Interaction of labour

Question 1

wage differentials

Answer 1

the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or locations

Question 2

monopsony

Answer 2

a market in which there is single buyer of a good, service or factor of production

Question 3

trade union

Answer 3

an organisation of workers that negotiates with employers on behalf of its members

Question 4

bilateral monopoly

Answer 4

a situation in which a monopoly seller of labour (a trade union) faces a monopsony buyer of labour (an employer)

Question 5

market equilibrium wage rate determined by

Answer 5

Within a market for labour, the market equilibrium wage rate is determined by the position that the supply curve of labour intersects with the demand curve for labour

Question 6

Wage differentials can exist because of:

Answer 6

Compensation – from risk taking or unsocial hours
High human capital – significant training, and many years of education, is needed to do the job
Different skill levels – the market for skilled work is more inelastic with respect to supply than the market for unskilled work
Differences in productivity – labour that generates more revenue is awarded higher pay as labour has a derived demand
Trade unions – collective bargaining offsets employer power and raises wage levels
Discrimination – it is illegal for employers to discriminate, though some discriminate by gender or race

Question 7

Why do trade unions exists

Answer 7

exist to negotiate for their members on pay, working conditions and job security

Trade unions can restrict labour supply with barriers to entry which:
Reduces firms’ flexibility to adapt to changing market conditions
Can lead to wages above the market equilibrium (can also be by negotiation) – reducing employment

Remaining workers receive higher pay at the expense of workers who are prevented from entering the industry
Trade unions can negotiate for improved working conditions or job security in exchange for higher productivity

Question 8

trade union analysis

Answer 8

A trade union may negotiate higher pay for workers with wages WTU, such that firms are unable to hire workers below this rate of pay. This leads to a reduction in demand for labour from L0 to LD. The preceding diagram shows wages increasing from W0to WTU . This wage price signal leads to more workers entering the market, and supply of labour increases from L0 to LS. The disequilibrium, LS-LD, leads to a surplus of labour, which is unemployment, and allocative inefficiency.

Question 9

trade union percentages

Answer 9

Only 23.5% of economically active people in the UK are trade union members, though more benefit from collective bargaining; the 50% of education workers unionised are represented by trade unions, but the other 50% also benefit from improvements in pay and conditions negotiated by trade unions.

Question 10

trade unions and government

Answer 10

The government has reduced trade union power to increase labour flexibility. By reducing trade unions’ ability to strike reduces their collective bargaining power, leading to wages being less ‘sticky downwards’. Because workers are more likely to receive a market equilibrium pay award, and less likely to be unemployed due to a disequilibrium in the wage level, the labour market is more flexible.

Question 11

evaluation of trade union activity

Answer 11

Depends on militancy of trade union
The more willing a trade union is to withhold the labour of its members, the more impact trade union activity has on a labour market.

Question 12

evaluation of government policies to increase labour flexibility

Answer 12

Depends on reduction in trade union power
The ability of trade unions to strike has fallen, leading to a record low number of working days lost in 2017 (276 000), down from a peak of nearly 30 million in 1979. But if trade unions still have other disruptive methods available, such as working to rule, then productivity can still be threatened, and the labour market still be somewhat inflexible.

Question 13

example of monopsony single buyer of labour

Answer 13

NHS - doctors and nurses
Government - teachers, police

Question 13

analysis of monopsony labour market

Answer 13

In a perfectly competitive market with a monopsony employer, workers receive lower wages and fewer are employed.
Usually, we assume that firms in the labour market face perfect competition, so must accept the market wage. Because there is a single buyer of labour, the monopsony views the supply curve of labour as the average cost of labour as it shows the wage rate needed to attract labour. Therefore, the marginal cost of labour is the cost of hiring an extra worker and raising wages for all other workers to that level. To profit maximise, the monopsonist hires labour up to the point where MCL=MRPL, L0, and pays just W0 based on the supply curve for labour S0. The monopsony employs less labour than under perfect competition, so employment is below productive efficiency. Also, firms pay less than the marginal cost of labour which is allocatively inefficient.

Question 14

Evaluation of monopsony employer

Answer 14

Depends on objective
If profit maximisation is the objective, then L0 will be the targeted level of employment, but if the monopsony has an objective that requires a higher output, such as sales maximisation, then the firm will employ more than quantity L0.
Depends on elasticity
If WED for labour is inelastic, the extent to which wages are lower, and employment is lower, are smaller.
If WES is relatively inelastic (workers cannot find employment in other industries), the monopsonist has greater power to offer lower wages compared to a more competitive equilibrium wage rate.

