3.5.3 Wage Determination in Competitive and Non Competitive Markets Flashcards
(26 cards)
Where does the Labour Market Equilibrium Occur?
Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)
Are individual firms price takers or makers in the labour market?
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
How are skill shortages a current labour market issue in the UK?
- In December 2021 more than 50% of firms surveyed reported difficulties in finding skilled workers
- A shortage of skilled labour means that firms are having to increase wage rates to attract labour
- Some of the many labour markets experiencing shortages include nursing, engineering, pharmacies, secondary teaching, and graphic design
How is Youth unemployment a current labour market issue in the UK?
- Unemployment for 16-24 year olds in April 2022 was at 10.8% compared to the general unemployment rate of 3.8%
- This means that it is nearly three times as likely for a young person to be unemployed
This is beacuse, where possible employers prefer to hire workers with more experience as it can lead to higher productivity
How is changes to retirement age a current labour market issue in the UK?
In recent years, State Pension reform has been ongoing and the retirement age is gradually being increased to 68 for both men and women.
Increases supply of labour?
Zero hour contracts - how are they an issue in the current UK labour market?
In 2022, nearly 1 million workers were on zero-hour contracts which is more than five times the number in 2000
- These contracts are extremely beneficial to employers. Workers are not guaranteed work and only get paid for the work they do.
- Workers do not receive many of the benefits that full-time employees receive - this reduces costs for the firm
- EVALUATION -> Some workers do enjoy the flexibility this provides as they can sign contracts with several firms and sometimes enjoy a wider variety of work
These contracts change unemployment figures as workers may not end up receiving much work, but are no longer counted as unemployed
Why and how does the government interevene in the labour market?
The UK Government usually intervenes in the labour market in order to improve equity and avoid the exploitation of workers.
They do it through a maximum or minimum wage.
What is a maximum wage?
A maximum wage is a government imposed price ceiling below the market price and is rarely used
- There has been some discussion recently to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full-time employees
- If CEOs were paid less then the average pay per worker may increase
What is a minimum wage?
A minimum wage is a legally imposed wage level that employers must pay their workers
- It is set above the market rate
- The minimum wage/hour varies based on age
Argument and Eval for NMW?
A NMW reduces the demand for labour from firms - this creates excess supply of labour and real wage unemployment rises.
However, wage efficiency theory -> as wages go up workers are more motivated and the risk of losing their jobs is greater so they become more producitve.
Who is the largest employer in the UK?
The UK government is the largest employer in the nation
(20% of employed people)
In many industries, the UK Government is the dominant employer and so is able to exercise monopsony power in setting the wage rates
What does a rise in the NMW mean for governments?
If the government increases the NMW, they are significantly increasing their own wage bill as they employ over 6 million people!
Increases to public sector pay often have to be paid for by increases in tax rates for the entire working population
What is the wage price spiral?
MAINLY MACRO
- Workers demand higher wages because the cost of living is rising
- Firms then raise prices to cover their higher wage costs.
- Those higher prices push the cost of living up even more.
- Workers again demand even higher wages because things are now even more expensive.
What are the 6 edexcel policies a government uses in order to reduce labour market immobility and market failure in the LM?
- Improved education / training
- Targeting skills shortages
- Subsidising employers - (to take on lower skilled workers and train them)
- Relocation subsidies
- Reducing infomation asymmetry
- reducing discrimination - opens up regional mobility as certain groups feel more comfortable moving to different areas of the UK.
How does reducing infomation asymmetry correct market failure in the labour market?
Setting up job centres and improving the flow of information between employers and the unemployed helps workers to quickly identify new opportunities
Explain the elasticity of demand for labour?
** This refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate)**
What does demand for labour being elastic mean?
If the demand for labour is elastic, then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firms
If demand is elastic firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise
What does demand for labour being inelastic mean?
If the demand for labour is inelastic, then an increase in the wage rate will result in a less than proportional decrease in the quantity demanded of labour demanded by firms
If demand is inelastic firms will have a much smaller response to rising or falling wages
What are the 4 factors that influence the PED of labour?
The proportion of labour costs to total costs
Ease and cost of factor substitution
Time period
PED of the final product
How does the proportion of labour costs to total costs influence the PED of labour?
The higher these are then the more elastic the demand for labour will be.
If labour costs are a BIG part of a firm’s total costs → firms are very sensitive to changes in wages.
➔ Demand for labour is elastic (they’ll quickly cut workers if wages rise).
Ease and cost of factor substitution - How does this influence the PED of labour?
If it’s easy and cheap for firms to replace workers with machines (capital), then the demand for labour is more elastic.
If it’s hard or expensive to replace workers, then the demand for labour is more inelastic.
How does the PED of the final product influence the PED of labour?
If the product being made is price inelastic, firms can raise prices without losing many customers, so they aren’t too worried about rising wage costs — making the demand for labour more inelastic.
Go to point in a question please
How does the Time period influence the PED of labour?
In the short run, firms can’t quickly change how they produce, so demand for labour is more inelastic.
In the long run, firms can adapt (e.g., invest in machines or restructure production), making demand for labour more elastic.
What is the elasticity of supply of labour?
This refers to how responsive the supply of labour is to a change in the price of labour (wage rate)
- If the supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in the quantity of labour supplied
- If the supply of labour is inelastic, then an increase in the wage rate will result in a less than proportional increase in the quantity of labour supplied
