A2 Unit F583: Economics of Work and Leisure
Trends in employment and earnings
Main Points
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The structure of employment in the UK has changed in recent years and continues to
change. The most notable decline was the loss of 4m jobs in manufacturing jobs between
1978 and 2005. There was a corresponding rise in business and finance jobs of 2.6m.
Recent government policy is to increase manufacturing jobs and reduce the reliance on the
finance industry.
The total number of people employed in the UK increased up to 2008. Most of these extra
jobs were in the public sector.
The number of part-time workers has also increased. Whilst the number of females in
employment has remained relatively constant the number of men in part-time employment
has increased.
The number of self-employed people was increasing up to 2006, accounting for 13% of all
those employed.
UK workers are getting older. The proportion of those employed over 50 increased by 26%
in 2006. Other EU counties are also experiencing an aging population with Italy and
Germany increasing the most.
The highest paid occupations are still dominated by men.
Up to 2008 total employment increased in all regions with the largest rise in London. Falls
were identified in Yorkshire and Humberside.
Key terms
Economic inactive – people of working age who are neither employed or registered as unemployed.
Labour force participation rate – The proportion of working age people that are economically active.
Public sector – sectors that are directly or indirectly financed by government.
Part-time work – people working less than 30 hours a week.
Temporary work –casual work, seasonal work, working for employment agencies on a fixed
contract.
Occupational segregation – dominance of an occupation by one gender.
Offshoring – transferring part of the process or the business overseas.
Key theoretical concepts
None.
Trends in leisure markets
Main Points
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The demand for leisure is derived from a play-off between the demands of work,
maintenance time and leisure.
Leisure can be categorised into home based activities, reading, gaming and watching TV, and
out of home activities such as eating out, clubbing and going to the cinema.
The supply of leisure is split between the private and the public sector. Private firms provide
pubs, clubs, cinemas, sports and theme parks. The public sector can also provide sports
facilities and other leisure activities such as museums, libraries, public parks etc as public
goods and merit goods.
The demand for an activity is determined by the price of the activity, the price of substitutes,
tastes, age and the price of complementary goods.
The key change in the leisure market has been the growth of home leisure activities and the
growth of tourism.
The increase in tourism was the result of an increase in disposable income, a reduction in
working hours and a fall in the real costs of travel.
Key terms
Public goods – a service that has the features of non-rivalry and non-excludability.
Merit goods – goods not-usually provided by the market but regarded as good for society.
Tourism leisure multiplier – the extent to which a chance in income from tourism causes GDP to
change.
Market concentration ratio – the percentage share of the market of a given number of firms.
people working less than 30 hours a week.
Key theoretical concepts
The backward bending supply curve of labour. This shows that at higher levels of income, people
value leisure time above the income earned through extra hours worked.
Market structures and competitive behaviour in leisure markets
Main Points
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The decisions that a firm makes depends upon market structures and conditions, average
costs, average revenues and profits.
Average costs fall and then rise due to economies of scale. Internal economies of scale
consist of purchasing economies, selling economies, technical economies, managerial
economies financial economies and risk-bearing economies.
Diseconomies of scale occur when a firm becomes too large. The affects of diseconomies of
scale are largely qualitative and includes declines in the quality of management, production
and sales.
Barriers to entry and market are key determinants of the competitiveness of a market. A
barrier to entry is an obstacle that stops new firms entering the markets. Examples include
high production costs, high sunk costs, economies of scale and patents.
Key terms
Short run – period of time over which at least one factors is in fixed supply.
Fixed costs – costs and revenues that do not change in the short run.
Variable costs – costs that change with changes in output.
Average cost /revenue – total costs or revenues divided by output.
Marginal cost / revenue – the change in total costs / revenues resulting from changing output by
one unit.
Economies of scale – fall in average costs as output increases.
Minimum efficient scale – the lowest level of output at which full advantage can be taken of
economies of scale.
Constant return to scale – the long run average cost remains unchanged as output increases.
Sunk costs – costs of buying assets that are lost if the firm leaves the industry.
Key theoretical concepts
Monopoly
Main Points
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A pure monopoly is where a firm has 100% of the market. These are rare. In legal terms,
any firm with a market share of over 25% is defined as a monopoly.
In economics a monopoly is a firm that can acquire supernormal profits and a price maker.
Monopolies will tend to increase prices and reduce consumer choice. They also reduce
dynamic efficiency as there is no incentive to innovate.
Any monopoly can be investigated by the Competition Commission. They have the power to
fine or order the breakup of non-competitive monopolies.
