Consequences of changes in the occupational and geographical mobility of labour

2.1 Labour‑market diagram – mini‑sketch guide

• Vertical axis: Wage rate (W)
• Horizontal axis: Quantity of labour (L)
• D_L – downward‑sloping labour‑demand curve (firms hire fewer workers as the wage rises because the marginal product of labour falls).
• S_L – upward‑sloping labour‑supply curve (higher wages attract more workers, including those previously not in the labour force).
• Intersection of D_L and S_L = equilibrium wage (W*) and employment (L*).
• Typical shifts:
  • Increase in labour demand (e.g., new technology, higher product demand) → D_L shifts right → higher W and higher L.
  • Increase in labour supply (e.g., population growth, more women entering the labour force) → S_L shifts right → lower W, higher L.
  • Trade‑union action – creates a wage floor; the effective supply curve becomes more inelastic and shifts rightward at the negotiated wage, resulting in a higher equilibrium wage but possible unemployment.
  • National Minimum Wage (NMW) – a legal price floor. If set above the market‑clearing wage, it creates excess supply (unemployment) for low‑skill workers.

2.2 Role of trade unions

• Negotiate higher wages and better conditions for members.
• By agreeing a wage floor, unions shift the effective labour‑supply curve rightward at the set wage, producing a wage above the market equilibrium.
• Possible side‑effects: unemployment for workers whose marginal product is below the negotiated wage (excess supply).

2.3 National Minimum Wage (NMW)

• Legally sets the lowest hourly pay employers may offer.
• Acts as a price floor. If the NMW is above the equilibrium wage for low‑skill workers, earnings rise but a surplus of labour (unemployment) may appear.

2.4 Influence of market structure on wage‑setting

The syllabus links workers’ wages to the type of product market in which firms operate.

• Perfectly competitive product market – firms are price‑takers; they hire labour up to the point where the value of the marginal product of labour (VMP_L) equals the market wage. This tends to keep wages close to the equilibrium shown in the labour‑market diagram.
• Monopoly (or monopolistic competition) product market – firms have market power and can set output prices above marginal cost. Because profit‑maximising output is lower, the VMP_L is lower, so the equilibrium wage tends to be lower than in a competitive market.
• Monopsony (single buyer of labour) – not explicitly required but useful to know: a dominant employer can set wages below the competitive equilibrium, creating a wedge between the wage paid and the VMP_L.

3. Reasons for differences in wages

4. Workers, production and firm costs

Understanding how workers contribute to output helps explain wage‑setting and firm‑cost behaviour.

• Marginal product of labour (MPL) – extra output from employing one more worker.
• Value of the marginal product of labour (VMP_L) – MPL × price of output. Firms hire workers up to the point where VMP_L = wage.
• Total product (TP) – total output produced by a given number of workers.
• Average product of labour (APL) – TP ÷ number of workers.
• Link to costs:
  • Labour cost = wage × number of workers.
  • When MPL falls (diminishing returns), the additional cost of extra output rises, pushing the firm's marginal cost (MC) curve upward.
  • Higher wages increase MC; lower wages reduce MC, influencing the firm’s supply decision in the product market.

5. Mobility of labour

5.1 Occupational mobility

• Definition: The ability of workers to change occupations or acquire new skills.
• High occupational mobility – easy retraining, flexible skill sets, fewer professional licences.
• Low occupational mobility – specialised skills, limited training opportunities, strong licensing or credential barriers.

5.2 Geographical mobility

• Definition: The ability of workers to relocate to a different area in search of work.
• High geographical mobility – affordable housing, good transport links, few legal or immigration restrictions.
• Low geographical mobility – high moving costs, family ties, restrictive immigration or work‑permit rules.

5.3 Consequences of changes in mobility

5.4 Illustrative example

Consider a country where a new technology reduces demand for coal miners but creates demand for renewable‑energy technicians.

• High occupational mobility: Miners retrain as technicians → unemployment stays low.
• Low occupational mobility: Many miners remain unemployed → rise in structural unemployment.
• High geographical mobility: Workers move from mining regions to renewable‑energy hubs → labour markets re‑balance.
• Low geographical mobility: Mining regions suffer prolonged joblessness while renewable hubs face skill shortages.

6. Division of labour

Division of labour is the breakdown of production into separate, specialised tasks.

6.1 Advantages

• Increases productivity – workers become skilled at a narrow task.
• Reduces production time and unit costs – faster assembly lines.
• Facilitates the use of specialised machinery.
• Encourages innovation in specific stages of production.

6.2 Disadvantages

• Repetitive work can cause boredom and demotivation.
• Over‑specialisation reduces occupational mobility (workers find it harder to switch occupations).
• Production is vulnerable to disruptions – a break‑down at one stage can halt the whole process.
• May increase wage inequality if skilled stages command higher pay.

6.3 Example

In a car factory the production line is split into chassis assembly, engine installation, painting, and interior fitting. Each worker repeats the same task many times a day, allowing the plant to produce hundreds of cars per shift – a clear productivity gain compared with a craft‑based approach where one worker builds an entire vehicle.

7. Government policies that affect labour mobility

• Training and education programmes – subsidised vocational courses raise occupational mobility.
• Transport infrastructure investment – better roads and rail reduce geographical‑mobility costs.
• Immigration and work‑permit rules – can facilitate or restrict the flow of foreign labour.
• Housing policies – affordable‑housing schemes encourage relocation to areas with job growth.
• National Minimum Wage legislation – directly influences wage floors and labour‑supply decisions.
• Environmental / sustainability initiatives – “green‑jobs” programmes create new demand for workers in renewable energy, energy‑efficiency retro‑fits and sustainable agriculture, affecting both occupational and geographical mobility.

8. Key concepts box (quick reference)

9. Suggested diagrams for exam answers

• Labour‑market diagram – demand and supply of labour showing equilibrium (W*, L*) and the direction of shifts for demand, supply, trade‑union action and NMW.
• VMP_L = Wage diagram – illustrates how firms hire labour up to the point where the value of the marginal product equals the wage.
• Flowchart of labour mobility – boxes for “Occupational mobility” and “Geographical mobility” linking to “Workers”, “Firms” and “Economic outcomes”.
• Division of labour illustration – simple line‑up of tasks on an assembly line.

10. Key take‑aways

• Workers choose occupations based on a mix of wage and non‑wage factors.
• In a competitive labour market wages are set where labour demand equals labour supply; trade unions and the NMW act as price floors.
• Market structure (competitive vs monopoly) influences the value of the marginal product of labour and therefore the wage level.
• Wage differentials arise from skill levels, sector profitability, discrimination, public‑vs‑private ownership and market structure.
• Workers’ productivity (MPL, VMP_L) links directly to firm costs and supply decisions.
• Higher occupational and geographical mobility help economies adjust to technological change and regional shocks, reducing structural unemployment.
• Division of labour boosts productivity but can lower occupational mobility and increase inequality.
• Government policies (training, transport, immigration, housing, NMW, and sustainability initiatives) can enhance labour mobility and support smoother economic adjustment.