Section 7 - The Labour Market

Question 1

Economically active population - definition

Answer 1

> The economically active population is the people in an economy who are capable of, and old enough to, work (regardless of whether they’re employed or unemployed).

Question 2

Labour

Answer 2

> The demand for labour comes from firms and the supply of labour comes from the economically active population.

Question 3

Demand for labour

Answer 3

> The demand for labour is derived demand.
When firms demand workers it’s because they need them to make the goods that are being demanded by their customers.
So the demand for labour is driven by the demand for the goods that this labour would produce - this is derived demand.
When demand for these goods increases, so does the demand for labour.
When demand for these goods decreases, the derived demand for labour also decreases resulting in unemployment.

Question 4

Firms and demand for labour

Answer 4

> Firms demand labour in order to make revenue from selling the goods/services that the labour produces.
The marginal productivity theory says that the demand for any factor of production depends on its marginal revenue product (MRP).
Firms will only hire workers if they add more to a firm’s revenue than they add to costs.

Question 5

Marginal revenue product of labour (MRPL)

Answer 5

> The MRPL is the extra revenue gained by the firm from employing one more worker.
It is calculated by multiplying the MPPS by the marginal revenue (MR, price per unit).

Question 6

Marginal cost of labour

Answer 6

> The cost of hiring one additional worker.

>In a perfectly competitive labour market the MCL is equal to the wage paid to the additional worker.

Question 7

Perfectly competitive labour market and wages

Answer 7

> In a perfectly competitive labour market the firm can’t influence the wage - the wage on the diagram is the equilibrium wage (the wage where supply equals demand in the market).
If you compare the wage to the MRPL, this indicates the quantity of labour a firm needs to use to be most cost-effective.
When MRPL is equal to the market equilibrium wage, the firm as the optimum number of workers to maximise profits.
When MRPL is greater than the wage then firm is employing too few workers and vice versa.

Question 8

MRPL and MPPL

Answer 8

> MRPL = MPPL x MR.
As the values on the MPPL curve are multiplied by the MR to form the MRPL curve, the curves are the same shape.
The MPPL curve is downward sloping because of the law of diminishing returns.
In other words, as each new worker is employed the amount of additional output that’s produced falls.

Question 9

What is demand for labour affected by?

Answer 9

> Productivity

>Wage

Question 10

Demand for labour and productivity

Answer 10

> Generally, a firm’s demand for labour will decrease if wages rise. However, this depends on whether the wage increase is accompanied by an increase in productivity.
Higher levels of productivity reduce unit labour costs.
So if wages increase but are accompanied by an equivalent increase in worker productivity, this means that the unit labour cost stays the same and demand for labour is unaffected.

Question 11

Unit labour costs - definition

Answer 11

> Unit labour costs are the labour costs per unit of output.

Question 12

Unit labour costs - info

Answer 12

> High unit labour costs suggest there’s low productivity and this would reduce a country’s international competitiveness.
If a firm’s unit labour costs are reduced as a result of an increase in labour productivity, it’ll become more competitive - unless the increase is due to something which will improve the labour productivity of competing firms too, such as new technology, in which case relative competitiveness won’t change.
International competition may mean the unit labour cost in a particular industry is too high and in some countries for them to be competitive and production in that industry will stop.

Question 13

MRPL curve

Answer 13

> The MRPL curve is also the demand curve for labour.
Anything that affects the MRP (or MPP or MR) will shift the demand (MRPL) curve for labour.
Examples include:
-A change in the price of goods sold (MR) - if demand falls for a firm’s product and its price falls, this would decrease the firm’s demand for labour and the MRPL curve would shift left.
-Factors that affect labour productivity - e.g. if new technology or training increase the productivity of workers, this would increase the demand for labour and the MRPL curve would shift to the right.
-Increases to the costs of labour - the cost of labour doesn’t only include wages. It also includes costs such as training, uniforms, safety equipment, and NI contributions. If any of these labour costs increased, this would decrease the demand for labour and the MRPL curve would shift to the left.

Question 14

Elasticity of demand for labour - basic

Answer 14

> A.k.a wage elasticity of demand for labour.
Elasticity of demand for labour measures the change in demand for labour when the wage level changes.
It’s calculated by dividing the % change in the quantity of labour demanded by the % change in the wage rate.
When demand for labour is elastic, small wage changes can cause large changes in the quantity of labour demanded.

Question 15

Elasticity of demand for labour - factors

Answer 15

1. The demand for labour is always more elastic in the long run as firms can make plans for the future to replace labour (or take on more). In the short run, changes are more difficult to make, so demand for labour is more inelastic.
2. If labour can be substituted easily by capital (e.g. machines), then the demand for labour will be elastic.
3. If wages are a small proportion of a firm’s total costs then the demand for labour will be more inelastic - this is because a wage increase will have little impact on total costs. If wages are a large proportion of a firm’s total costs then demand for labour will be more elastic - even small wage increases will have a large impact on total costs.
4. It’s important to consider the PED of the product being made. The more price elastic the demand for the product is, the more elastic the demand for labour will be. In this situation when wages rise, firms aren’t able to pass the increase in costs (higher wages) to consumers by increasing prices. If they did their sales would decrease by a greater proportion than the increase in price - so overall their sales revenue would fall.

