Labour Markets, Poverty & Inequality Flashcards
Def + competitive + Trade union decides WTu + perfectly elastic + MRP
What is the Standard An for Trade Unions (can also be used for wage differentials)
- Trade Unions are organisations that through collective bargaining negotiate for higher wages and improved working conditions for its members. For example, in 2018, the UK government annoinced a pay increase for teachers in England and Wales by 3.5% which was negotiated by the National Education Union.
- In a competive labour market, the inital equilibrium is at Qc with the wage rate at Wc.
- The trade union decides that Wc is too low and that none of its workers should work for less than Wtu, making supply perfectily price elastic for wages below Wtu and putting a Kink in the labour supply curve.
- A firm, assumed to be profit maximising, will only hire workers if their MRP is greater than or equal to the marginal cost of labour. Since the wage rate under the trade union has increased, firms can profitably hire less workers (ceteris Paribus).
- Consequently, there may be unemployment as shown by Qc-QTu.
Trade Union EV - trade unions may not cause unemployment due to an increase in productivity
(insert rightwards shift in MRP diagram)
* However, perhaps trade unions may not cause unemployment due to the fact that the increased wages negotiated by the trade union can increase productivity.
* This is because, since workers are being paid more, they may now be more motivated and work harder (efficiency wage theory)
* As a result of increased productivity, marginal physical product (MPP) will increase.
* This is a component of MRP (MPP x MR). Consequently, there will be a rightwards shift in MRP, from MRP1-MRP2.
* Since MRP of workers in trade unions has increased, a greater number of workers can now be profitably hired by firms as the point at which MRP is equal to MCL is greater at MRP2.
* Therefore, trade unions will not cause unemployment (ATQ)
Trade Union EV - trade unions may cause unemployment
- However, trade unions can cause unemployment.
- Firms, assumed to be profit maximising, can only profitably hire workers where their MRP is greater than or equal to the marginal cost of labour.
- Since, trade unions have successfully negotiated higher wages for its members. Firms can now profitably hire less workers (ceteris Paribus) as the point at which MCL is equal to or less than MRP is lower at the trade union wage rate.
- Consequently, some union members will face unemployment.
- (ATQ - why is that bad, poverty, inequality, externalities, macroeconomic consequences???)
Def + inital + Gov increases wage + extension + Firms hire less (MRP) +
Minimum Wage - Standard Analysis
- A minimium wage is the minimium amount of pay that employers are legally required to pay their employees. For example, in the UK in 2024, the national minimum wage for 18-20 year olds is £8.60 an hour.
- Initially, in a competitve labour market, the wage rate is at W1 and quantitity of workers is at QL1. However, the govenment may decide that W1 is too low and may increase the national minimum wage from W1-Wm.
- At this higher wage rate, there is an extension of suply from QL1-QL3 due to the substitution effect of labour whereby leisure time is less attractive relative to working.
- At the wage rate Wm, firms hire less workers. This is because, firms, assumed to be profit maximising, will only profitably hire workers if the marginal cost of labour is less than or equal to MRP and at the higher wage rate Wm that point is decreased. There is therefore a contraction in demand from QL1-QL2.
- This results in an excess supply of labour which is the level of unemployment caused by the increased national minimum wage (QL3-QL1)…… (ATQ)
National Minimum Wage EV - it may cause unemployment particulary amongst young workers
(There are many ways to approach this and it largely depends upon the question at hand, you could explain why the national minimum wage causes unemployment through contraction and extension in supply but if you’ve already done that you’d be repeating yourself, instead adapt it to the question at hand)
* However, the imposition of a national minimium wage can cause unemployment, particularly amongst young workers.
* Firms, assumed to be profit maximising will only hire workers if the marginal cost of labour is less than or equal to MRP. Due to an increase in the national minimum wage workers, in theory, need to have higher MRP if they want to be profitably hired by firms.
* This may cause unemployment, particularly amongst young workers, as they likely lack skills relative to older workers (age differential).
* As a result, they are going to be less productive and in turn their marginal physical product (MPP) will be reduced.
* This is a component of MRP (MPP x MR). Since younger workers generally have lower MRP this may mean that firms cannot profitably hire them causing unemployment….. (ATQ)
* However, there is emperical evidence that suggests the national minimum wage does not cause unemployment (Card and Krueger 1991).
