Labour Market BASIC

Question 1

Summarise some of the reasons why there is a disparity in earnings- via statistics

Answer 1

• UK HPC- FTSE 100 CEOs saw total pay of £3.41m (103x NMW)
• In football terms, Messi and Ronaldo receive £200m per annum
• UK public average earnings were £605 and private was £577- a 7% wage premium
• Gender pay gap in the UK was around 7.7%

Question 2

How does the Neoclassical model describe the Labour Markets?

Answer 2

• KEY IDEAS: self-interested individuals make rational decisions- Workers maximise utility subject to constraints
• Firms maximise profit subject to technological constraint
• EXTENSIVE and INTENSIVE margins; whether to work/not work and how much to work

Question 3

What does the Supply of labour look like for unique labour inputs?

Answer 3

• Supply of labour is few (so on the left of the graph) and vertical (as not many can do the job)
• Therefore in this market, the equilibrium quantity is low, but the wage is very high compared to the normal equilibrium
• Adam Smith: Wage is not equated across jobs, but all advantages and disadvantages are equal (skill, risk, time)

Question 4

What are causes of wage differentials?

Answer 4

• Worker’s Attributes: Workers bring their own Human Capital into the labour market (education and training)
• Job Characteristics: Must consider the entire job perks- how dangerous/enjoyable jobs are –> wages aren’t the whole decision when considering a job

Question 5

What is the empirical wage model?

Answer 5

• lnW = lnW0 + βworker + γjob + ε
• Use logs to say the percentage change of w
• This means that β and γ become elasticities
• These models do have the ommitted variable problem unfortunately

Question 6

Is the Gender Pay Gap common? What measures have been taken

Answer 6

• In almost all nations, there is some sort of pay gap
• In the UK; employers with 250 or more employees had to report data via legislation (2017)
• EU, women’s average earnings was about 12.7% lower than men

Question 7

What is the economic interpretation of the Public Sector Wage Premium?

Answer 7

• Public sector tends to be the largest employer in a country (UK ~17%)
• Public sectors tend to be more unionised than the private sector -> resulting in greater wage
• In the public sector, there is less competition and more monopsony employment
• Can use regressions or Endogenous Treatment Model

Question 8

What is the economic interpretation of the Minimum Wage?

Answer 8

• In Neo-Classical Model, there is no point setting a MW- as the market clears for the type of employment
• NMW must set above the equilibrium wage this creates real-wage unemployment (Ns>Nd)
• Creates a wage-price spiral and reduces monopony power

Question 9

What are some drawbacks of the Neoclassical model? How can this be rectified

Answer 9

• Fails to explain wage differentials
• This can be used to model, using WA/JC, meaning that the Neo-classical model works again