3.5 Labour Market

Question 1

Demand for labour (definition and type)

Answer 1

= quantity of labour employers wish to hire at each possible wage rate

= derived demand as it is derived from demand for the product the labour produces (firms only want workers if ppl are willing and able to buy the product they produce)
Employ workers as there is a need to produce goods and services

Question 2

Factors that influence the demand for labour: (diagram)

PPP WR DCTR

Answer 2

The wage rate- As wage rates increase, demand for labour contracts since MRP of labour must be higher for it to be worthwhile employing more people, so less people are employed.

Productivity directly affects an individuals MP by influencing marginal product- If labour productivity increases, the MP of workers rise- increases willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.

Demand for the final product- Labour is a derived demand, derived from the demand for goods and services produced. If the demand for the final product produced increases, so will demand for labour, increasing the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.

The price of the final product directly affects MRP by influencing marginal revenue- If the final price of a product increases, the MRP of workers rise. This increases the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.

Cost of capital is an important factor for labour demand in long run- if capital becomes more expensive, workers can substitute for capital; a more profitable decision by firms, inc the willingness and ability of firms to hire workers at a given wage rate, shifting labour demand curve to the right from D1 to D2. Substitutes for labour: If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left:

How profitable the firm is- more profit, more labour they can afford to employ

Tech- Improvements in computers and technology means that many jobs have been lost with the work being done by machines. This means that there is less demand for labour, but demand for labour in technological based industries is increasing. By 2040, about 47% of jobs could be lost to technology.

Regulation- : As laws are passed some jobs disappear, such conductors, whilst other jobs are made. High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas. France is a country that used to have high levels of labour regulation and this is something the new president, Emmanuel Macron, is trying to change.

Question 3

MRP

Answer 3

marginal revenue product = MP X MR

= measure of worker’s output
Extra revenue generated when an additional worker is hired

Question 4

Immobility of labour (as a market failure in labour markets)

Answer 4

Geographical: unwillingness of labour to move to another location to seek work (family, high travel/accom costs, differences in cost of living), causes imbalance of labour supply in certain areas

Occupational: workers lack the skills and training required to transition to another job sector, often occurs during structural changes in economy & naturally as consumer taste changes (eg. transition period from manufacturing to services), = lack of supply for higher skilled jobs w more qualifications required (with higher wages so more inequality), gov intervention needed for training, info gap or benefits for workers

Question 5

Supply of labour def

Answer 5

= ability & willingness of people to make themselves available to work at different wage rates

Question 6

Factors influencing supply of labour (diagram)

Answer 6

• wage in substitute occupations
• barriers to entry
• non-monetary job characteristics
• improvements in occupational mobility of labour
• time
• size of working pop
• value of leisure time

Question 7

The individual labour supply curve (diagram, what determines its shape)

Answer 7

Key choice between work and leisure
Income effect : rise in income as wages rise (positive income effect)but potential of individuals reaching target income can cause a negative income effect
Substitution effect : as wages rise, oc for leisure time increases as well, always providing an incentive to work. Positive effect

First section - income and substitution effect both positive. So wage effect positive
Middle section - substitution effect remains positive, income effect negative (individuals starting to reach the target income), but it’s not enough so wage effect positive
Last section - sub effect posive, income effect negative and wage effect negative so curve bends backwards

Question 8

Government intervention in the labour market: (list)

Answer 8

• maximum wages
• minimum wages
• public sector wage setting
• policies to tackle labour market immobility

Question 9

What are the determinants of wage elasticity of demand for labour?

Answer 9

Wage elasticity of demand for labour DEF- responsiveness of the quantity demanded of labour to the wage rate. %change in QD/ %change in wage rate

1) Substitutability between labour and capital. As wages rise labour demand= responsive and fall proportionately more than the wage increase if labour and capital machinery are easily substitutable wage elastic demand. High skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced.

2) Price elasticity of demand (PED) for the final product. If the PED for the final product is price inelastic, an increase in wages for workers in the industry can be passed onto the consumer via a higher price as demand will not fall considerably with revenue and profit increasing. Therefore labour demand will decrease but proportionately less than the wage increase, wage inelastic demand in this case. Low PED- still inelastic demand for labour

3) Labour costs as a proportion of total costs. If labour costs are a large percentage of total costs, as wages rise, firms need to reduce employment in order to stay profitable where the fall in labour demand will be proportionately more than increase in wage; wage elastic demand.

4) Time period. In the short run normally two factors of production are fixed: land and capital. Therefore workers cannot be easily substituted for capital as wages rise, making labour demand wage inelastic. However in the L/R as wages rise, demand for labour will fall proportionately more than the increase in wage as all FOP = variable. This means that capital can substitute for labour, thus labour demand is wage elastic.

Question 10

What factor make demand for labour wage inelastic?

Answer 10

§ If labour and capital aren’t easily substitutable – an increase in the wage rate will lead to a fall in demand for labour but proportionately less than the wage increase= wage inelastic demand

§ If the PED for the final product is price inelastic, an increase in wages for workers in the industry can be passed onto the consumer via a higher price as demand will not fall considerably with revenue and profit increasing. Therefore labour demand will decrease but proportionately less than the wage increase,

§ If labour costs are a small percentage of total costs, as wages rise, firms do not have to reduce employment to stay profitable thus labour demand will fall but proportionately less than the wage increase= wage inelastic demand

§ short run normally two factors of production are fixed: land and capital. Therefore workers cannot be easily substituted for capital as wages rise, making labour demand wage inelastic

Question 11

What does it mean if demand for labour is elastic or inelastic?

Answer 11

When demand for labour is elastic, small wage changes can cause large changes in the quantity of labour demanded.