Question 16

Labour supply - definition

Answer 16

> Can refer to individual or occupation.
An individual’s labour supply is the total number of hours that the person is willing to work at a given wage rate. In the short run the supply of labour depends on an individual’s decision to choose between work or leisure at a given wage rate.
For an occupation, the labour supply is the number of workers willing to work in that occupation at a given wage rate.

Question 17

Labour supply - trend

Answer 17

> As the wage rate for an occupation rises, the quantity of labour supplied increases:

• Usually, individuals are prepared to work more hours as the wage rate increases. However, there’ll be a limit to how many hours an individual will be prepared to work, even if wages continue to rise.
• Although individual workers have a limit to the amount of labour they’re willing to supply, high wages will attract more workers to an occupation and increase the labour supply.
• This means that the supply curve for labour in an occupation slopes upwards.

Question 18

Influencing the supply of labour

Answer 18

> The supply of labour in the long run is determined by pecuniary (monetary) and non-pecuniary (non-monetary) factors. These factors determine the welfare gained by working, which is known as the net advantage.
The net advantage of a job can be divided into 2 types of benefits - pecuniary and non-pecuniary benefits.
When a worker enjoys their job (has high job satisfaction) they’re more willing to accept a lower wage (low pecuniary benefits) because they gain high non-pecuniary benefits from their job.
People are likely to gain low non-pecuniary benefits from unpleasant of boring jobs with low job satisfaction. Everything else being equal, workers doing these jobs will want a higher wage to compensate for the low non-pecuniary benefits they receive.

Question 19

Net advantage

Answer 19

> The welfare gained by working.
Can be divided into 2 types of benefits:
1. Pecuniary benefits: this is the welfare the worker gains from the wage they receive (or more specifically, what’s bought with it).
2. Non-pecuniary benefits: this is the welfare a worker can gain from non-wage benefits of their job. Firms offering non-pecuniary benefits can encourage workers to supply more labour at a given wage rate. So they can effectively cause the position of the labour curve to shift.

Question 20

Examples of non-pecuniary benefits

Answer 20

>Flexible working hours
>Employee discount
>A generous holiday allowance
>Convenience of job location
>Training available
>Opportunities for promotion
>Job security
>Perks of the job (e.g. a company car)
>Job satisfaction.

Question 21

Factors that can affect the supply of labour (other than wage and non-pecuniary benefits)

Answer 21

> Factors that affect the supply of labour include:
-the size of the working population in an area or the country as a whole. For example, if there’s an ageing population with a large proportion of people in retirement then there may be insufficient workers to meet demand for labour.
-the competitiveness of wages - workers may pick the job that will pay them the highest wage. Firms/industries that pay poor wages may struggle to attract enough labour.
-the publicising of job opportunities - it may be difficult to attract sufficient workers to a particular job/industry if jobs aren’t advertised effectively.
Net migration.

Question 22

What does the quantity of labour supplied depend on?

Answer 22

> The elasticity of labour supply.

Question 23

Elasticity of labour supply

Answer 23

1. The main determinant of the elasticity of labour supply is the level of skills and qualifications needed for a job.
2. The mobility of labour.

Question 24

Elasticity of labour supply - skills and qualifications

Answer 24

> Low-skilled jobs:
1. In low-skilled jobs the supply of labour tends to be elastic. This means that a small rise in the wage rate causes a proportionally larger rise in the quantity of labour supplied. This is because there’s a large pool of low-skilled workers and many may be unemployed and looking for work (i.e. very willing to work).
2. It’s also important to remember that most low-skilled jobs tend to have similar wage rates. If one low-skilled job increases its wage rate, even by a small amount, low-skilled workers from other occupations will be attracted quickly.
Skilled jobs:
1. The supply curves for skilled jobs such as doctors, pilots and lawyers tend to be inelastic, particularly in the short run. This can be explained by looking at the following example.
2. If there was a shortage of doctors in the UK, a rise in the wage rate would not be enough to increase the supply in the short run as it takes several years to train to become a doctor. Increasing wage rates would have the effect of persuading more people to choose medicine at uni (in order to become doctors), but this would only have an effect in the long term.
-(net migration of doctors from other countries into the UK could increase supply in the short run).

Question 25

Elasticity of labour supply - mobility of labour

Answer 25

> The mobility of labour is also another important factor that affects the elasticity of supply.

• if workers are occupationally mobile (they can move from one occupation to another quickly), then wage rises will cause greater increases in the supply of labour - labour supply will be more elastic.
• if workers are geographically mobile (they can move locations to where the jobs are), then wage rises will cause greater increases in the supply of labour - labour supply will also be more elastic.

Question 26

Supply of labour and net migration

Answer 26

> Net migration of labour can increase the supply of labour.
The EU supports the free movement of labour between its member states.
Net migration of workers to a state can increase the supply of labour and help alleviate shortages of skilled workers.
It can also help with the increased demand for seasonal workers, for example in agriculture and constructions.

Question 27

Wage differentials - definition

Answer 27

> Wage differentials are the differences in wages between different groups of workers, or between workers in the same occupation.

Question 28

Wage differentials - info

Answer 28

> There are many reasons why these differentials exist, for example:

1. workers that are highly skilled tend to be paid more, e.g. if they’re highly trained or have high-level qualifications (having lots of skills or experience to offer an employer is known as having high human capital).
2. Wages vary in different regions and between industries - in some locations/industries workers will earn more.
3. A trade union can influence the wage rate paid to a group of workers.

