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Week 5 : The Economics of LaborMarkets


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LEARNING OUTCOMES

Students who successfully complete this module will be able to:

  • Understand the theory of individual laborsupply;
  • Use the theory of labor supply to analyze theallocation of working hours, the difference between male and female labor supply, and the impactof government policies on labor supply.
  • Understand the theory of labor demand; Analyze labor market equilibrium under differentmarketconditions.
  • Understand human capital investments and wage differentials; Analyze wagestructures.
  • Analyze various topics such as migration, labor market discrimination, and incentive problems inlabormarkets.

Students who successfully complete this module will be able to:

  • Understand the theory of individual laborsupply;
  • Use the theory of labor supply to analyze theallocation of working hours, the difference between male and female labor supply, and the impactof government policies on labor supply.
  • Understand the theory of labor demand; Analyze labor market equilibrium under differentmarketconditions.
  • Understand human capital investments and wage differentials; Analyze wagestructures.
  • Analyze various topics such as migration, labor market discrimination, and incentive problems inlabormarkets.

The Demand for Labour

Shifts in the Demand for Labour

The number of people employed at each wage level can change and in the next diagram we see an outward shift of the labour demand curve. The curve shifts when there is a change in the conditions of demand in the jobs market. For example:

  • A rise in the level of consumer demand for a product which means that a businessneeds to take on more workers (see below on the concept of deriveddemand)
  • An increase in the productivity of labour which makes using labour more costefficient than using capitalequipment
  • A government employment subsidy which allows a business to employ moreworkers

The labour demand curve would shift inwards during a recession when sales of goods and services are in decline, business profits are falling and many employers cannot afford to keep on their payrolls as many workers. The result is often labour redundancies and an overall decline in the demand for labour at each wage rate.

Shifts in labour demand

Labour as a Derived Demand
  • The demand for all factor inputs, including labour, is a derived demand i.e. the demand depends on the demand for the products theyproduce
  • When the economy is expanding, we see a rise in demand for labour providing that the rise in output is greater than the increase in labourproductivity
  • During a recession or a slowdown, the aggregate demand for labour will declineas businesses look to cut their operations costs and scale back onproduction.
  • In a recession, business failures, plant closures and short term redundancies lead toa reduction in the derived demand for labour.
  • In fast-growing markets, there is often a strong rise in demand for labour – for example an increase in demand for new apps for smart phones and tablets causes an increase in labour demand and then higher wage rates for app programmers.