National Minimum Wage + Trade Unions Evaluation - Unemployment will not occur due to efficiency wage theory.
(obviously adapt to whichever one you are writing about - for this example I am just going to write about trade unions bc why not)
* However, perhaps trade unions may not cause a fall in unemployment due to increased productivity from higher wages (efficiency wage theory).
* If a trade union manages to successfully negotiate for higher wages, workers may become more motivated.
* As a result, they may become more productive workers which in turn will increase their output.
* This will increase marginal physical product (MPP) which is a component of MRP.
* Firms, assumed to be profit maximising, can only profitably hire workers if the marginal cost of labour is less than or equal to MRP.
* Since MRP has increased due to higher wages negotiated by trade unions the point at which MCL=MRP is greater meaning that firms can hire more workers at the increased wage rate. (ATQ)
National Minimum Wage + Trade Unions Evaluation - Macroeconomic consequences (positive)
(you can use this evaluation for either, less so trade unions (make sure to specifiy a trade union with a large trade union density) but minimim wage definitely - Insert AD/AS diagram)
* The imposition of a national minimum wage can have positive macroeconomic consequences, such as increased Economic growth.
* Since, wages have risen in the economy due to an increase in the national minimum wage, consumers now have higher levels of disposable income (ceteris parbibus). As a result, consumers have a greater ability to consume normal luxury goods.
* This will increase consumption which is a component of aggregate demand.
* Consequently, aggregate demand will shift rightwards from AD1-AD2 resulting in short-run economic growth.
* This increases real national output and boosts employment which….. ATQ e.g reduces inequality, reduces poverty, increases standards of living etc.
* Furthermore, due to increased wages from a rise in the national minimum wage. The substition effect of labour can occur wherby leisure time is relatively less attractive than working due to greater incentives to do so i.e rise in NMW.
* This leads to people working more hours which boosts productive capacity. As a result, LRAS may shift rightwards from LRAS1- LRAS2…… (benefits of that etc…..)
National Minimum Wage Evaluation - May depend upon the level of inflation
- However, the effectiveness of a national minimum wage depends upon the level of inflation.
- In April 2022, the national living wage was increased from £8.91-£9.50 for those who are 23 or over, which is an increase of 6.6%. However, in October 2022 at the peak of the cost of living crisis in the UK inflation was around 11%.
- This means that, in real terms wages have not risen in the UK and in fact in this instance wages have fallen in real terms (6.6%-11%=-4.4%).
- Consequently, material living standards will not improve…. (ATQ - poverty will not decrease etc etc…..)
Increased Education and Training - Standard An (Also a reason for Wage differentials)
(This can pretty much be used in all labour markets questions so its very important to memorise this one)
* The government could provide greater levels of education and training.
* This means that those who undergo this education and training gain new skills and qualifications, thus improving human capital.
* Consequently, they may become more productive or the value of what they can produce increases, meaning that their marginal physical product (MPP) or Marginal Revenue (MR) increases.
* These are components of MRP (MPP x MR).
* Firms assumed to be profit maximising can only profitably hire workers if the marginal cost of labour is less than or equal to MRP and since workers have now increased their MRP the point at which MRP=MCL is higher and therefore more workers can be hired since according to MRP theory a worker’s demand is derived from their MRP.
* (This last part really depends upon the question….e.g reduces poverty, pay differentials etc etc.)
shortage teachers meaning train new or greater incentives, example
Increased Education and Training - Evaluation opportunity cost?
Opportunuity cost sixth form teachers lack of education, future problems
Furthermore, issue of waht to teach + time lag.
- However, there may be a large opportunity cost for providing a greater degree of education and training.
- In the UK, there is already a shortage of teachers, meaning that the government either has to train new teachers or provide greater incentives for those already teaching to leave their current teaching job to provide greater education and training.
- For example, the UK government may decide to provide greater financial incentives to teach people new skills causing sixth form teachers to leave sixth form colleges to teach said people.
- This poses an opportunity cost as by sixth form teachers leaving sixth form colleges to teach in the government scheme those in Sixth form colleges may now lack adequate education.
- This can then cause further problems such as those who are in Sixth form now lacking the relevant skills and education possibly resulting in future structural unemployment due to the occupational immobility of labour.
- Furthermore, there is also the issue of what to teach and whether or not that is currently valued in the labour market, and even if what is taught currently is valuable due to the time lag their skills may become void in the future labour market.