Question 29

Wages - what makes them higher

Answer 29

> Wages will probably be higher if demand is high and inelastic, and supply is low and inelastic.
Wages tend to be low when demand is low and elastic, and supply is high and elastic.

Question 30

Wage differences - lawyer

Answer 30

> Lawyers:

• lawyers are paid high wages.
• demand for lawyers is high because they have a high MRP (in other words they’re able to make lots of revenue 1900 for their firm.
• demand is also inelastic because lawyers aren’t easily replaced, few people have the right skills and experience.
• supply will be low, especially in the short run, as it takes a long time to train to become a lawyer, and not everyone has the abilities to become one.

Question 31

Wage differences - office cleaners

Answer 31

> Office cleaners:

• office cleaners are paid fairly low wages.
• demand for cleaners is relatively low compared to the supply. The MRP for cleaners is low - this means demand for them is low as cleaners don’t contribute greatly to the revenue of their employer.
• supply will also be high and elastic as there are no long training periods involved. Many people can do the job as no specific skills or qualifications are needed.

Question 32

What is meant by real wages

Answer 32

> Take inflation into account and represent the actual purchasing power of people’s wages.

Question 33

What are wages made up of?

Answer 33

1. Transfer earning = the minimum payment that’s required to keep labour in its current occupation - i.e. the minimum pay that will stop a worker from switching to their next best paid job.
   >Workers are often paid in excess of their earnings - the excess above transfer earnings is called economic rent.
2. Economic rent.
   >The more elastic the supply curve, the smaller the economic rent.

Question 34

Perfectly competitive labour market

Answer 34

> In a perfectly competitive labour market firms are price takers.
The diagrams show the equilibrium wage rate and level of employment for a perfectly competitive labour market and an individual firm within it.
The ruling market wage is determined by the forces of demand and supply.
Individual firms have no power to influence the wage level so they’re forced to accept the ruling market wage - price takers.
The ruling market wage is also the individual firm’s labour supply curve. This curve is perfectly elastic because the wage rate is set by the market and the firm can hire as many workers as it wants at this wage rate.
Theoretical model.

Question 35

Monopsony - definition

Answer 35

> A monopsony means there’s only one buyer in a market.

>In a monopsony labour market there’s a single employer, so workers have only one choice of employer to work for.

Question 36

Monopsony labour market - info

Answer 36

> A monopsony labour market is an example of an imperfect market.
A monopsonist employer can pay a wage that’s less than a worker’s MRP and less than what would have been paid in a perfectly competitive labour market (wages are relatively lower than in perfect competition).
Monopsonist employers can also drive down the level of employment below the level that would exist in a perfectly competitive labour market.

Question 37

Monopsony labour market - diagram explanation

Answer 37

> The wages and employment levels in a monopsony labour market can be shown using the diagram below:

1. The MCL curve is above the ACL curve so the cost of employing one more worker is more than the average cost. MCL is above ACL because each time an extra worker is hired, not only does the firm have to pay that worker a higher wage to attract them, but the firm also has to increase existing workers’ wages to the same level.
2. The ACL curve shows the number of workers that are prepared to work for the monopsonist at different wage levels - so the ACL is also the supply curve.
3. Firms will hire the number of workers that maximise their profits (where MRPL = MCL).
4. Unlike in a perfectly competitive market this wage is lower than the MRP of labour. The monopsonist could pay a higher wager, but it doesn’t need to as the workers will work for that wage. This means that monopsonists are price makers.

Question 38

Trade union - definition

Answer 38

> A trade union is an organisation formed to represent the interests of a group of workers.
Examples include the NUT and PFA.

Question 39

Trade unions - purpose

Answer 39

> One of the main purposes of a trade union is to bargain with employers and get the best outcome for its members.
E.g. they can bargain for improved pay, better working conditions and job security.
Members of a TU have increased bargaining power compared to individual workers.
When a TU negotiates with an employer this is called collective bargaining.
Productivity bargains can be made, which is where unions agree to specific changes that’ll increase productivity in return for higher wages or other benefits for its members. E.g. performance-related pay agreements may be negotiated.
TU can also have a role in making sure workers are safe at work by making sure any laws about working conditions are adhered to. E.g., they will ensure that workers have sufficient breaks and their place of work meets health and safety requirements.
TUs can also help protect their members from discrimination.

Question 40

Collective bargaining

Answer 40

> When a TU negotiates with an employer.
Collective bargaining can be done on a national level (e.g. to secure a pay rise for all workers in a particular industry) or at plant level (e.g. negotiating improved working conditions for employees at an individual workplace).

Question 41

Productivity bargains

Answer 41

> Where unions agree to specific changes that’ll increase productivity in return for higher wages or other benefits for its members.
E.g. performance-related pay agreements may be negotiated.
This is when workers get pay increases that are linked to the quality of their work and productivity.

