Market failure and the role of the government and unions

Question 1

When does Labour market failure occur?

Answer 1

Occurs when market forces of demand and supply don’t result in an efficient allocation of labour resources

Question 2

Evidence of LMF

Answer 2

• Surpluses and shortages of forms of labour
• Workers in ill-suiting jobs
• Lack of training
• Wages above or below equilibrium rate

Question 3

Causes of LMF

Answer 3

• Abuse of labour market power
• Imperfect information (employers and workers)
• Economic inactivity
• Unemployment
• Discrimination
• Segmented labour markets
• Immobility of labour

Question 4

Trade union abuse of market power

Answer 4

• Push wage rate above equilibrium (causing unemp.)
• Restrictive practices such as job demarcation - workers will only do tasks outlined in original job description
• Such actions lower the flexibility of the labour force

Question 5

Monopsonist

Answer 5

A single buyer of labour e.g. NHS

Question 6

Oligopolist

Answer 6

One of a few dominant buyers of labour e.g. large publishing firms

Question 7

Determination of wages w/ monopsonists and oligopolists

Answer 7

• Price makers - influence the wage rate
• to employ more they have to raise the WR
• So the MCL will exceed the ACL

Question 8

When can a TU raise wage rate without causing unemployment?

Answer 8

consult graph on p67

Question 9

Bilateral monopoly

Answer 9

• When a TU negotiates with a monopsonist employer

- A market with a single buyer and seller

Question 10

How is the wage rate determined in a bilateral monopoly

Answer 10

• By the relative bargaining strength of the two sides
• If the monopsonist is powerful, WR will be close to that which would exist without union intervention
• If the TU is powerful, WR will be close to the upper limit a monopsonist can pay without threatening the existence of the firm
• TU does take into account possible adverse effect
• Consult graph on p68

Question 11

Factors influencing an employer’s bargaining strength

Answer 11

• Greater the financial reserves
• Lower the proportion of workers in a union
• Greater degree of substitution between capital/labour
• Higher the rate of unemployment - can replace existing workers with unemployed workers
• Lower public support from the public
• Lower the disruption any industrial action would cause to the production process e.g. train strikes cause a lot of disruption
• More branches the firm has which employ non union labour - can move production process
• More legislation favours employers

Question 12

Trade unions

Answer 12

Labour organisations that seek to promote the interests of their members

Question 13

Functions of TUs

Answer 13

Negotiate pay and conditions of employment
Provide a channel of communication
Presence may reduce labour turnover and increase level of training
Tend to reduce income inequality
Financial services and legal advice
Lobbying national government
Setting minimum qualification standards (bid to increase pay)

Question 14

Effect of TUs on wages and unemployment

Answer 14

Setting a minimum wage for union members - alters supply curve to W1XS (p69) - in this case it reduces employment
Seek to raise WR by pressing employers to raise qualifications required (shift SoL to the left)

Question 15

Effect that TU has on employment in different market structures?

Answer 15

Perfect & Monopolistic competition - adverse effect, these firms can only earn normal profit in the LR; rise in costs will cause marginal firms to leave the industry causing output and employment to fall

Question 16

Any type of market structure:

Answer 16

Seek to raise employment while raising wage rate through supporting measures to increase productivity
e.g. training initiatives
OR: measures to increase demand for the product e.g. investing in an advertising campaign
Successful: MRP will shift to the right and hence the demand curve

Question 17

Factors influencing a TU’s bargaining power

Answer 17

Greater financial reserves
Higher proportion of workers in organisation
More inelastic the demand for the firm’s product
Lower the degree of substitution between C/L
Lower the proportion of labour costs in total costs
Lower the rate of unemp.
Greater public support
Favourable legislation
More disruption industrial action would cause

Question 18

Imperfect information

Answer 18

Workers and employers
Less well paid & not suited for skill-set
Employers incur costs - obtaining information, interviewing
Workers incur costs - jobsearching, attending interviews

Question 19

Skill shortages

Answer 19

Occur when firms have difficulties recruiting required skilled people
Result in an increase in costs of production - bid up wage rate to get the skilled workers, or fill vacancies with less skilled workers - higher ULC
Cause - lack of training, training is a merit good
If left to market forces it’d be under-consumed - workers and firms take a short term view

Question 20

Economic inactivity

Answer 20

Influences the size of LF and so AS
Some isn’t market failure - full time students have long term benefits, people looking after family
Discouraged workers/long term sick (but could work a bit) considered a taxpayer burden

Question 21

Unemployment

Answer 21

Means that LMs are not clearing
Some of those willing to work can’t get a job
Means a country has a negative output gap