- Therefore, education and training may not….. (ATQ)
Def + comp + increase number of workers MCL & ACL, profitability, wages
Monopsony - Standard An
- A Monopsony is a sole employer of a particular kind of labour. For example, in the UK the NHS and teaching can be considered to be a monopsony.
- In a competitive labour market, the wage rate would be at Wc and Qc where demand is equal to supply.
- A monopsonist, however, will seek to supress wages and decrease employment.
- In order to increase the number of workers employed, the monopsonist (facing the upwards-sloping market labour supply curve) has to increase wages, includng for existing employees. As a result, the marginal cost of labour is twice as steep as the ACL curve.
- The Monopsonist, assumed to be profit maximising, can only profitably hire workers if the MCL is less than or equal MRP. Therefore Qm workers will be hired, paying them the minimum wage required to secure their services, Wm with employment and wages being lower due to the presence of a monopsony employer.
- (ATQ…..) e.g this is an example of labour market failure as the monopsonist supresses wages and employment below the competitve…..Poverty? Inequality?
Def + higher wage + elasticity + MC=WR + Curves + MRP + Outcomes
Bilateral monopoly - Standard An + EV for Monopsony
(analyse a monopsony before you bring in the bilateral monopoly)
* A bilateral monopoly is where workers in a monopsonist industry are also members of a trade union.
* In response, a trade union is formed that insists on a higher wage rate of Wtu, with no worker prepared to accept a wage below that, making the supply of labour perfectly price elastic.
* When the supply is perfectly price elastic, the marginal cost of hiring a worker is equal to the wage rate, but when there are no more workers prepared to accept Wtu, the trade union labour supply curve rejoins the competitve one and the marginal cost curve reverts to the upward sloping one.
* The monopsonist, assumed to be profit maximising, will only hire a worker if their MRP is greater than or equal to the marginal cost of labour.
* The monopsonist will now hire Qtu workers, and pay them Wtu, thus showing how a bilateral monopoly causes a higher wage rate and employment.
* ATQ….why is this good/bad.
Def + perception + MRP + demand + effect of that + contraction + related
Wage Discrimination - Standard An (also a reason for wage differentials + supply of labour)
(For the diagram, have to diagrams, one for the market where the discrimination is taking place, with a leftwards shift in MRP. Then for the other one a related labour market with a rightwards shift in supply.)
* Wage discrimination is where different workers are paid different wages to do the same job.
* Employers who wage discriminate mispercieve the true value of (potential) employees and believe that their MRP is less than it actually is. For example, in April 2023, in the UK the gender pay gap is 7.7%.
* The demand for a worker is derived from their MRP. This is because, firms assumed to be profit maximising, can only profitably hire workers if their MRP is greater than or equal to the marginal cost of labour.
* As a result, the workers who are wage discriminated against have lower demand at D2 than they should D1.
* Consequently, fewer workers are hired at a lower wage rate.
* On the diagram on the left, there is a contraction of supply, resulting in those workers who are discriminated against having to move to other markets to find work.
* This shifts the labour supply curve in the related industry from S1-S2, thus depressing wages in the labour market from W1-W2.
* ATQ…..
Demand for Labour Standard An - productivity of labour + education and training.
- One determinent of the demand for labour is labour productivity.
- Labour productivity is the output of a worker in a given period of time.
- A firm, assumed to be profit maximising can only profitably hire workers if their MRP is greater than or equal to the marginal cost of labour.
- If labour productivity is higher, then the demand for workers is also going to be higher. This is because, since labour productivity is high, workers produce more output.
- As a result, marginal physical product (MPP) increases. This is a component of MRP (MPP X MR).
- Profit maximising firms will therefore demand these workers to a greater degree as they will generate more revenue for the firm then they cost (wages).
Demand for Labour Standard An - Substitutes for labour
- One determinent of the demand for labour is the availability of cheap substitutes for labour.
- If there are a greater degree of substitutes for labour available, such as, automated machinary like conveyor belts.
- Then firms may decide to replace machinary with human capital as it may be more profitable to for firms to use machinary.
- Firms, assumed to be profit maximising will only hire workers if their MRP is greater than or equal to the marginal cost of labour.
- If the MRP of machinary is greater than the MRP of humans then there will be a leftwards shift in demand for human capital due to greater availability of cheaper substitutes.
