3.5 Labour Market Flashcards

Question

What are the cons of wage discrimination?

Answer 1

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

Answer 2

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

Answer 3

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

Answer 4

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

Answer 5

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

Answer 6

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

Answer 7

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

Answer 8

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.

Answer 9

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

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

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

Answer 15

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.

Answer 16

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

Answer 17

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

Answer 18

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

3.5 Labour Market Flashcards

(42 cards)