When it’s inelastic even large wage changes only cause small changes to the quantity of labour demanded.

Question 12

What is definition of supply of labour?

Answer 12

number of workers willing and able to work in a profession at a given wage rate in a given time period

Question 13

What are the non wage factors that affect the labour supply curve

Answer 13

SIMBA POV

1. Substitute’s wage. If the wage in substitute occupations decreases, more workers will be attracted into the market as the earning capacity is greater. The willingness and ability to work increases at the same wage rate, shifting the labour supply curve to the right from S1 to S2
2. Incentives. If there are non monetary benefits to the job as well as a suitable wage, workers will be attracted into the market. Such perks could include a company car, private healthcare, a good pension plan, flexible holiday leave, free lunches etc which increase the willingness for workers to enter a profession, shifting the labour supply curve to the right from S1 to S2.
3. Mobility of Labour. If more workers gain skills and qualifications necessary to work in a given profession, labour supply will increase or if the workforce generally becomes more educated the willingness and ability of workers to take jobs in a profession increases, shifting the labour supply curve to the right from S1 to S2
4. Barriers to Entry. If barriers to entry into a profession are high, it becomes more difficult for workers to enter that industry. If to become a hotel receptionist for example, requirements are for individuals to able to speak a variety of languages, experience required is high and computer proficiency expectations- high, several people who want to work in this job may not be able to, shifting the labour supply curve to the left from S1 to S3.
5. Ability to work overtime. Overtime opportunities = lucrative as an extra earner for workers. such opportunities exist, willingness of workers to enter profession increases, shifting labour supply curve the right from S1 to S2
6. Size of the working population. If the size of the working population increases due to immigration of people of a working age for example, the number of people who are willing and able to work in a given profession increases, shifting the labour supply curve to the right from s1 to 52.
7. Value of leisure time. If individuals value leisure time less and consider working and earning income to be important, the willingness and ability to work inc in labour market- shifting labour supply to the right from S1 to

Question 14

What are the determinants of wage elasticity of supply?

Answer 14

Def- responsiveness of supply to a change in wage rates.

POLVOTS

1. Pool Of potential workers that could enter the profession is high, as wage increases= proportionately greater increase in labour supply than the increase in wage- labour supply wage elastic
2. Length of the training period strongly determine responsiveness of workers to higher wage rates. If length of the training period is high to enter a profession, higher wage rates will attract workers to enter but such a long training period will detract the majority from actually entering. Therefore as wages rise, labour supply will increase but proportionately less than the wage increase; wage inelastic labour supply.
3. Vocational element to the job. Professions -, vocational element - teaching, holidays reps for example - tend to have more wage inelastic supply= wage isn’t a fundamental consideration when deciding to take the job or not, thus if wages fall, supply will decrease but proportionately less than wage decrease = wage inelastic labour supply
4. Time. Professions where it takes time to exit the industry - influence workers responsiveness to lower wages or higher wages in other occupations. If wages decrease but notice times needed are long- can force a worker to remain the job for a period of time before leaving. short run therefore as wages fall, supply will decrease but proportionately less than the wage decrease implying wage inelastic labour supply.
5. Nature of skills required. strongly determine the responsiveness of workers to higher wage rates. If the nature of skills required is high to enter a profession, higher wage rates will attract workers to enter but such a strict skills requirement will detract the majority from actually entering. Wages rise, labour supply will increase but proportionately less than the wage increase; wage inelastic labour supply.

Question 15

What makes wage supply elastic or inelastic?

Answer 15

Elastic:

1) Large pool of potential workers
2) Small training period
3) Non vocational elements
4) Low skills
5) L/r- easier for people to respond to wages

Inelastic:

1) Very specific skills required
2) Little pool of potential workers
3) Long training period
4) Working in vocational professions
5) S/r – immediately after a wage decreases- labour supply may decrease but proportionately less than wage decrease- cotracts

Question 16

How does labour suffer from occupational or geographical immobility?

Answer 16

They can suffer from occupational immobility where workers find it difficult to move from one job to another because of a lack of transferable skills. It is particularly difficult in S/T when workers need to get new training
but in the L/R it may only be possible at a high cost.

§ Moreover, they can suffer from geographical immobility where they find it difficult to move from one place to
another due to the cost of movement, family etc. There may be no jobs available in Glasgow, but jobs in London. Unfortunately, someone from Glasgow will struggle to get a job in London as they may not know about the vacancies, it would be expensive to attend interviews and they would have to leave their family behind. Housing is also a big issue because people may not be able to afford to buy a house in their new area. They may also struggle if they need to find social housing and it is difficult for young people, since they often do not have the money to move out of their parents’ home. In general, those on lower incomes are more geographically immobile.

§ Immobility can mean that there can be excess supply of labour in one area/occupation and excess demand in another. Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation because of their immobility.

Question 17

What are the current labour market issues?

Answer 17

§ Skills shortages: IN DEC 2021, more than 50% of firms surveyed reported difficulties in finding skilled workers. The UK suffers from geographical and occupational immobility, which means that even if there are enough engineers, there aren’t enough engineers in certain areas.

§ Young workers: Workers who join the workforce during recessions tend to receive lower lifetime earnings than those who enter the labour force in better times. Youth unemployment can be a particular issue; UNEMPLOYMENT FOR 16-24 year olds in APRIL 2022 WAS 10.8% COMPARED TO GENERAL UNEMPLOYMENT RATE OF 3.8% during hard times, firms are unlikely to employ new workers but are reluctant to let go of their current workers and so the young struggle to get a job.