Key terms
Natural monopoly – a market where long run average costs are lowest when output is produced by
one firm. e.g. Thames Water
Dominant monopoly – a market where a form has more than 40% of the market.
Profit maximisation – achieving the highest possible profit where marginal cost equals marginal
revenue.
Supernormal or economic profit – profit earned where average revenue exceeds average cost.
Normal profit – the level of profit needed to keep a firm in the market in the long run.
Market concentration ratio – the percentage share of the market of a given number of firms.
people working less than 30 hours a week.
Key theoretical concepts
Oligopoly
Main Points
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An oligopoly is a market of three to five firms with a high concentration ratio.
The main features of an oligopoly are that firms are interdependent, there are high levels of
non-price competition. Pricing and advertising decisions are taken after considering the
reaction of rivals.
Prices are sticky downwards and firms can charge higher prices than in a free market.
Price changes are normally initiated by one firm that is identified as the market leader.
Formal collusion involves the firms forming a cartel. Where firms work together to fix prices
that are acting as a monopoly and this is illegal.
Key terms
Oligopoly – a market structure consisting of a few large firms.
Kinked demand curve – a demand curve made up of two parts. It suggests that price that price
increased are demand elastic and price falls are demand inelastic.
Cartel – a group of firms that formally collude to fix prices.
Game theory – a theory of how decision makers are influenced by the actions and reactions of
others.
Key theoretical concepts
Monopolistic Competition
Monopolistic Competition
Main Points
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This is a market with a high degree of competition with each firm selling similar products.
The market is characterised by a large number of firms, low barriers to entry or exit, price
differentiation and non-price competition.
Low barriers to entry and exit means that new firms can flood the market at times of peak
demand. This will drive down prices until normal market conditions return.
Good example of this time are football and royal memorabilia, ice cream sellers and water
seller in Oxford Street in hot weather.
Key terms
Monopolistic competition – a market structure with a large number of small firms selling a similar
product.
Incumbent firms – firms already in the market before a period of peak demand.
Key theoretical concepts
Long run output of a firm producing under monopolistic competition
Labour market demand
Main Points
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Labour, in common with other factors of production, has derived demand. This means that
the demand for labour depends on demand for the demand for the product or service they
produce.
The firms demand for labour depends upon the expected demand of the product, the
productivity of workers, the wage rate, complementary labour costs and the price of other
factors of production.
Marginal Revenue Product theory suggests that the demand for labour depends on the
additional revenue gained by employing an extra work.
MRP is MPP (the extra output attributed to employing one extra worker) x Price
Firms will only employ workers up to the point where MRP > cost (point Q1 below). This
suggests that workers will always make more money for the company than they are paid.
The elasticity of demand for labour influences union activity. Unions in industries with
inelastic demand can ask for higher wages without the risk of members losing their jobs.
Elasticity of demand for labour depends on the PED of the final product, the proportion of
wage costs as total costs, the ease with which labour can be substituted by machines and
time.
Key terms
Marginal Physical Product – the change in output resulting from employing one more worker.
Marginal Revenue Product – the change in revenue resulting from employing one more worker.
MRP = MPP x Price
Flexible labour markets – more elastic labour markets where employers have more freedom to
reduce the number employed in response to a wage increase.
Key theoretical concepts
Labour market supply
Main Points
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The short-run supply curve of labour is the backward bending supply curve. This shows that
the behaviour of workers depends on income and substitution effects. It shows the pay-off
between leisure and work and how it changes according to the number of hours worked.
The extent to which people can work in industries depends up its elasticity of supply.
Industries with inelastic supply are those that require high qualifications, lengthy training,
and a limited number of workers with the required skills. Such industries tend to be high
wage industries.
Low wage industries have inelastic labour supply. This is shown by a more horizontal supply
line.
The supply of available workers in an industry if that industry becomes attractive to an
increasing number of workers. This can be due to high wages, the pleasantness of the job,
holidays, fringe benefits and job security.
Whether workers stay with a firm or an industry depends upon the economic rent and
transfer earnings enjoyed by employees.
Key terms
Income effect of a wage rise – the effect on the supply of labour caused by a change in the ability to
buy leisure.
Substitution effect of a wage rise – the effect on the supply of labour caused by a change in the
opportunity cost of leisure.
Elasticity of supply of labour – the responsiveness of the suplly of labour to a change in the wage
rate.
Transfer earnings – the minimum amount that has to be paid to keep them in their current
employment. It equates to the opportunity cost of labour.
