3.5.3 - wage determination in competitive and non-competive markets

Question 1

What is the **equilibrium wage **

Answer 1

the wage rate at which the quantity of labour supplied by workers matches the quantity of labour demanded by employers.

Question 2

What is meant by **sticky wages **

Answer 2

So during a recession demand for labour will fall as labour is demand derived and since in a recession there is⬇️ demand. Demand for labour will also fall ⬇️ so wages will fall However (look at photo) the sticky wage theory helps us to understand that wages adjust slowly to changes in labor market conditions. This may be due to (look at flashcards 3)

Question 3

Reasons why wages may be sticky

Answer 3

Question 4

What are the conditions for a competitive labour market

Answer 4

Question 5

What are the current issues in the Labour market ?

Answer 5

• Skill shortages
• Youth unemployment
• Changes to retirement ages
• School leaving age
• Zero hour contracts
• Tempoary/flexible working
• Gender pay gaps

Question 6

Blurt everything you know about Skill shortages

Answer 6

Question 7

Blurt everything you know about Youth unemployment

Answer 7

There are a number of reasons for this for example, employers are more reluctant to hire younger people due to a lack of experience. Furthermore, a lack of quality education or disconnects between the skills taught and those required in the labour market can also cause youth unemployment.
- Youth unemployment is particularly damaging, because it could lead to hysteresis. This is a type of structural unemployment, where someone is out of work for a long time, so their skills deteriorate. This makes it harder to find a job, and it leads to long-term unemployment. If young people find it hard to get a job, then they might be discouraged from participating in the labour market as an adult.

Question 8

Blurt everything you know about Changes to retirement ages

Answer 8

In 2017 the office of national statistics found that 18% of the UK population are aged 65 and over and 2.4% are aged 85 and over. This creates a problem for the UK government as an aging population puts strain on government spending (increase in number of people claiming state pensions and increased NHS spending required to cope with increased demand as more people experience health issues as they get older). In order to deal with this situation the UK government plan to increase the age in which state pension can be claimed. This is aimed at reducing the UK dependency ratio as an increase in the retirement age will increase the number of people of working age. As such, government tax revenue will increase, helping to cope with the costs that occur as a result of an aging population.

Question 9

Blurt everything you know about School leaving age

Answer 9

Question 10

Blurt everything you know about Zero hour contracts

Answer 10

Question 11

Blurt everything you know about Tempoary/flexible working

Answer 11

Question 12

Blurt everything you know about Gender pay gaps

Answer 12

• ## Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part-time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. Although a gap still exists, it is narrowing.

Question 13

Examiner tips and tricks

Question 14

Current immigration trends

Answer 14

• left brexit = saw the end of free movement of labour for EU residents
• has led to an increase in net immigration of more people coming to the
  UK than leaving = mostly from non-EU countries
• the number of immigrants from non-EU countries has experienced a significant surge in the last two years
• immigration from EU countries have declined since 2016

Question 15

Influence of immigration on labour supply?

Answer 15

• increase in labour = rightward shift = lead to a fall in wages for certain jobs
• could stimulate growth, enhance productivity + diversify the skills available in the work force
• especially true if immigrants are selected to industries where there are currently shortages
• (could also be used on a LRAS diagram)

Question 16

Macro impact of immigration?

Answer 16

• increase in demand for education + healthcare = more govt spending needed - increase in AD
• increased demand for rental properties = could lead to an increase in rent
• increase in consumption = increase in AD

Question 17

NWM with inelastic demand for labour

Answer 17

Eval: Many studies have shown that unemployment does not increase - and in some instances employment increases. This is likely due to the fact that workers are receiving higher wages and choose to consume more. This increases aggregate demand (AD) in the economy which in turn increases the demand for labour by firms - thus eradicating any potential real wage unemployment.

Question 18

NMW with elastic demand for labour

Answer 18

Eval : Many studies have shown that unemployment does not increase - and in some instances employment increases. This is likely due to the fact that workers are receiving higher wages and choose to consume more. This increases aggregate demand (AD) in the economy which in turn increases the demand for labour by firms - thus eradicating any potential real wage unemployment.

Question 19

Advantages of NMW

Answer 19

• Keynesian argument = higher wage rates = increased disposable income of lower-paid workers (many of whom having a larger marginal propensity to consume as they can’t afford to save)
• therefore increase consumption + feed through to the circular flow of income creating further jobs from the multiplier effect
• efficiency wage argument = raising pay levels for low paid jobs may
  increase productivity = psychological benefits + employers may be
  incentivised to improve training + production processes
• lowers the increase in labour cost

Question 20

Disadvantages of NMW

Answer 20

• competitiveness + jobs = rise in labour costs makes it more expensive to employ people
• can lead to unemployment - some businesses like pubs + hotels worse off
• BUT this will depend on how far the NMW is set above equilibrium + the
  PED + PED of labour supply
• furthermore an increase in AD which is stimulated from higher wage will
  increase the demand for labour by firms = thus eradicating
  unemployment

Question 21

Blurt everything you know about public sector wage settings.

Answer 21

• The uk gov is the main employer in public sector jobs (e.g nurses, doctors, teachers) meaning they can exercise monopsony power in setting the wage rates.
• Between 2008 and 2010, public sector pay grew (4.5%) relative to the private sector (1%).

Question 22

What are some policies to tackle labour market immobility.

Answer 22

• Improved education and training.
• Targeting skills shortages.
• Subsiding employers.
• Relocation subsides.
• Reducing information asymmetry.
• Reducing discrimination.

Question 23

Define the term elasticity of demand for labour.

Answer 23

The responsiveness of a change in demand for labour due to a change in the wage rate (price of labour).

Question 24

How would we know if the demand for labour was elastic ?

Answer 24

If the change in demand for labour by employers is greater than the change in wage rate.

Question 25

How would we know if the demand for labour was inelastic ?

Answer 25

If the change in demand for labour by employers was less than a change in the wage rate.

Question 26

What factors are affecting PED.

Answer 26

The easier it is to substitute factors, the more elastic the demand for labour, because firms can easily to switch to cheaper forms of production.

Question 27

Examples of jobs that have elastic demand for labour

Answer 27

Question 28

Examples of jobs that are demand inelastic

Answer 28

Question 29

Define the term price elasticity of supply for labour.

Answer 29

The responsiveness of the quantity of labour supplied when there’s a change in the wage rate.

Question 30

How would we know if supply of labour is elastic ?

Answer 30

If the quantity change of the supply of labour is greater than the change in wage rate.

Question 31

How would we know if the demand for labour is inelastic ?

Answer 31

If the quantity change of the supply of labour is less than the change in wage rate.

Question 32

What types of jobs are supply inelastic ?

Answer 32

* Occupations which require a longer and higher level of training tend to have an inelastic supply of labour i.e even if wage rates increased significantly, there would be a less than proportional increase in the supply of labour in the short run

Question 33

What kind of Jobs are supply elastic ?

Answer 33

* In low skilled occupations the quantity of labour supplied is very responsive to a change in wage rates i.e. supply of labour is elastic.