§ Retirement: Rising life expectancy and an increase in the number of people reaching retirement age, as the ‘baby boomers’ reach retirement, has negative effects on the government budget. Pensioners now makeup over 50% of welfare spending. RETIREMENT AGE GRADUALLY INCREASSING TO 68

§ Wage inequality: Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages. This is a contentious issue and raises questions over relative poverty and the level of redistribution required.

§ Zero-hour contracts: IN 2022 NEARLY 1 MILL WORKERS WERE ON THESE CONTRACTS, MORE THAN 5 TIMES THE NUMBER IN 2000. There has been a rise in zero-hour contracts and this causes problems for employees who do not know how much they will earn a week and receive little notice of when they will be required to work.

§ The ‘Gig economy”: Many more people are now self-employed and undertake short term contracts, working for companies such as Uber and Deliveroo. There are concerns over the rights of these workers and the unreliability of their pay each week.

§ Migration: Many people suggest that migration causes a fall in wages but it allows employers to recruit from a larger pool of workers and helps to fill skills shortages. There are also issues over the correct level of unemployment, underemployment, the minimum wage, conditions in work etc.

Question 18

What are the characteristics of a perfectly competitive labour market?

Answer 18

1) There are many (infinite) suppliers of labour (workers) to the market and many hirers of workers (employers). - firms must compete with one another to offer wages that attract workers they need and that workers do not have excessive bargaining power to push up wages as there’s alternative, competing supply.

2) All workers in the industry are homogenous with identical skill sets. Together with many workers and employers, firms = wage takers - no ability to exercise power in market by setting own wages. Makes no sense for firms to offer a wage higher than equilibrium market wage - workers are homogenous and so firms will be paying higher when other workers could’ve been hired at a lower wage. Offering a lower than equilibrium wage, firms - not able to attract workers to work for them- workers move to substitute employer offering higher equilibrium wage= MC and AC for firm operating in perfectly compe firm = wage - drawn horizontally.

3) There is perfect knowledge of market conditions for both workers and employers/ perfect mobility of labour. Workers know wages on offer in all professions and requirements with perfect mobility of labour between professions, wage differentials in economy won’t exist in l/r. Higher wage rates= signal for workers to leave industry and enter profession where wages are higher, lowering supply in the lower wage industry and enter profession where wages are higher, lowering supply in higher wage profession closing wage differential

4) Firms are profit maximisers- choosing only to employ workers where they’re needed- only employ workers up until where the MRP= marginal cost of labour (MRP= MC1). Hiring beyond this point- cost of employing workers = higher than the revenue workers make for firm = reducing profit. Employing at a level below this – will not maximise profit as further employment= generate revenue from workers greater than cost of employment thus more profit is possible with more employment up until MRP=MC1

5) There are no barriers to entry/ exit. No extra skills/ qualifications needed. - no cost, time periods= free to exit

Question 19

What does labour market equilbrium look like on a diagram?

Answer 19

Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)

The DL is the demand by firms for workers
The SL is the supply of labour by workers

Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry

If they offer a lower wage, they will likely struggle to recruit workers

If they offer a higher wage there will be a large number of workers applying to work there

DIAGRAM ANALYSIS:

The market for graphic designers is in equilibrium where DL = SL

The equilibrium wage is W and the quantity of labour is Q

There is no excess supply of labour
There is no excess demand for labour

Question 20

What are the labour market imperfections? Why do wages differ?

Answer 20

1) Labour is not homogenous in reality. Workers differ in a multitude of wage, including their MRPs and their substitutability to work in given professions with varying skillsets and qualifications= lead to differences in pay between workers. Employers may use wage discrimination – illegal, but still takes place

2) Labour is not perfectly mobile and information is imperfect. Two labour immobility’s restrict movement of labour allowing wage differentials to persist. Occupational immobility of labour – workers do not possess skills to transfer and geographical immobility of labour- stop workers moving to areas where wages are higher.

3) Barriers to entry and exit can be high enough to prevent fluidity of the labour market in reducing wage differentials. Barriers to entry into a profession such as training periods, skills and qualifications required and barriers to exit a profession like notice periods or redundancy payments- harder to leave jobs where wages are low and take jobs where wages are higher

4) The existence of trade unions can push up wages beyond MRP - cause wage differentials between professions where unions do and do not exist. trade unions= collective bargaining- to restrict labour supply and fight for high wages greater employment threatening strike action. This distorts efficient, competitive labour market outcomes. Successful unions= large mark up, the difference between the union wage and non-union wage, providing a reason for existence and persistence of wage differentials

5) Employers with monopsony power are able to set their own wages, ignoring competitive wage rates given that there’s little to no competition between firms when employing workers. Such employers- offer wages below MRP and competitive wage rates to profit max when hiring workers to the benefit of employer. Lower wage rates- remain over time – persistent wage differentials

Question 21

How can the government tackle geographical immobility?

Answer 21

§ They could improve the supply of houses and reduce the price of properties making it easier for people to move. They could make renting cheaper to help people working in temporary jobs.

§ They could improve transport links which will allow people to work further away from where they live and if they do move, it will be easier for them to visit family and get to job interviews.

§ National advertising could be used so people know about jobs all over the country.

§ The government could introduce subsidies on houses, taxes etc. in areas where there are labour shortages to encourage people to move to the area and take up jobs.

§ One action taken has been to move public agencies out of London, DVLA = moved to Swansea . Although this
doesn’t improve the mobility of labour, helps to prevent excess demand for labour and excess supply in another

Question 22

How can the government tackle occupational immobility?

Answer 22

Additionally, they can improve occupational mobility of labour, through education. This will help to make the workforce more employable and better at a wider range of jobs:

§ Vocational training can be increased, particularly for younger students.

