and many
in jobs where MRP is low. Ex- Secretary, less pay
➢ People in the same occupation sometimes earn more than others due to
experience.
➢ Skills/training: Jobs requiring higher level of skills and training usually fetch
higher remuneration
➢ Education/qualifications: Again jobs requiring higher level of
education/qualification are paid higher remunerations.
➢ Experience: People with vast experience will get higher remuneration as
compared to a person with lesser experience.
➢ Level of responsibility: Jobs with greater responsibilities are usually paid
more.
➢ Geographical area: Jobs located in urban areas are usually carrying higher
remunerations because of higher living costs in cities. People working in
trecherous geographical areas may get extra remuneration in the form of
additional allowances.

➢ Trade union membership: Trade Union members might end up negotiating
better remunerations then non-trade union members.
➢ Demand factors: Firms producing goods and services which are high in
demand usually pay better remunerations to their workers.
➢ Supply factors: Industries where there is a shortage of workers will usually
pay higher remuneration to attract workers.

Labour Markets 2023

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Platinum Business Academy

No 106, S D S Jayasingha Mawatha,

Kohuwala, Sri Lanka Advance Level Cambridge

• Demand for labour comes from the employer.

Wasim Imtiasz 1|Page

Kohuwala, Sri Lanka Advance Level Cambridge

workers who had been employed in those processes.

• Changes in Product Demand

• Changes in the Number of Firms

expect to see local wages for these workers rise as a result.

Wasim Imtiasz 2|Page

Kohuwala, Sri Lanka Advance Level Cambridge

Wasim Imtiasz 3|Page

Kohuwala, Sri Lanka Advance Level Cambridge

No of workers TP MPP Price (£) MRP(£)/MRPL

MRP: Additional income earned by an extra worker.

No of workers TP MPP Price MRP

Kohuwala, Sri Lanka Advance Level Cambridge

Kohuwala, Sri Lanka Advance Level Cambridge

• A rise in the price of a substitute

Changes in wages cause movement along the demand curve.

Wasim Imtiasz 6|Page

Kohuwala, Sri Lanka Advance Level Cambridge

Factor affecting supply of labour

Wasim Imtiasz 7|Page

Kohuwala, Sri Lanka Advance Level Cambridge

Wasim Imtiasz 8|Page

Kohuwala, Sri Lanka Advance Level Cambridge

Wasim Imtiasz 9|Page

Kohuwala, Sri Lanka Advance Level Cambridge

Perfect market competition

Labour Output MPP Price of MRPL Wage per Contribution

Kohuwala, Sri Lanka Advance Level Cambridge

Kohuwala, Sri Lanka Advance Level Cambridge

Determination of wages and level of employment under market-forces

Kohuwala, Sri Lanka Advance Level Cambridge

Level of employment and wages in a Perfectly Competitive Market

The level of employment is Q and the wage paid W is equal to MRP.

Kohuwala, Sri Lanka Advance Level Cambridge

Imperfect market is one:

• Either the firm is a single buyer of labour- Monopsonist, ex: in UK government

Kohuwala, Sri Lanka Advance Level Cambridge

• Monopsonist’s wage=W, employment= Q

Kohuwala, Sri Lanka Advance Level Cambridge

To control monopoly and monopsony power in the labour market

To raise the wages of low paid workers

To stop discrimination and reduce unemployment

Kohuwala, Sri Lanka Advance Level Cambridge

Kohuwala, Sri Lanka Advance Level Cambridge

Trade union intervention in imperfect market

Kohuwala, Sri Lanka Advance Level Cambridge

Kohuwala, Sri Lanka Advance Level Cambridge

Kohuwala, Sri Lanka Advance Level Cambridge

Imperfection in the Labour Market

1. Geographical and Occupational Immobility

Kohuwala, Sri Lanka Advance Level Cambridge

There is a difference in wage rate for different groups of workers.

more productive (higher MRP)

in jobs where MRP is low. Ex- Secretary, less pay

➢ Education/qualifications: Again jobs requiring higher level of

education/qualification are paid higher remunerations.

➢ Experience: People with vast experience will get higher remuneration as