Question 42

Trade unions - UK

Answer 42

> Trade union membership in the UK was at its peak in the late 1970s.
TUs are most powerful when they have huge membership - the more members a union has, the more influence it can have.
At their peak in 1979, the TUs in the UK were very powerful and had around 13 million workers.
During the 1980s, when Margaret Thatcher was the Prime Minister, the Conservative government acted to reduce the power of TUs - e.g. by making it more difficult for TUs to go on striker. The government at the time saw weakening the trade unions as a supply-side policy that would help make the UK industry more flexible and competitive.
In addition, there was a big decline in the large manufacturing industries (e.g. shipbuilding) in the 1980s and 90s, which had huge TU membership. This de-industrialisation meant that there was a shift in employment towards jobs in the service sector where unions tend not to exist - so union membership fell sharply.
Modern trends in the economy have also reduced union membership further. Workers on flexible contracts and part-time workers (both of which are becoming more common in the economy) are less likely to join a union.
Since the mid 1990s TU membership has remained fairly stable at around 7 million members.

Question 43

TU wage negotiations

Answer 43

> Trade union wage negotiations may result in unemployment.
TUs can cause labour market failure by forcing wages up to a level higher than the market equilibrium wage - causing a surplus of labour (i.e. unemployment). Some of a firm’s income is redistributed to the workers and its costs of production increase.

Question 44

TU wage negotiations - diagram explanation - perfectly competitive labour market

Answer 44

> Without trade union action firms would pay the equilibrium wage rate We and the level of employment would be Le.
When the TU forces the wage rate up to Wt this means the firms can’t employ workers for less than this wage. This results in a kinked supply curve. At Wt the quantity of labour employed falls to L1.
At this higher wage rate there’s an oversupply of workers - there’s insufficient demand for the number of workers willing to work, so there’s unemployment (L1 to L2) and this is labour market failure.
The level of unemployment caused by the wage increase depends on the elasticity of the labour demand curve.

Question 45

TU - pay rises

Answer 45

> TUs can help to increase the wages of their members without causing unemployment. To do this the productivity of TU members must increase - this would increase demand for workers from firms and help prevent the situation of an excess supply of labour.
TUs can help persuade their members to agree to more efficient working practices which increase worker productivity. This is good for firms as a more productive workforce may increase their profits. Workers will benefit from higher wages and TU membership won’t be reduced by unemployment.
When workers become more productive a firm’s MRP curve shifts to the right. Firms can afford to pay wages that are equal to the worker’s MRP, so if a trade union can help raise the MRP of workers, then an increased wage can be justified.

Question 46

TUs in a monopsonistic labour market - info

Answer 46

> A monopsonistic employer pays workers a wage that’s lower than their MRP. If a TU was involved it could increase the wage rate whilst maintaining the same level of employment, or even increasing it.
When a TU enters a monopsonistic labour market this is an example of a bilateral monopoly. This is when there’s a single buyer and a single seller - so in this case there’s a single buyer of labour (the monopsonist) and a single seller (the TU).
The presence of a TU in the market means that the wage rate and level of employment have been brought closer to the levels that they’d be at in a free market. The TU has had a positive impact on the labour market.

Question 47

TUs in a monopsonistic labour market - diagram

Answer 47

> W1 is the wage that the monopsonist would have paid its workers without a union.
The presence of a union may increase wages to W2. In doing this it will change the shape of the supply/ACL curve, and that’ll then change the shape of the MCL curve.
The profit maximising level of workers is still where the MCL curve crosses the MRP curve. This is now at point U, giving a new increased level of employment of L2.
The union has managed to increase wages from W1 to W2, and increase employment from L1 to L2.

Question 48

Trade unions and market failure

Answer 48

> Trade unions are less likely to cause market failure today.
Government legislation has reduced the power of TUs. They’re less likely to cause market failure (e.g. by increasing unemployment) because they have less influence.
TUs have made big changes in the workplace though. In return for higher pay and better working conditions firms have benefitted from a more productive and flexible workforce. Don’t forget that the increased productivity of workers may drive an increased demand for workers and lead to a reduction in the level of employment.

Question 49

Wage discrimination

Answer 49

> Wage discrimination takes place when employers with monopsony power pay different wage rates based on different workers’ willingness to supply labour.
Wage discrimination is common in professions where employees negotiate their own pay and conditions - some people will be able to negotiate a higher wage than others for the same job.
In general, there are some categories of workers who are more likely to be prepared to work for lower wages, e.g. young workers, part-time workers, some immigrants.

Question 50

Wage discrimination - what workers are more likely to be prepared to worker for lower wages?

Answer 50

> E.g:

1. Young workers may be more interested in gaining experience than earning a high wage.
2. Part-time workers may be willing to work for lower wages if they’re not the main wage earner in their household.
3. Some immigrants will accept lower wages if they’re higher than the wages they could earn in their country of origin.

Question 51

Wage discrimination - diagram explanation

Answer 51

> Without wage discrimination all workers in a competitive market are paid We - the market equilibrium price.
The total wage cost for firms is OWeALe.
When employers start to pay the minimum each worker is prepared to work for (i.e. their transfer earnings), the total wage cost is reduced to OBALe.
Employers gain while workers lose out.

Question 52

Wage discrimination - advantages

Answer 52

1. WORKERS: as employers’ wage costs will be reduced, it can increase demand for labour, providing more jobs.
2. EMPLOYERS: reduces the cost of wages, which can lead to higher profits.
3. ECONOMY: could increase employment levels through increased demand for labour.

Question 53

Wage discrimination - disadvantages

Answer 53

1. WORKERS: can lead to the exploitation of vulnerable workers who could be forced to accept low wages. Could force wages down for all workers in a market.
2. EMPLOYERS: can require additional administration (e.g. it takes extra paperwork to pay workers in the same job different wages). Can lead to industrial unrest if workers know about the differences in wages.
3. ECONOMY: could lead to increases in inequality, so benefits may be required to ‘top up’ low wages.