§ They could encourage further study, such as university or technical courses at college. They have been
encouraging engineering degrees.

§ They could encourage greater spending on training within work.

§ Education could be targeted at improving skills shortages and helping with job applications, for example interview skills- encourage flexible work patterns which will allow more parents to work.

§ Discrimination in the labour market could be reduced and employers who take on unemployed individuals from
groups with above average unemployment rates could be subsidised.

§ Apprenticeships, restrucuting of exam system

§ Reducing power of trade unions= inc flexibility

Question 23

What is wage discrimination and what are the conditions?

Answer 23

Wage discrimination- when workers are paid different wages for equal work with no difference in skill sets or costs of employment

CONDITIONS:

1)
Employer must have some degree of monopsony power to practice wage discrimination, firms must be able to set wages depending on the willingness of workers to supply labour. Firms in highly competitive labour markets will be unable to successfully and sustainably wage discriminate against their workers.

2) Firms must be able to differentiate between groups of workers who they believe will succumb to wage discrimination- certain groups of workers who are more likely to accept lower wages for doing exactly the same work as others. If firms are able to gain this information there is potential for firms to wage discriminate and reduce COP.

i. Young workers= inexperienced, little knowledge of competitive labour market wages for profession entering - lack confidence to fight back against low wage. Young workers - fortunate to have a first job offer, a chance to work, gain experience and MRP before asking for higher wages instead of realising wage offered is well below their MRP.

ii. Part time workers - often not the main wage earners in the household = less likely to make wage demands to an employer. The wage = not a prominent consideration in the minds of many part time workers = greater targets for wage discrimination earning lower hourly wages compared to full time workers doing the same work.

iii. Immigrants, having come from their home countries are more likely to accept lower than competitive wage rates as they are likely to still be higher than what they could have earned at home. Employers knowing this information are likely to target immigrants when applying wage discrimination.

3) There must be an opportunity for workers to negotiate their own pay and conditions= possible for some workers to bargain for higher wages than others despite the same work being carried out whereas if professions pay workers using pay scales or other more transparent pay schemes where workers are paid based on experience on a like to like position on the pay scale, it becomes far more difficult for firms to actively use wage discrimination.

4) Crucial employers are able to keep groups completely separated preventing the spread of information within the company about different wages offered to discriminated against and non discriminated against workers. Current anti-discrimination legislation and existence of union power make this crucial otherwise firms could find themselves in legal difficulties or could face strike action and strong rebukes from trade unions who will force higher wages and potentially compensation for staff who have been discriminated against.

Question 24

What are the pros of wage discrimination?

Answer 24

1) Workers - Wage discrimination reduces total costs for employers freeing up more expenditure on greater employment in firm / for innovation / R&D boosting dynamic efficiency in the economy, If employment is boosted, more workers find jobs increasing their living standards.

2) Firms - Wage discrimination clearly reduces COP for firms directly increasing profitability = allowing firms to reduce prices and boost profitability through an increase in sales revenue too. By innovating and re-investing these profits firms can strengthen their long term market position boosting future growth and further profit increases.

3) Economy- If firms reinvest profits made as a result of wage discrimination, the boost to the economy could be significant through dynamic efficiency. Such investment will increase the quantity and quality of the capital stock and thus boost the productive potential of the economy allowing LRAS and thus long term economic growth to rise. If cost reductions provide incentives for firms to boost their labour demand. unemployment across the economy will fall, allowing more individuals to access work, earn incomes and enjoy a boost to their SOL

Question 25

What are the cons of wage discrimination?

Answer 25

1) Workers 1) Wage discrimination = exploitation of workers, esp vulnerable workers such as youth and immigrants. Workers - paid exact wage willing and able to work for matching exactly what they could have earned in another profession = no economic rent at all for the discriminated against worker= such workers are left with lower incomes and a lower SOL despite having same MRP as another worker earning a higher wage.

2) Workers 2) Wage discrimination can in theory reduce wages for all workers in a profession, included those groups of workers who are not discriminated against= higher wages on offer for those in certain groups attracts more of those workers to enter the profession thus increasing the supply of non discriminated against workers and reducing wages despite their wages still being higher than discriminated against workers.

3) Employers 1) Wage discrimination can actually increase costs for businesses= extra admin is needed to organise contracts with individualised pay and conditions, lengthening HR process and increasing the intricacies of necessary paperwork- net result for firms could actually be a rise in business costs acting against interests of firm.

4) Employers 2) Wage discrimination can lead to strikes and disputes if workers find out about wage differentials within company. Current anti-discrimination legislation and existence of union power means firms could find themselves in legal difficulties or could face strike action and strong rebukes from trade unions who will force higher wages and potentially compensation for staff who have been discriminated against.

5) Economy- increase income inequality in society moving the Gini coefficient towards 1. Governments looking to meet their macroeconomic objective of a more equal distribution of income could react to this by increasing welfare payments, providing a top up for those on lower incomes. As a consequence, taxation will increase to fund this, burdening current generations if done immediately or future generations if the money has been borrowed

Question 26

What does monopsony mean in the labour market?

Answer 26

The sole employer of labour in a given profession , nurses/teachers. As state is main employer.