Question 22

Unemployment causes

Answer 22

Cyclical unemployment - lack of AD (derived demand)
Frictional unemployment - unaware of vacancies
Voluntary unemployment - unwilling
Structural unemployment - unsuited for jobs in the labour market due to economic changes e.g. manufacturing decline

Question 23

Equilibrium unemployment

Answer 23

Unemployment that exists when the LM is in D/S equilibrium - voluntary, frictional, structural

Question 24

Disequilibrium unemployment

Answer 24

Cyclical - due to a lack of AD

Question 25

Discrimination & LMF

Answer 25

Results in an inefficient allocation of resources and inequitable wage differentials -Group discriminated against suffer - lower pay, harder to gain unemp., settle for ill-fitting jobs -Producers who discrim. have a smaller labour pool, may not make best use of e.g. black workers they employ -Consumers experience higher prices if producers discriminate, or if they discriminate against firms for employing an ethnic/gender group -Govt. more welfare benefits

Question 26

Segmented labour markets

Answer 26

Barriers that exist to free movement of workers between LMs No barriers - workers would move from low to high wage jobs, equalising wages Some barriers improve LM efficiency e.g. surgeons need the qualifications Some are unnecessary, may have been introduced to push up wages and keep groups out

Question 27

Immobility of labour

Answer 27

GEOGRAPHICAL - barriers to movement of workers e.g. family ties, prices of housing; shortages and surpluses of workers in different areas, regional unemployment, geog. wage differentials OCCUPATIONAL - barriers to workers changing occupations e.g. qualifications, skills, social barriers contribute to occu. wage differentials and structural unemp.

Question 28

Other causes of LMF

Answer 28

Attachment between workers and employers | Inertia - laziness (employers and employees)

Question 29

Economic effects of LMF

Answer 29

micro = unemp. and skills shortages, workers in wrong jobs misallocation of resources increases cost of production and reduces consumer surplus MACRO = reduces int. comp., adverse effect on net trade also raise govt. costs - state benefit, LM legislation, spending on education, training and regional policy

Question 30

Trends in UK TU membership

Answer 30

As in many other countries, downwards Decline in union power (legislation, companies deciding not to recognise unions) Stronger within professional occupations e.g. teachers Higher proportion of women workers in TUs

Question 31

Labour disputes trends

Answer 31

Last 4 decades - decline

Question 32

Forms of bargaining

Answer 32

National collective bargaining - unions favour this, gives them greater power & negotiation EoS EU - collective bargaining on the basis of multi-employer bargaining - unions negotiating with associations of employers UK - trend towards performance-related pay agreements e.g. 3% pay rise, 2% rise in productivity

Question 33

Types of labour market flexibility

Answer 33

Numerical flexibility - ability to change no. of workers Temporal flexibility - ability to change hours worked Locational flexibility - ability to change place of work e.g. home, different office Functional flexibility - ability to change tasks performed Wage flexibility - ability to change wages paid

Question 34

Consequences of flexibility

Answer 34

GOOD: keeps firms ACs low; wont be overstaffed during periods of falling D able to raise output when D increases by easily hiring Low labour costs = factor in int. competitiveness for workers - some enjoy working casually, part time, freelance, from home Create employment - firms more likely to hire during periods of rising D; particularly case w. young workers Attracts FDI - boost employment BAD: for workers Chance of being out of work higher Less job security Need to be more mobile (OCC. and GEOG.) Can put stress on workers Wage flexibility = wage inequality??

Question 35

UK LM flexibility?

Answer 35

more than most of EU Increase in temporary, part time, flexible hours, jobsharing etc. 80s - LM reforms, fewer restrictions on hiring and firing

Question 36

Govt. measures to achive LM flex.

Answer 36

Increased LM information, training and education to make L more mobile Cut marginal income tax rates & unemployment benefit - link JSA more closely to the search for employment Removing employment protection legislation - make LMs more efficient in responding to changing market conditions Welfare-to-work in the UK = support while actively seeking unemployment

Question 37

Government intervention in LMs

Answer 37

May intervene to correct LMF & raise efficiency, promote equity and social cohesion Affects wages and employment in various ways - govts employment of public sector workers, provision of information, regional policy, training & edu, NMW, anti-discrim. legislation and TU legislation

Question 38

Government as an employer

Answer 38

UK govt. = major employer e.g. NHS Direct and indirect on LMs Direct : government raising wages of nurses in NHS will have a direct effect on wages Indirect: increasing public sector teacher wage will put upwards pressure on private sector teachers wages

Question 39

Labour market information & government

Answer 39

State funded careers service, Job center plus, careers education in schools etc.

