Chapter 12: The
factor markets: the
labour market
12.1 Introduction
,Households supply their labour to the labour market, firms purchase labour with
salaries/wages, the price of labour is determined by supply and demand.
The importance of the labour market
1. Related to unemployment, BEE trade unions and politics
2. Wages and salaries are the main source of household income
3. Circular flow
12. 2 The labour market vs the goods market
Labour market Goods market
Labour services are non-transferrable Goods are fully
to others
Non-monetary factors must be Monetary factors only
considered
Rented not sold Sold
Non-economic factors must be Economic factors only
considered (loyalty, ethics, fairness)
Characterised by trade unions, N/A
employees’ associations, collective
bargaining, government intervention
Labour employed by long-term Traded at best price daily
contracts
Heterogenous Can be standardised
Variety – segmented Easy to move to short-term
Gets non-wage benefits (eg: medical Goods just have a price
aid)
Remuneration affected by a number of Goods market conditions predominant
factors not directly related to labour
market conditions
, 12.3 A perfectly competitive labour market
Requirements for perfect competition
Large number of buyers and sellers
All particulars are wage takers
Labour must be homogenous – identical skills
Workers must be completely mobile – move freely from 1 employer to
another
No government intervention
All participants have perfect knowledge – full information access
There must be perfect competition in the goods market
Equilibrium in a perfectly competitive labour market
At equilibrium there is no
unemployment
Equilibrium is determined by interaction
between demand for labour and supply
of labour
The equilibrium wage rate = We
Equilibrium quantity = Ne
Individual supply of labour
Each individual decides how to divide time between work and leisure
Quantity of labour supplied (no. of working hours offered by a worker) tends to
rise as the wage rate rises, but only up to a certain point
Substitution effect
As the wage rate increases, workers will work more hours, substituting leisure
time to gain higher wages
Graph points A to B
Income effect
Leisure is a normal good, so as income rises workers want more leisure time
Increase in wages = decrease in hours worked
Graph points B to C
factor markets: the
labour market
12.1 Introduction
,Households supply their labour to the labour market, firms purchase labour with
salaries/wages, the price of labour is determined by supply and demand.
The importance of the labour market
1. Related to unemployment, BEE trade unions and politics
2. Wages and salaries are the main source of household income
3. Circular flow
12. 2 The labour market vs the goods market
Labour market Goods market
Labour services are non-transferrable Goods are fully
to others
Non-monetary factors must be Monetary factors only
considered
Rented not sold Sold
Non-economic factors must be Economic factors only
considered (loyalty, ethics, fairness)
Characterised by trade unions, N/A
employees’ associations, collective
bargaining, government intervention
Labour employed by long-term Traded at best price daily
contracts
Heterogenous Can be standardised
Variety – segmented Easy to move to short-term
Gets non-wage benefits (eg: medical Goods just have a price
aid)
Remuneration affected by a number of Goods market conditions predominant
factors not directly related to labour
market conditions
, 12.3 A perfectly competitive labour market
Requirements for perfect competition
Large number of buyers and sellers
All particulars are wage takers
Labour must be homogenous – identical skills
Workers must be completely mobile – move freely from 1 employer to
another
No government intervention
All participants have perfect knowledge – full information access
There must be perfect competition in the goods market
Equilibrium in a perfectly competitive labour market
At equilibrium there is no
unemployment
Equilibrium is determined by interaction
between demand for labour and supply
of labour
The equilibrium wage rate = We
Equilibrium quantity = Ne
Individual supply of labour
Each individual decides how to divide time between work and leisure
Quantity of labour supplied (no. of working hours offered by a worker) tends to
rise as the wage rate rises, but only up to a certain point
Substitution effect
As the wage rate increases, workers will work more hours, substituting leisure
time to gain higher wages
Graph points A to B
Income effect
Leisure is a normal good, so as income rises workers want more leisure time
Increase in wages = decrease in hours worked
Graph points B to C