The existence of monopsony power in the labour market implies an imperfect labour market where buying power over labour exists. A monopsonist is a wage maker, able to set wages in order to maximise profit when hiring workers, employing workers at Qm where MRP=MCL. Reading the wage off the ACL curve, monopsony labour market outcomes are at wage Wm and employment Qm, vastly different from efficient, competitive labour market outcomes Wc and Qc found where demand is equal to supply. Clear that monopsonies exploit workers by offering wages much lower than MRP at Qm and they under employ workers compared to competitive levels, using their market power to distort efficient labour market outcomes. Measure MRP in real world-the more monopsony power there is= greater the difference will be between the wage offered and MRP of workers.= distorting efficient labour market outcomes- market failure

Question 27

What is a monopoly in the labour market (trade unions)

Answer 27

Existence of trade unions means they can operate as the only seller of labour

Trade union- organisation of workers using collective bargaining to further their interests in terms of pay, working hours, holidays and working conditions.

The labour market above is operating efficiently at competitive levels WI and Q1. If workers through their trade union are unsatisfied with pay and conditions- union bargain for a higher wage of wtu, controlling labour supply at that wage rate up until the existing labour supply curve at QS. Firms are very likely to accept this given the number of workers they can lose if they reject the settlement and threat of strike action with no production and negative publicity. Firm= wage taker at trade union wage rate WTU- new supply curve = wage up until QS. Union cannot control labour supply beyond this point - those workers require a higher wage to enter profession- new supply curve with trade union involvement possesses a kink reverting back to original supply curve beyond QS

Question 28

What is the evaluation for trade unions?

Answer 28

The impact of trade unions depends on their strength and power i.e. the union density- measures % number of workers In a profession that are members of a union. Higher percentage- greater power of union to bargain collectively- improve wages/ working conditions- inc SOL- greater control of LS. Lower power- less distortion

§ Success of the union fighting for higher wages is determined by the union mark up- difference in wage between workers who are members of a trade union and those who aren’t= bigger the difference in favour of union workers, more successful the union is in bargaining for better pay and conditions. Smaller difference- wont promote outcomes

Trade unions- more likely to be successful when the economy is in a period of strength not when theres economic turmoil in a recession
. In a boom -firms are more willing to inc wages when revenues and profits are strong and labour is scarce- improving the bargaining power of unions. In a recession however, unions have less power- firms – low rev, profit- less likely to inc costs by allowing wages to rise. Usually an abundant supply of labour- firms sack workers if necessary and hire new to avoid succumbing to wage bargaining of unions

Union power is significantly weakened with regulation that reduces their power. Since 1970- power reduced as legistlation has become more strict towards TUs. This is because closed shop trade unions now illegal, limiting union density as workers now have to be spread across different union. Also lots of legislations have come in that reduce level of strikes (ballots having to come in secret in order to allow strikes to take place, strikes can only happen if 75% of members in union agree to it, can only strike against your own employer). Economy also has shifted away from manufacturing towards service sector jobs, where there are lots of different employers making organizing trade unions much harder

trade union may promote better outcomes: trade unions in monopsony labour market. Fight for higher wages-
get wages closer to equilibrium and also increasing employment

Question 29

How can the gov intervene- NMW? PROS?

Answer 29

Governments feel as though wages in the competitive market are not high enough for workers to sustain a satisfactory standard of living.

§ minimum wage can be imposed above equilibrium acting as a floor where wages can fall below as the below disarm illustrates

Reduce Poverty: A national minimum wage set above equilibrium in the labour market can boost the wages of the lowest paid in society helping to reduce poverty and raise living standards, lowering income inequality, with the Gin Coefficient tending towards 0.

§ Can reduce male/ female wage differentials as women are more likely to take up lower paid jobs- min wage can decrease gaps between men and women

§ Minimum wage can reduce voluntary unemployment in the economy- provides an incentive for those outside the labour force and living on welfare, savings or their spouses income to find workers themselves knowing they’ll earn an income than can improve SOL- promotes the attitude of work and welfare, reducing the long term burden on state finances. prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive.

§ Imposing a national minimum wage can inc the fiscal dividend for the gov because if incomes rise for a large proportion of the pop revenue from income tax and VAT- reduces the strain on gov finanes- gov can repay debt, service debt interest and hypothecated in productive areas of the economy such as education, infra, healthcare education. healthcare and infrastructure.

§ For individual workers the national minimum wage can boost productivity. This is because receiving what for some might be a substantial pay increase will boost morale translate into higher productive. This benefits the employer through greater profitability but also productive potential of the economy. Any direct increases in costs of production through the imposition a minimum can be onset through productivity gains. Incentive for firms to boost human capital- training, skills= productive potential inc

§ A NMW powerful weapon to fight against a monopolist employer. An employer with monopsony power - able to use buying power of labour in market - set wages below MRP and constrain employment below competitive levels. A minimum wage - counter monopsony power increasing wages unemployment to competitive level is improving efficiency of labour market where monopsony power exists

Question 30

What does an NMW diagram look like?

Answer 30

The market equilibrium wage & quantity for truck drivers in the UK is seen at WeQe

The UK government imposes a national minimum wage (NMW) at W1

Incentivised by higher wages, the supply of labour increases from Qe to Qs

Facing higher production costs, the demand for labour by firms decreases from Qe to Qd

This means that at a wage rate of W1 there is excess supply of labour & the potential for real wage unemployment equal to QdQs

Question 31

What is the evaluation for NMW?

Answer 31

Evaluation 1) The level of unemployment caused by a minimum wage is dependent on the elasticity of demand for and supply of labour. The more inelastic labour demand and supply is in a given market, the smaller the difference will be between quantity demanded and supplied in the market - thus impact on U/E= minimal.

§ Evaluation 2) depends on how high the minimum wage is set above the equilibrium wage in the market. A minimum wage set so high will cause greater disequilibrium and unemployment whereas a minimum wage that is set close to the equilibrium level is unlikely to affect the unemployment rate dramatically.