Question 15

Example of bilateral monopoly

Answer 15

Bilateral monopoly
Monopoly trade union seller of labour
BMA as trade union for doctors, and sole contract negotiator for doctors

Monopsony single buyer of labour
NHS - doctors

Question 16

analysis bilateral monopoly labour market

Answer 16

The preceding diagram shows a bilateral monopoly; the monopoly trade union seller of labour faces a firm that is a monopsony buyer of labour. If unhindered by the trade union, the monopsony firm offers wage WMONOPS and uses LMONOPS labour assuming a profit maximising objective. But the trade union is likely to negotiate a higher wage rate above WMONOPS, leading to the firm taking on more labour above LMONOPS as described by the supply curve S0=ACL. The equilibrium moves towards the perfectly competitive level at wage WPC and quantity LPC, though we do not know the extent to which the equilibrium moves and where the final resting place lies – only that it is between LMONOPS and LPC, and WMONOPS and WPC

Question 17

evaluation of bilateral monopoly

Answer 17

Depends on relative strength of the two groups
The more financially stable the monopsonist, the greater their bargaining power as the firm could ‘weather’ strikes.
The more willing to strike (militant) the trade union, the greater their bargaining power

Elasticity of demand
WED for labour; WED is more elastic when a firm can easily substitute labour for capital, so the trade union would be less able to negotiate higher wages
PED for the good produced; if PED is inelastic, higher costs can be passed on and the trade union can negotiate higher wages

Question 18

Judgement - impact of a power imbalance in a bilateral monopoly

Answer 18

Trade union power has been significantly curtailed over recent decades, reducing the threat of strike action from employees. This favours the firm, the monopsonist, over the trade union, the monopolist, in their negotiations. In response to this power imbalance, rather than negotiate for higher wages, a trade union may therefore seek to improve working conditions for their members.

Question 19

occupational mobility

Answer 19

the ability of workers to move between jobs, which depends on the extent to which their skills are transferable and the cost of retraining

Question 19

geographic mobility

Answer 19

the ability of workers to move between locations for work depends on their willingness to uproot family and education ties, and their ability to pay to move

Question 20

analysis occupational mobility

Answer 20

Apprenticeships act as paid retraining, reducing opportunity cost of workers moving from one industry to another. Workers receive pay while training instead of paying to retrain, making it more affordable for workers that have families to support and mortgages to pay.

The apprenticeship levy tries to overcome the free rider problem (firms recruiting apprentices trained by another firm); when large employers take on an apprentice they must also pay a levy which, when they later employ that apprentice, only they can reclaim (along with an extra subsidy).

Question 21

analysis geographical mobility

Answer 21

Differences in house prices may make it unaffordable for workers to move between regions of the UK, especially with the high rate of owner-occupied homes (as opposed to rented homes), and long waiting lists for council houses.

Question 22

analysis regional policy

Answer 22

Differences in average incomes can be mitigated with government intervention by locating government departments in regions to create jobs, or devolving powers and money to regions for the creation of transport infrastructure.

Question 23

technology analysis

Answer 23

Investment in new technology increases productivity and marginal revenue product of workers if labour markets are sufficiently flexible, and can be retrained fast enough, and at large enough scale, to take advantage of new opportunities. Economies of scale can be gained if workers specialise.

Question 24

analysis contracts and legislation

Answer 24

Firms must give notice before firing workers and pay redundancy, increasing the potential costs of hiring new workers, reducing employment in the short run. Zero-hour contracts mean workers have no guaranteed working hours, so actual hours worked vary from week to week. As redundancy pay is based on contracted hours, this reduces the cost of both hiring, and firing, workers.

Question 25

evaluation occupational mobility

Answer 25

Depends on cause of change
The impact of changes in occupational mobility depends on the cause of the changes; if improved education leads to workers with more transferable skills, the productivity of the workforce may increase more than if firms have to retrain workers themselves

Depends on level of apprenticeship pay
The minimum level of pay for an apprentice is £4.81 per hour, which is below the National Minimum Wage and far below the National Living Wage of £9.90. So, the extent to which apprenticeships reduce labour immobility depends on how large a pay cut workers are willing to take, as older workers are both the most likely to want to retrain and the highest paid.

Question 26

evaluation geographic mobility

Answer 26

Depends on cause of change
The impact of changes in geographic mobility depends on the cause of the changes; if domestic workers are less able to afford to move location due to uneven increases in house prices, then firms may have to offer increased remuneration to attract workers, whereas more days off would be more effective if the immobility were caused by unwillingness to leave friends and family

Question 27

evaluation regional policy

Answer 27

Depends on size of intervention
A large department or a large amount of devolved funding will have a larger impact, but recent policies(such as the £13bn Northern Powerhouse) have been limited in scope compared to the differences in incomes

Question 28

evaluation technology

Answer 28

Depends on safety nets
The willingness of workers to retrain, and move from one declining industry to another growing industry depends on whether they are sufficiently incentivised. A disproportionate number of former coal miners gained disability incomes instead of moving into alterative professions.

Question 29

evaluation contracts and legislation

Answer 29

Depends on prevalence of zero-hour contracts
Zero-hour contracts increase the flexibility of the labour market, and allow some workers, such as parents with childcare commitments, to join the workforce. However, workers may only be able to find part time work when they have a preference for full time work.