Question 54

Labour market discrimination - definition

Answer 54

> Labour market discrimination is when a specific group of workers is treated differently to other workers in the same job.

Question 55

Labour market discrimination - info

Answer 55

> Workers can be discriminated against because of their race, gender, sexuality, religion, disability, age, etc.
2 types e.g. racial discrimination, gender pay gap.
In the UK this sort of discrimination is against the law. The Equality Act of 2010 replaced all previous anti-discrimination laws and made discrimination illegal in the UK.
Discrimination can be one cause of the unequal distribution of wealth and income and can lead to a misallocation of resources, reduced efficiency and increased costs.
Labour market discrimination is a cause of labour market failure.

Question 56

Labour market discrimination - racial discrimination

Answer 56

> Racial discrimination can occur when employers only want to work with and employ people from a particular ethnic background.
They’re prepared to pay a price for this - the loss in productivity from not employing a worker that’s perhaps most suited for the job.

Question 57

Labour market discrimination - gender pay gap

Answer 57

> The gender pay gap is where average pay rates are lower for women than for men.
Part of this pay gap is thought to be due to discrimination by employers that are prepared to pay male employees more than female employees for doing the same job.

Question 58

Consequences for the workers who suffer discrimination

Answer 58

> Workers who suffer from discrimination are generally forced to accept lower wages.
Discrimination can also mean that some workers find it more difficult to find a job. They may resort to accepting a lower-paid job that they’re overqualified for. This is unfair to them and is also a misallocation of resources.
In addition, workers who are the victims of discrimination may be put off from going for promotions, which can leave them in low-paying jobs with limited career prospects.

Question 59

Consequences for employers who discriminate

Answer 59

> Employers who discriminate can incur increased costs.
Employers who are influenced by their own prejudices believe that the MRP of the discriminated group of workers is lower than it really is. This means that they demand fewer of these workers.
When demand falls the MRP/demand curve shifts left, which means that wages go down for the discriminated group.
By discriminating like this, firms have fewer workers to choose from. By ignoring workers who may have been more suited to a job and more efficient, they increase their costs of production. Increased costs may lead to increased prices.
Employers that don’t discriminate have access to a greater supply of labour:
-As the demand for discriminated workers is reduced in firms that discriminate, there are more workers available to supply their labour to firms that don’t discriminate.
-The supply curve for these firms shifts right and the wage rate decreases. This means discriminated workers could lose out again.

Question 60

Labour market discrimination - diagram

Answer 60

> For discriminated workers, MRP is lower than the level in the free market and this results in a lower wage rate (Wd).
For favoured workers employers believe their MRP to be greater than it really is. This shifts the MRP curve to the right. increasing the wage rate for these workers (Wf).

Question 61

Consequences of discrimination for the government and the economy

Answer 61

> The government may need to increase welfare payments to support discriminated workers.
Discriminated workers working for unfairly low wages will also reduce the government’s tax revenues, which would be higher if these workers were paid fairly.
If discriminated workers aren’t in a job that’s well suited to them (e.g. if they’re overqualified), their levels of productivity can fall. When output and efficiency (both allocative and productive) fall, a country may lose international competitiveness. This could negatively affect the country’s balance of payments, reducing the sale of exports, and this in turn may cause unemployment.

Question 62

Economic inactivity

Answer 62

> Not all economic inactivity as labour market failure.
People are classed as economically inactive if they’re not working and also not looking for work.
Economically inactive people are considered by economists as a waste of a scarce resource (labour).
It can be good for some people to be economically inactive. E.g:
-people that are looking after family members may actually save the government money. For example, the benefits paid to people caring for an elderly relative may be less expensive than the cost of providing a professional carer.
-those in full-time education are also going to add value to the economy in the future when they will increase the quality of the labour force.
However, people who are inactive due to long-term illness or disability, but are still able to work, represent market failure. Labour is a scarce resource and these people could still add to an economy’s output if work can be found for them.
Discouraged workers who have tried to find work but have given up are also a waste of scarce labour. They are also more likely to suffer from depression, which can add to health care costs.

Question 63

Examples of reasons for economic inactivity

Answer 63

1. They care for the sick, elderly or young people (unpaid).
2. They’re in full-time education.
3. They have a long-term illness or disability.
   - They’re choosing not to find a job or have given up.

Question 64

Labour markets and imperfect information

Answer 64

> Imperfect information is another source of labour market failure.
Perfect information would exist if workers knew everything about every job and employer knew everything about every potential worker. Using this information workers and employers would find their ideal job and employees.
Of course the real world isn’t perfect.
Imperfect information increases frictional unemployment. When people are between jobs they need to spend time researching to find the right job. If they had the benefit of perfect information their task would be simpler.

Question 65

Imperfect information in the labour markets - examples

Answer 65

> Many workers end up in jobs that aren’t the best fit for them (e.g. they don’t utilise their skills fully and keep them motivated) and/ore don’t pay enough. Or, they might end up with no job at all.
Employers end up with workers that aren’t as productive as they could be, which increases their costs of production and makes their goods less competitive.