§ Evaluation 3) youth and low skilled - most likely to lose out from min wage despite legislation enacted to protect workers from wage exploitation. Young workers/ low skilled don’t have MRPs high enough to justify employment at the minimum wage to a profit maximising employer. When employed, revenue generate for the company = less than cost of employment at minimum wage = extremely difficult to get a job.

Real wage U/E can be caused by the imposition of a national min wage- wage =set above equilibrium in labour market at Wmin, supply of labour at Qs is greater than demand for labour at Qd causing an excess supply of labour and real wage U/E. High min wages inc costs for businesses - make it harder for workers to get into work given the MRP needed to justify the minimum wage explaining the contraction of demand for labour= this disequilibrium in the labour market could lead to the u/e rate in the economy increasing away from the full employment level where the government loses one of its key macroeconomic objectives.

The NMW = unintended consequences - negative impact on businesses. NMW directly increases costs for many businesses employing lower skilled workers, impacting profitability = business shut down, firms leaving country to operate elsewhere or businesses taking away perks for workers - free lunches or extended breaks. Businesses have is to pass on these higher costs to consumers via higher prices, increasing inflation- CS decreases and worsening international competitiveness- worsen trade def. Macroeconomic objectives - inflation target and a satisfactory balance of payments = lost, unintended consequences of policy potentially resulting in government failure. Less supernormal profit- less dynamic efficiency gains

There may be regional differences in pay that the national minimum wage does not fully account for. For example a NMW might be successful in reducing wage differentials in the north of the UK where wages do not reach the levels down south. But down south, workers living on the NMW may still struggle to lift themselves out of relative poverty= NWM might not be as effective at reducing income inequality and reducing widespread poverty as regional minimum wages could be

The impact of any minimum wage will depend on where it is set, and whether this is above or below the current wage. The level of job losses is dependent on the elasticity of supply and demand. If both are relatively elastic, there will be large job losses but if both are relatively inelastic, the losses will be small. Dependsmagnitude- GOV DONT HAVE PERFECT KNOWLEDGE

Question 32

How can gov intervene- maximum wages?

Answer 32

Reduce income inequality- maximum wages in the labour market or caps on bonuses for those earning high incomes, gov will prevent the extent to which wages can rise reducing gap between rich and poor in society- reducing inequality (promote equity)

§ The introduction of maximum wages will lead to excess demand within the industry, since people may not put themselves forward for the job if they don’t think the salary matches the stress and responsibilities or they know they could get higher wages abroad. The UK may suffer from a loss of the best workers , which will reduce the quality of businesses and decrease competitiveness.

§ impact depends on the elasticities of supply and demand: inelastic means there will be little impact. It is argued that supply and demand for the highest paid workers, such as chief executives, is very inelastic since there is a small supply of chief executives and businesses only need one chief executive so their cost is a very small part of total costs. - maximum wages will have almost no effect on the market, other than causing a reduction in wages.

Question 33

What are the arguments for maximum wage and arguments against?

Answer 33

FOR:

People earn too much and they ‘don’t deserve it’.

§ It helps to reduce costs for firm- prevent wage price spiral

§ In some labour markets, labour may have the ability to bargain for wages which include substantial economic rent.

§ Prevents most skilled labour migrating to the highest paid jobs. For example, if lawyers received very high wages,
best graduates may train to become lawyers, but this means other job sectors, such as doctors, engineers would not attract the best workers. Doctors and engineers may have greater social value than lawyers.

AGAINST:

Excess demand= shortage

§ Less risk taking/ innovation- l/r econ growth decreases- productive potential decreases

§ Get around it- pay in shares

§ To reduce wages, why not increase income tax-. If you want to reduce incomes of high earners, you could just
impose high rates of marginal income tax on high earners- raises tax revenue for gov = redistribute income.

§ Disincentives to work. A maximum wage may encourage workers to leave and work in another country. Firms
may find a shortage of skilled workers or top executives, this could harm economic prospects.

§ If firms are willing to pay high wages, then presumably the workers must have a value/MRP
§ Apart from specific industries= little benefit of imposing a maximum wage, save perhaps a mild feeling of social
justice that people don’t deserve to earn too much. (whatever that value is)

§ Higher pay inc motivation- work harder

§ International cooperation is needed- otherwise they’ll just move

§ Issues with monitoring compliance

§ Gov suffer from imperfect info- max wage may not be high enough to reduce income inequality

Question 34

What is the evaluation for maximum wages?

Answer 34

May be ineffective if managers are given other, non-money benefits, or alternative financial rewards e.g. share options.

§ Depends on the magnitude of the maximum wage.

§ Depends on wage elasticity of supply and wage elasticity of demand for labour.

§ There may be other reasons to keep workers in the UK e.g. family ties.

§ Lower incentive may result in managers becoming less productive/skilful thus lowering the competitiveness of UK businesses.

§ Issues with monitoring compliance, especially in multinational firms

Question 35

What is wage differentials and what are the reasons for it?

Answer 35

Wage differentials- the differences in wages between different groups of workers or between worker in the same occupation.

1) Women tend to take breaks from the workforce to have children and raise a family. The age at which this happens often coincides with the time where skills and productivity flourishes the most enabling quick career progress to be made. During periods of inactivity, women do not add to their MRP, sometimes losing skills whereas their male counterparts who are purely career driven without taking breaks from the labour force are able to progress faster, attain skills, promotions and earn higher wages increasing their demand from D1 to D2.

2) developing countries, women - less qualified than men - unequal opportunities existing in education between boys and girls. Cultural factors - role to play in curtailing time in school for girls = men will have higher MRPs and thus can earn higher wages in professions that command greater skills compared to women. In many developed countries, argument has lost weight given equal opportunities in education and beyond between men and women with women attainment levels in education often superseding those of men.