Economic rent – this is the amount paid in excess of transfer earnings required to keep a worker in
their current job
Key theoretical concepts for backward bending supply curve see ‘Trends in leisure markets’
The determination of wages and employment
Main Points
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Monopsonists and oligopsonists are dominant buyers of labour in the employment market
and they can influence the wage rate. Examples include the NHS and schools.
These firms have a great deal of bargaining strength with unions as they have greater
financial reserves and because workers have few alternative employers that can offer a
higher wage rate.
An employer’s bargaining strength is determined by their financial resources, the proportion
of unionised workforce, the amount of anti-union legislation, the degree of substitution
between capital and labour, the rate of unemployment and the amount of support that the
unions get from the public.
In the UK the government has taken measures to increase market flexibility through
increased labour market information reduction on labour taxes, cutting unemployment
benefits, and removing employee protection legislation. The result is that the labour market
is more responsive to changes in the wage rate.
Key terms
Monopsonist – a single buyer of labour
Oligopsonist – one of few dominant buyers.
Bilateral monopoly – a labour market with a single buyer and single seller.
Key theoretical concepts
Trade unions
Main Points
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A trade union will be stronger if it has high union density, greater financial reserves, inelastic
demand for the firm’s product, low substitution between capital and labour, greater public
support and the ability to cause greater disruption through industrial action.
Stronger unions have the capacity to increase wages above the market rate (see below).
The trend in union membership is downwards, from 58% in 1984 to 29% in 2004.
This was largely the result of a decline in union power following a range of anti-union laws in
the 1980s and 1990s.
This decline in union power has been associated with a decline in the number of industrial
disputes. In the 1970s the average number of working days lost to industrial disputes was
12.9m. By 2005 it was only 157400.
Standard methods of industrial actions are working to rule, overtime bans and strikes.
Today unions have a greater focus on offering benefits to members and protecting the
health and safety and employment rights of members,
Key terms
Trade union – an employee’s organisation that seeks to further the interests of its members.
Collective bargaining – this is where the unions, normally, negotiate wages and employment rights
on behalf of a group of workers.
Union density – the proportion of a workforce that belongs to a union / unions.
Work to rule – workers only complete the work stipulated in the contract of employment.
Economic rent – this is the amount paid in excess of transfer earnings required to keep a worker in
their current job
Key theoretical concepts
Government intervention in labour markets
Main Points
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Governments intervene in labour markets to correct labour market failure, raise efficiency,
and promote equality and social cohesion. They can do this by a number of methods.
The government can employ more workers in the public sector.
They can provide more information about jobs through job centres and careers websites.
Government and the EU provide funds to provide jobs in deprived areas. Governments may
also offer discounts on local and business taxes.
The government invests in education in order to increase the MRP and the occupational
mobility of labour.
The government has weakened trade union power and restricted their bargaining power.
Minimum wage legislation was introduced in April 1999 in order to help low paid workers.
This would increase unemployment under normal market conditions but increase
employment in an economy dominated by monopsonist employers.
Minimum wage in summer 2011 is £5.93 an hour for over 21s, 4.92 for those age 18-20 and
3.67 for those aged 16 and 17.
Key terms
None
Key theoretical concepts
NMW increasing unemployment.
NMW reducing unemployment
Income distribution and poverty
Main Points
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The causes of inequality between households include unequal holdings of wealth,
differences in the composition of households, the pattern of inheritance, differences in skills
and qualifications, differences in educational opportunities and discrimination.
Wealth is very unevenly distributed in the UK. In 2003 20% of the nation’s wealth was
owned by just 1% of the population and the least wealthy 50% owned only 7% of the wealth.
Governments can affect the distribution of income and wealth through progressive taxation,
the provision of state benefits, labour market policy, anti-discrimination laws and a macroeconomic policy to increase the wealth of the whole economy.
The main causes of poverty in the UK are unemployment, low wages, sickness and disability,
old age and being a lone parent.
Governments aim to reduce poverty by operating a NMW, cutting income tax for the
poorest workers, increasing employment and training opportunities, increasing benefits and
increasing the availability of childcare.
A trade union will be stronger if it has high union density, greater financial reserves, inelastic
demand for the firm’s product, low substitution between capital and labour, greater public
support and the ability to cause greater disruption through industrial action.
Key terms
Progressive taxation – income tax rates increase with income so that the richest pay proportionately
more.
Absolute poverty – the inability to purchase the basic necessities in life.
Dependency ratio – the proportion of the population that are too young, too old or too sick to work
and reliant on the output of those who are working.
Lorenz curve – a diagram used to illustrate income or wealth distribution.
Gini coefficient – this is used to make international comparisons of income inequality using the
Lorenz curve.
Key theoretical concepts
Lorenz Curve and Gini coefficient