Question 66

Skill shortages

Answer 66

> A shortage of anything drives up its price. Therefore shortages of skilled labour drive up the wage costs for firms, which in turn increases their costs of production.
A shortage also means that firms may be forced to employ workers who don’t have the desired level of qualification/experience for the job, this will reduce productivity and quality levels.
Training can increase employees skills and make them more productive, but employers can be reluctant to provide it as they often worry about other firms poaching their newly-trained employees without incurring the costs of this training.
Encouraging the immigration of workers with certain skills is one way of tackling skills shortages.

Question 67

Unemployment

Answer 67

> Unemployment exists when labour supply is greater than labour demand.
Unemployed workers are a waste of scarce resources - unemployment means an economy isn’t making use of all its resources effectively. However, in an economy there’s always some level of unemployment, and unemployment actually helps keep wages down.
Unemployment only becomes a serious market failure if it’s at a high level and persists for a long period of time.
The replacement ratio is the ratio of how much a person would earn if they unemployed to how much they’d earn if they were employed.
If the level of unemployment benefit is too high, i.e. the replacement ratio is too high, this can cause unemployment, This means that people can be better off by choosing not to work (voluntary unemployment) and claiming unemployment benefit rather than working for a low wage - this is called the unemployment trap.

Question 68

How can unemployment keep wages down?

Answer 68

> If everyone in an economy had a job and an employer wanted to hire a worker, they would have to offer them a higher wage than their current job.
A firm could offer them higher non-pecuniary benefits instead, but this would increase the firm’s costs.

Question 69

Replacement ratio - definition

Answer 69

> The ratio of how much a person would earn if they were unemployed to how much they’d earn if they were employed.

Question 70

Unemployment trap

Answer 70

> When people can be better off by choosing not to work (voluntary unemployment) and claiming unemployment benefit rather than working for a low wage.

Question 71

Geographical immobility of labour - definition

Answer 71

> Geographical immobility of labour is when workers aren’t able to (or are reluctant to) move to different locations to the best jobs for themselves.
When this happens they end up either unemployed or in jobs that aren’t suited to them - so there’s a misallocation of resources and market failure occurs.

Question 72

Geographical immobility of labour - info

Answer 72

> When this happens they end up either unemployed or in jobs that aren’t suited to them - so there’s a misallocation of resources and market failure occurs.
There are a number of reasons behind geographical immobility. They include:
-people make friend and have family that they don’t want to move away from.
-it’s expensive to move house. Not only does it cost to buy a house, but is costs to sell your house too.
Geographical immobility can lead to labour shortages in one area and labour surpluses in another. This can then be followed by regional wage differences - high where shortage and low where surplus.

Question 73

Occupational immobility - definition

Answer 73

> Occupational immobility is when workers aren’t able to move from one occupation to another with ease.

Question 74

Occupational immobility - info

Answer 74

> In an ideal world workers would be able to transfer their skills from one job to another or retrain with ease, but in reality this often isn’t the case. When workers have specific skills they aren’t always able to use them in another job.
Occupational immobility can be affected by age. Younger workers are more likely to retrain, but older workers may lack the confidence or motivation to do so.
Some occupations also require high-level qualification and particular personality traits. E.g. not everyone is cut out for the years of academic study required to become a vet and not everyone can cope with the sight of blood.
Occupational immobility can contribute to unemployment, and may mean skills shortages are harder to fix. E.g. if the labour of skilled workers in a particular occupation started to be replaced by machines, those workers may not be able to easily transfer their skills to other occupations and many could become unemployed.

Question 75

Government intervention in the labour market

Answer 75

> Governments intervene to correct labour market failure because it causes several problems, such as unemployment or very low wages.
There are many ways governments can intervene in the labour market. One of the main ways is by influencing wages.

Question 76

The National Minimum Wage

Answer 76

> The NMW sets a legal minimum hourly rate of pay for different age groups.
A NMW was first introduced by the UK government in 1999 to stop firms setting wages so low that their employees couldn’t afford a decent standard of living. It aims to prevent the exploitation of workers due to the payment of unfairly low wages.
By increasing the pay of the poorest workers a NMW leads to a more equitable distribution of income.
A NMW helps to encourage people to work. For example, having a minimum wage might encourage workers to get a job instead of claiming benefits, as it improves the replacement ratio.
In addition, increasing the number of people in work increases the participation rate, which is good for the economy and increases the labour supply.
In 2016, the UK gov introduced a higher minimum wage for workers aged 25 and over called the National Living Wage (NLW).

Question 77

NMW - unemployment

Answer 77

> Using supply and demand diagrams it could be argued that increasing the wage rate would lead to a contraction in demand for labour.
Introducing a min wage that’s higher than an industries equilibrium wage (We) would raise the wage rate from We to NMW. This would cause labour supply to increase from Qe to Q2 and demand to fal from Qe to Q1.
This could cause unemployment of Q1 to Q2 because there’s an excess supply of labour.
Introducing a min wage when the demand and supply of labour is fairly elastic results in greater unemployment than when the demand and supply of labour is more inelastic - the difference between Q1 and Q2 is larger.
Unemployment caused by the introduction of NMW would be an example of government failure. However, there’s evidence to suggest that having a NMW hasn’t caused a significant negative impact on the level of employment in the UK.
A NMW can be used to help tackle inequality and poverty - there are there ways of doing this too.