3) Legislation and a greater commitment to diversity in the workforce has drastically increased the supply of women into the labour force- Furthermore a change in society attitude has meant that women are also very career driven, working consistently for longer without taking large breaks from the work force. This shifts the supply curve of women to the right
from 51 to 52, reducing wages from W1 to W2.

4) Statically proven that women are concentrated in occupations where wages tend to be lower such as working part time, in service sector occupations, in the public sector, in vocational occupations and working in professions where there’s low union density= keep wages low with limited wage rises from year to year.

5) Women are often not the main wage earners in the household and work in more part time occupations than men and are therefore less likely to make wage demands to an employer. The wage in this sense is not a prominent consideration in the minds of many female part time workers making them greater targets for wage discrimination earning lower hourly wages compared to full time male workers doing the same work.

6) Despite it being illegal, women can still fall victim to labour discrimination where employers pay women less due to prejudice, information failure regarding skills and qualifications that woman hold or bias to promote men to leadership positions rather than women.

7) Unions density reducing in the UK economy has led to collective pay bargaining being replaced by individual
= negotiating pay increase needs to be done in person rather than through a union. Statistics show that women find it more difficult than men to put themselves in such a position and then to be successful in negotiating a pay rise keeping their wages lower than me

Question 36

What is the public sector wage setting?

Answer 36

Since trade unions in the UK are weak, in the short run, the government can effectively make whatever wage decisions it decides to improve budget.

§ Between 2010 and 2015, public sector workers experienced a pay freeze. This put downward pressure on private sector wages since few people were likely to leave the private sector for the public sector and private sector employers could use this as evidence to limit pay rises for their workers.

§ However, in the long run, if private sector workers receive pay rises and public sector workers don’t, people will move from the public sector to the private sector and this will force the government to increase public sector wages in order to expand supply.

§ As a result, the wages of public and private sector workers tend to rise by the same percentage over a long period of time but in the short term they can rise by different rates

Question 37

Compare premier league footballers and teachers using wage differentials?

Answer 37

1. Footballers have significantly higher MRP than teachers= footballers have extremely unique talents, which can raise huge amounts of revenue for the club via final positions in leagues and cups, merchandise sales, ticket sales, television rights deals and sponsorship deals. As a consequence, football clubs are willing to pay very high wages for such talent especially at the end of player contracts where there are no transfer fees involved increasing demand from D1 to D2 pushing up wages from W1 to W2.
2. There is a very low supply of highly talented footballers and the supply of them is extremely wage inelastic. The barriers to becoming a professional footballer are very large with big sacrifices to devote the time necessary to reach a professional standard. Many do not make it leave them with little alternative, keeping the supply of elite footballers very low. Furthermore such sacrifices and the length of training time required to gain unique skills means that extremely high wages on offer due to ever increasing demand does not attract many more footballers into the profession pushing wages up even more.
3. In the UK, state school teachers are employed by a monopsony employer (the government) with the ability to set wages given the buying power they possess. The state will use this power to offer wages to teachers below their MRP at WM and Qm, widening this wage differential.
4. Though there are trade unions in teaching profession - large number of members arn’t willing to fight for higher wages and better working conditions, the reluctance of teachers to strike at meaningful times limits the threats that unions can make. Teachers do not strike during exam periods or during term times where pupil performance Is at risk, choosing instead to strike at end of the school year where the impact of pupil attainment is minimal. As a result the state is less willing to give in to wage demands with wage increases remaining timid.
5. The teaching profession carries a vocational element to it whereby if wages fall in real or nominal terms, labour supply will fall but proportionately less than the fall in wage; wage inelastic supply. In this sense, wages can be low with a high number of teachers remaining employed. Compensating negative wage diff- long holidays

Question 38

What are the pros of wage differentials?

Answer 38

The existence of wage differentials- strong incentives for individuals to gain qualifications and skills by improving education:
Workers know only way to access a higher paying job is for MRP to increase to justify a higher wage. Beneficial for the individual our SOL increase but also good for productive potential of the economy as well, inc labour productivity and international competitiveness. Limited supply and increased demand for those with specialist skills= upward pressure on wages.

Wage differentials encourage enterprise and entrepreneurial spirit.= always incentive to innovate, take risks and create new products and services when there is an appropriate reward, i.e. ability to earn more than others who haven’t taken risks. Successful entrepreneurial activity can lead to technological advances, increasing the productive potential of the economy and long run growth whilst also creating employment opportunities for others. Those on lower incomes - benefit through lower prices and greater access to brand new high quality goods and services if entrepreneurship is allowed to flourish.

3. Wage differentials strongly promote a work and not welfare attitude.- always a strong incentive to get into work and do what is necessary to access higher paying professions rather than living on welfare which provides a much poorer standard of life= less strain on gov finances, with funding of the welfare state remaining sustainable without the need for excessive borrowing or large increases to taxation.
4. Wage differentials promote efficient allocation of resources in labour market= individuals always have incentive to work in job that suits them the most moving between jobs using wages to signal their movement, before settling in profession - most productive= workers will feel more motivated and productivity will improve, increasing business profitability and productive potential of the economy.
5. Wage differentials can be positive if the trickle down effect takes place. Fee market view This is when individuals who earn high wages spend that money in the economy creating regional multiplier effects and opportunities for others who then receive higher wages themselves. Consequently incomes can rise for majority in society rather than rising incomes being confined only to those earning the highest- tax rev generated

Question 39

What are the cons of wage differentials?

