Little book of lists
F583 The Economics
of Work and Leisure
1
Labour
General essential knowledge
Economically active = people who are in work OR seeking work
Economically inactive = people who are neither in work OR looking for a job
Potential labour force = the size of the labour force if economically inactive people would
join.
Actual labour force = the employed and the unemployed.
Employment rate = the proportion of working age people who are in work
Unemployment rate = the proportion of working age people who are not in work but are
seeking it
Earnings = wages plus overtime or bonuses
NB to be unemployed a person has to be looking for work. If they are not looking for work
they are NOT in the labour force
Unit labour costs = the labour costs per unit of output
Productivity = output per worker
Primary
Secondary
Tertiary
Work force sectors
stage of production, extractive industries e.g.
farming, fishing
2nd stage of production, manufacturing industries
3rd stage of production, services e.g. retail, financial
services
1st
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Section 1 – wage determination
Factors affecting supply of labour – pick 4 main ones
 The wage rate on offer
 Substitute occupations
 Barriers to entry e.g. quals required
 Mobility e.g. occupational and geographical
Short run supply of labour –
 Income effect
 Substitution effect
= Backwards sloping supply curve
Long run supply of labour –
Pecuniary
 Wages
 Bonuses
 overtime
Non pecuniary
1. Holidays
2. Interest of the job itself
3. Perks and fringe benefits
4. Job security
5. Location
6. status
Elasticity of supply of labour
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the quals and skills required
the length of training
the mobility of labour (geographical and occupational)
time period
Factors affecting demand for labour
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Demand for the product
Productivity
Wage rate
Complementary labour costs
The price of other factors of production (ie can you substitute labour with capital)
3
MRP theory –
How it is calculated?
 Marginal physical product (MPP) x price
2 things it shows
 How much labour to demand
 Productivity and revenue from the products produced determines wages
5 criticisms
o
o
o
o
It assumes workers are homogenous – they are not
It assumes firms do not have monopsony power – they do
It assumes that there are no trade unions to affect the wage rate – there are
It assumes that the productivity of each worker can be measured – not all jobs
have output that can be measured
o It assumes that the supply curve is perfectly elastic – it is not
Elasticity of demand of labour
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Ease of factor substitution – labour for capital
The proportion of wage costs in the total costs
The price elasticity of demand for the product
Time
Wage differentials
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Gender, male vs female
Skilled vs unskilled workers
Part time vs full time workers
Ethnic grouping
Transfer earnings and economic rent – what is each of them?
Transfer earnings
The minimum amount that has to be paid to
ensure a worker stays in their current
occupation
Economic rent
The amount received over and above
transfer earnings
The proportion of economic rent and transfer earnings depends on the elasticity of supply
for labour. Inelastic = more economic rent, elastic = more
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Reasons for differences in pay
 Male and female wage differences (perceived MRP)
 Compensating differentials
 Differences in accumulated human capital (education/training)
 Different skills levels
 Different MRP
 Inelastic and elastic supply and demand
Section 2 – Labour Market Failure
Labour market failure
 Trade Unions
 Minimum wage
 Monopsony power
 Net Migration (emigration – immigration)
 Discrimination
 EU Directives
 Poverty and inequality
 Labour market flexibility
 Others - segmentation, unemployment, economic inactivity, information failure,
immobility, ageing population, skills shortages
 Government solutions to labour market failure
Trade unions
problems
 Create unemployment
 Wage inflation (cause wages to rise)
 Lost productivity
evaluative points
o Their numbers have declined in recent years so they don’t have as much power
o Many things they campaigned for have become law now so they are not so
needed to fight for workers’ rights e.g. minimum wage, laws and health and
safety
o They are more powerful in the public sector
o When they interact with a monopsony they can increase the employment rate
by increasing the wage rate so that more workers want to supply their labour.
Minimum wage
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 Creates unemployment
 Wage inflation (cause wages to rise)
 Could increase incentive to work (this is not a failure)
Evaluation points
o Only affects people who are in work
o Depends on the level it is set at (could be below the market rate)
Unemployment
3 types
 Frictional
 Cyclical
 Structural
4 solutions
o Minimum wage
o Government can employ people themselves (expand public sector)
o Education and training
o Provide more information about jobs
Immobility of labour – 2 types
 Geographical
 Occupational
Flexible labour markets –
5 types of flexibility
 Numerical
 Temporal
 Locational
 Functional
 Wage
4 methods to achieve flexibility
 Education and training
 Cut benefits
 Cut income tax rates
 Remove employment protection legislation e.g. maternity leave, unfair
dismissal
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Poverty and inequality
2 types
1. Absolute
2. Relative
3 ways to measure it
 Lorenz curve
 Gini co-efficient
 % of people below the median wage
3 solutions to it
o Minimum wage
o Cut the bottom rate of tax
o Increase benefits to the poor
Problem of ageing population – 3 solutions
 Raise retirement age
 Promote private pensions
 Discourage early retirement
Migration
2 benefits
 Labour is more supply elastic
 Increases labour supply
2 drawbacks
 Could depress wages
 Could increase unemployment
EU Directives – 2 examples
 Parental leave directive
 Minimum wage directive
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Competition
1 way of measuring market concentration
 Concentration ratio
Profits – 2 types
 Abnormal
 normal
Economies of scale
 Managerial
 Selling
 Buying
 Financial
 Technical
Barriers to entry
 Economies of scale
 Branding
 Advertising
 Predatory pricing
 Legal (patents)
Monopoly
 One firm dominates the market
 Abnormal profits in long run
 High barriers to entry
 Economies of scale
Oligopoly
 A few firms dominate the market
 Abnormal profits usually
 High barriers to entry
 Economies of scale
Monopolistic
 Many firms in the market
 Normal profits only in the long run
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Low barriers to entry
No opportunity for economies of scale
Efficiency
 Productive
 Technical
 Allocative
 Dynamic
Goals (objectives) of firms
 Profit maximisation
 Sales maximisation
 Growth maximisation
 Satisficing
 Utility maximisation
Regulation – 3 examples
 Advertising standards agency - e.g. regulating Virgin Media’s advert with Usain Bolt
 Competition Commission – making BAA sell of some London airports
 FIFA – Financial fair play rules
Contestability – 3 characteristics
 Low barriers to entry/exit
 Normal profit in the long run
 Hit and run competition
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