Question 78

NMW - advantages

Answer 78

> Introducing a NMW may help those on very low incomes and reduce the level of poverty in a country.
A NMW may also boost the morale of workers as they’ll receive better wages. Happier workers tend to be more productive, so output may increase as a result.
A NMW means there’s greater reward for doing a job that pays the NMW. It gives people more incentive to get a job rather than be unemployed.
The government’s tax revenue is likely to be greater if a NMW is introduced.
How beneficial a NMW is may depend on level it’s set at.

Question 79

NMW - disadvantages

Answer 79

> A NMW can increase wage costs for firms. This might mean they have to cut jobs, resulting in increased unemployment.
A NMW could decrease the competitiveness of UK firms compared to firms in other countries that have lower wage costs.
UK firms may have to pass on increased wage costs to consumers by increasing their prices, and this could contribute to inflation.
There are doubts about whether introducing a NMW really decreases poverty. This is because many of the poorest members of society, such as the elderly and disabled, aren’t in work (so aren’t able to benefit from an increased wage rate).

Question 80

Living wage

Answer 80

> The living wage is an hourly wage independently worked out by the Living Wage Foundation.
It’s a wage that’ll cover an individual’s basic cost of living in the UK and it’s higher than the current NMW (and NLW).
There are 2 different rates - one for London and one for the rest of the UK.
It’s not compulsory for employers to pay the living wage, but the gov. encourages it.
Over 1000 UK employers, such as Barclays and Google, have voluntarily committed to pay their employees at, or above, the ‘living wage’.

Question 81

Maximum wage general

Answer 81

> A government can set a maximum wage.
A maximum wage limits a worker’s wage rate.
To be effective it must be set below the market equilibrium wage rate, which reduces wages in that market and increases demand for labour.

Question 82

Maximum wage - benefits

Answer 82

> Rises in wages above increases in productivity can cause inflation, so setting a maximum wage can limit how much prices can rise and help to prevent the wage-price spiral.
A maximum wage could limit the level of inequality in a country (especially if there’s also a minimum wage.)
A maximum wage could reduce a firm’s labour cost and increase their willingness to hire more workers.

Question 83

Maximum wage -disadvantages

Answer 83

> Some believe it’s unfair to not reward greater effort or ability with higher income.
The possibility of higher pay and pay increases provides motivation to work harder.
If only some countries had a maximum wage, people who could earn higher wages in other countries might move abroad.
Similarly if one industry had a maximum wage and another didn’t, then people would train to work in the industry without a maximum wage.

Question 84

Labour force flexibility - intro

Answer 84

> Government intervention to improve the flexibility of the labour force will help to reduce labour market immobility.
A flexible labour force is one where workers can transfer between activities quickly in response to changes in the economy.
Labour force flexibility is good for the economy.

Question 85

Labour force flexibility - government intervention

Answer 85

> To increase the flexibility of workers, governments can promote or subsidise training and education schemes that help workers gain skills and knowledge that are attractive to employers. They can also provide training directly, e.g. skills training to the unemployed.
Recently, there have been changes to the UK education system, such as an increase in apprenticeships and vocational education, and restructuring of the exam system. These schemes should improve labour market flexibility by helping young people to develop skills they need to get a job. It takes time for the effects of these changes to be seen, so it’ll be a while before anyone can assess whether they’ve been successful or not.
The UK government has also increased flexibility by reducing the power of trade unions, which can cause inflexibility in the labour market.

Question 86

Labour force flexibility - employers

Answer 86

> For employers, a flexible workforce is one that can be hired and fired easily.
Laws that make it easy to hire and fire workers encourage employers to take on more workers.
This is because firms know they can change the size of their workforce quickly (and therefore cheaply) in response to changes in the market.
Different types of contracts (such as short-term and zero-hour) can also make workers more flexible for employers.

Question 87

Labour force flexibility - contracts

Answer 87

> Short-term contracts allow firms to hire a worker for a certain length of time - if the firm still needs the worker towards the end of the contract they can extend the contract for a longer period (or not) to suit their needs.
Zero-hour contracts are where firms can hire workers without guaranteeing them a definite number of hours of work per week - the employer can offer these employees a number of hours that suits the firms needs.
The cost of employing staff on short-term and zero-hour contracts is less than full-time contracts (e.g. no sick pay if on zero-hour one).
Zero-hour contracts are popular with governments because they reduce unemployment figures, but they can cause problems - workers on these contracts don’t have a guaranteed income, so it’s hard for them to manage their finances.

Question 88

Zero-hour contracts - definition

Answer 88

> Zero-hour contracts are where firms can hire workers without guaranteeing them a definite number of hours of work per week - the employer can offer these employees a number of hours that suits the firms needs.

Question 89

Wage flexibility - definition

Answer 89

> Wage flexibility refers to the ability of real wages to change in response to changes in demand for and supply of labour.

Question 90

Wage flexibility - info

Answer 90

> Performance-related pay and regional pay awards are examples of uses of flexible wages.
Wage flexibility can be an important feature during a recession - wage cuts and pay freezes can be accepted by workers as an alternative to losing jobs.
Governments can improve wage flexibility by scrapping the NMW and limiting TU power.
Wage flexibility is an important characteristic of a flexible labour force.

Question 91

Pensions and participation rates - key issue

Answer 91

> As more people are living longer, governments may need to change the way that state pensions work to ensure that they can continue to afford to pay pensions to an increasing number of people for an increasingly long time.