Answer 39

The existence of large wage differentials between professions can worsen income inequality in society leading to social fractions between groups, strains on government finances, higher levels of personal indebtedness and potentially lower economic growth. As a normative consideration, some economists would consider rising income inequality due to large wage differentials as unfair and an example of labour market failure.
INDIVIDUALS ON LOW INCOME CAN LIVE IN POVERTY AND ALSO ISSUES FOR ECONOMY
GOV HAS TO FORK OUT MORE UNEMPLOYMENT BENEFITS WHICH PUTS STRAIN ON THEIR FINANCES
LARGE INCOME INEQUALITES CAN REDUCE LR GROWTH AS POOR HAVE HIGHEST MPC, SO SPENDING CAN REDUCE IF TYOU LOWER THEIR INCIME. RICH HAVE HUGHEST MPS MEANING THEY WONT SPEND. SOCIAL COSTS OF INEQUALITY, HIGHER CRIME RATES, DEPRESSION AND ANXIETY RATES, DIVORCE AN PROTESTING WHICH CREATES NEGATIVE EXTERNALITIES

Action against wage differentials is extremely limited if the government is a monopsonist employer in various professions.
s. In the UK for example, teachers, doctors, nurses, dentists and many more employees are employed by the state with buying power over workers used to push wages below MRP in such professions. Governments are unlikely to ever increase wages substantially to reduce wage differentials as it would lead to the deterioration of government finances and also potentially increase inflation beyond the government’s target of 2%, losing a key macroeconomic objective.

can be argued that the trickle down effect is purely theoretical and not a realistic occurrence. High wage earners may not spend their income domestically instead buying imports, they may save their money or move their money abroad where more lucrative rates of return can be found. This does not create any regional multiplier effects and will not increase incomes for those lower down on the pay spectrum nor will it create employment opportunities domestically.

Question 40

What is the evaluation for wage differentials?

Answer 40

Inequality - have both costs and benefits as mentioned above. Just because wage differentials can result in inequality doesn’t necessitate gov intervention. The costs and benefits of income inequality need to be weighed up before a carefully considered conclusion is reached whether the benefits outweigh the costs or vice versa. If the benefits do outweigh the costs, the economy can actually prosper without increasing the size and role of government.

It is tempting for governments to react to wide wage differentials by intervening in the labour market, which
rationale for intervention is normative based on fairness but if costs of intervention outweigh the benefits, government failure. If the government imposes wage controls such as caps
on the salaries of professions where pay is high (a maximum wage). Though this could stop excessive wage growth, it could stop innovation and productivity improvements and make some workers leave the country to work in countries where such labour law does not exist; unintended consequences large costs.
could result in government failure.

There are short run and long run considerations - must be weighed up carefully before assessing the impact of wage differentials.
Short run costs via issues that arise due to widening income inequality but in the long run = also substantial benefits. The wide-ranging advantages of entrepreneurship, positive incentives that improve livelihoods of individuals and improve growth rates in the economy, a lower strain on gov finances and potential benefits arising from the trickle down effect are all long run outcomes = could significantly outweigh short run costs. It is a natural human trait to discount future benefits but if short run costs are weighed up too strongly leading to unnecessary government intervention which prevents L/R benefits occurring, society will lose out considerable and in a multitude of ways.

Fiscal dividends- higher income earners contribute towards tax revenues which can therefore be hypothecated into merit goods, public services- helping those on lower incomes= reduces wage differential.

T

Question 41

What is the wage differential between Londoners and northerners?

Answer 41

1) With the restructuring of the UK economy away from northern focused manufacturing sectors and towards the southern focused financial services sector, the demand for manufacturing jobs has declined markedly from D1 to D2 whilst the demand for workers down south with high MRPs who can work in high profile positions has increased from D1 to D2 leading to the existence of wide wage differentials.

2) Greater U/E in northern manufacturing industries = accompanied by negative regional multiplier effects whereby U/E and loss of incomes for 1 group of workers reduces demand for goods and services in local area threatening other employment as labour = deriver demand. Wages across entire area fall whilst down south, higher incomes stimulate positive multiplier where opposite impact is felt, significantly widening the wage differential.

3) Economic theory = if large wage differentials exist between northern and southern areas= migration of workers from the north to the south, following higher wages to close the gap. However may not take place - occupational and geographical immobility of norther workers. Northern workers may not have transferable skills to take up jobs in southern areas - family ties/ other reasons why northerners are committed to regions rather than wanting to move down south to take on jobs that are better paid leading to persisting wage differential

4) Even if northern workers do migrate down south it is likely to be the most prosperous northern workers who can actually take up and transfer to jobs down south which leaves the lower skilled workers remaining in the north, widening the differential even more

Question 42

What is the wage differential between different ethnic groups?

Answer 42

1) Minority ethnic groups tend to have a low level of qualifications and productivity to work in higher paid occupations. Add to this limited English speaking proficiency and the MRPs of such workers is low, preventing them access to higher paid occupations.

2) Workers from certain ethnic groups are concentrated in low wage occupations and live in poorer parts of the country where MRP for workers is lower resulting in low demand for workers at D2 and increasing the supply of workers from S1 to S2. Both conditions will push down wages to W2 for these workers and widen ethnic wage differentials.

3) Ethnic minority workers have strong family ties and other cultural reasons explaining why they are committed to their regions rather than wanting to migrate and move to take on jobs that are better paid in higher profile areas = wage differentials between ethnicities persisting.

4) Despite it being illegal, workers from certain ethnic groups can still fall victim to labor discrimination where employers pay these workers less due to prejudice, information failure regarding skills and qualifications that workers from ethnic backgrounds hold or a bias to promote certain workers to leadership positions rather than those from different ethnic backgrounds