Question 92

Pensions and participation rates - Resolutions

Answer 92

> There are a number of methods the government can use to increase the number of people working for longer:

1. Raising the state pension age - this will mean that on average pensioners will have fewer years claiming the state pension. In the UK the state pension age rose to 66 in 2020 and is said to increase.
2. Increasing the contributions necessary to qualify for a state pension. In the UK to receive the state pension you need to have paid NI contributions for a certain number of years. Pension reforms may see the no. of years of necessary contributions increase.
3. Decreasing the amount paid out. This means people would need to do more planning and saving for retirement while they’re working, so they have enough money to live when they retire. This is why the UK made it compulsory fir employers to enrol workers on a workplace pension so that retirees have extra income in addition to the amount they’ll receive from their state pension.

Question 93

Pension Legislation changes

Answer 93

> In April 2015 there was a big change in Pension Legislation:

1. Approx. 18 million people aged 55 and over were given more flexibility in how they can use and withdraw their private pension savings.
2. Changes were made to pension tax rules and certain parts of pension legislation.
3. E.g. people now have the option to withdraw their entire pension fund and use or invest it as they choose, instead of having to accept a regular payment.
4. This change aims to increase choice. However, it’s likely to also lead to an increase in spending. This could boost the economy because more spending may increase demand in an economy, creating economic growth and leading to more employment and higher wages. On the other hand, this growth might only be short term, and less spending later on could restrict future growth. It may also mean there’s a risk that pensioners run out of money later in retirement so rely more on the state.

Question 94

Laws - workforce size and participation rates

Answer 94

> The pension age is planned to increase to 68 by 2046 - this will increase the size of the workforce, and may raise the participation rate.
From 2015, people must remain in some form of training or education until they’re 18. This will cause a reduction in the size of the workforce, but the long-term benefits of a better educated, better paid, more productive and more flexible workforce are likely to outweigh this drawback.
Childcare can be expensive and its cost can contribute to situations where working means people are worse off than if they don’t work. So increasing state provision of childcare or childcare subsidies is likely to increase participation rates especially of women.
Incentives to workers and firms can also increase participation rates.

Question 95

What else can affect the level of employment and wage rates?

Answer 95

> Governments can increase the incentive to work to address the market failure that’s caused by economic inactivity in the labour force.
They can do that by lowering income taxes and benefit payments.

Question 96

Income tax

Answer 96

> Lowering marginal tax rates means workers get to keep more of their earnings. This acts as an incentive to work more and can increase the labour supply in the economy.
At the moment, workers in the UK have a tax-free allowance - this means they pay no tax on the 1st part of their earnings (£11,000ish).
Recent government policy has seen the size of the tax free allowance increase.
This increases people’s incentive to work and increases equity.

Question 97

Benefits

Answer 97

> Lowering benefits increase the gap between income earned in work and income without work - i.e. it reduces the replacement ration.
This gives people a greater incentive to work, increasing the participation rate and labour supply.
Lowering benefits will reduce the effect of the unemployment trap and cut voluntary unemployment.
Recent changes in benefit legislation include:
-A benefits cap for working-age people claiming certain benefits - the aim is to prevent people from being better off not working than working.
-The introduction of Universal Credit from 2013 - a number of benefits, such as income-based Jobseeker’s Allowance, are combined into one benefit. It’s paid to people looking for work and those on low-incomes. The aims of Universal Credit include making it easier for people to move into work and reducing the number of working people in poverty.

Question 98

Legislation and regulation in labour markets

Answer 98

> The UK and EU implement legislation and regulation in labour markets for a number of reasons, e.g. stop unsafe practices and prevent exploitation of employees.
Legislation involves putting specific laws in place, e.g. the UK has legislation on flexible working hours - everyone now has the right to request flexible working hours.
Regulations are rules, which are often put in place so that UK or EU legislation is met.
Many businesses complain that current levels of EU and UK legislation and regulation, inc. those in the labour market, are too high and impact on jobs and growth - e.g. rules on maternity and paternity leave. However, the European Commission works to reduce the burden of regulations for small businesses.

Question 99

Migration

Answer 99

> Migrant workers that are young, skilled and flexible will generally have a positive effect on the economy - these workers will earn and spend money, increasing AD.
Can fill skills gaps. E.g. NHS.
This means sometimes governments will implement policies encouraging immigration. E.g. Canada’s Federal Skilled Worker Program allows foreign workers from 347 different occupations to apply for permanent residency if they meet certain criteria.
Free movement of workers - EU.
In the UK, there has been a net inward migration of working-age people in recent years helping them to cope with ageing population.
Migrant workers increase supply of labour so it’s possible that migrant workers entering a labour market depress the market wage rate. This is thought to be especially true of low-skilled workers, such as farm labourers.

Question 100

Immigration

Answer 100

> In recent years, UK gov. has tried to reduce immigration, particularly of low-skilled workers. This is because the high level of migration to the UK is believed to be unsustainable. The gov. is more supportive of skilled migrants as they can contribute more to the economy.
The UK has made some changes to its policies to limit immigration - for instance:
-It’s placed a cap on the no. of skilled worker visas available to non-EU workers.
-Restrictions on certain welfare benefits have been brought in to make the UK less attractive to migrants, e.g. EU migrants can’t claim benefits during their first 3 months in the UK.