Question 40

Regional policy & government

Answer 40

Seeks to influence the distribution of firms and people Reduce problem of geog. immobility & regional unemployment - variety of measures Financial assistance given to workers to relocate to areas where their particular skills are required Work is taken to the workers - subsidies/tax holidays to firms that set up in areas of high unemployment

Question 41

Training & government

Answer 41

- Provide training directly to its own employees, the unemployed, those changing jobs - Subsidise individuals to engage in training/subsidise firms to provide training - Pass training based legislation

Question 42

Education & government

Answer 42

Increases/improvements in state education provision should raise qualifications/skill levels of workers Increase the occu. mobility of the LF, reduce skills shortages, raise productivity of labour Measures to raise skills and qualifications = INVESTMENT IN HUMAN CAPITAL investment in developing the ability of wide range of people, social exclusion will be reduced

Question 43

Minimum wage legislation & government

Answer 43

To help raise the pay of low paid workers To have an effect = has to be set above equilibrium WR Some economists argue it causes higher unemployment - much like a trade union increasing the wage rate Raises the SoL, reduces the demand for L

Question 44

Risks of NMW

Answer 44

May encourage firms to seek lower cost of employing low skilled workers by cutting fringe benefits Encourage workers who previously earned near the NMW to press for a wage rise Reduce wage differentials - affect labour mobility

Question 45

NMW = good?

Answer 45

May not result in higher unemployment Low paid workers often have low bargaining power against their employers (usually olig. and monop.) Rise in demand from increased Disp. income = shift right in demand curve

Question 46

Discrimination legislation

Answer 46

UK - illegal on grounds of gender, marital status, race, colour, disabilities, age May change social/employer attitudes over time However, difficult to see if it is still happening

Question 47

TU legislation

Answer 47

-Thought that TU power too weak from previous legislation, government may repeal some legislation Vice versa

Question 48

Income distribution

Answer 48

Income & wealth are unevenly distributed in the UK

Question 49

Functional distribution of income

Answer 49

Income can be earned by each FoP - labour = wages, capital = interest, land = rent, entrepreneurs = profits Wages = largest % of total income In UK, share of profits has been increasing at expense of wages

Question 50

Size distribution of income

Answer 50

Division of income among individuals Inequality between highest earners and lowest earners

Question 51

Causes of geographical distribution of income

Answer 51

Unemployment rate Proportion of population claiming benefits Qualifications and skills of the LF Industrial structure Occupational structure Living costs that give rise to differences in pay There are variations within regions e.g. London

Question 52

Causes of income inequality between households

Answer 52

Unequal holdings of wealth - wealth generates income in form of profit, dividends, interest Differences in the composition of households e.g. some have 1 worker, some have 4 Differences in skills and qualifications Differences in educational opportunities Discrimination Differences in hours worked

Question 53

Wealth

Answer 53

A stock of assets that have financial value

Question 54

Marketable wealth

Answer 54

Wealth that can be transferred to another person e.g. shares, homes

Question 55

Non-marketable wealth

Answer 55

Specific to a person, can't be transferred e.g. pension rights

Question 56

UK size distribution of wealth

Answer 56

Very unevenly distributed | A fifth of the country's wealth is owned by the top 1% of the population

Question 57

Wealth distribution between assets

Answer 57

Some forms of wealth e.g. life insurance, housing and pension funds are more evenly distributed Some are not e.g. land, shares

Question 58

Wealth distribution between groups

Answer 58

People on 40s/50s have had more time to accumulate savings and wealth Group that currently has the lowest holding of wealth is Bangladeshi in UK Men more than women

Question 59

Causes of wealth inequality

Answer 59

Inequality of income - work overtook inheritance as a source of wealth in the UK; high income = easier to save and make interest on savings Differences in entrepreneurial skills Pattern of inheritance - large houses etc. passed on in family to one son, keeps largest estates in the same small population Marriage patterns of the wealthy - rich marry rich

Question 60

Gini coefficient

Answer 60

Used to make international comparisons of income inequality - found using the Lorenz curve Ratio of the area between the lorenz curve and the line of equity, and the total area under the line of equity

Question 61

Lorenz curve

Answer 61

A diagram used to measure the level of income inequality Graph w/ line of equity at 45 degrees, lorenz curve varying levels underneath the line P88

Question 62

Ways in which governments affect the distribution

Answer 62

Progressive taxation rates regressive taxes e.g. VAT make distribution more unequal Provision of state benefits - 2 types means tested: available under certain conditions e.g. income under a certain level universal: available to all e.g. pensioners all allowed winter fuel allowance Provision of benefits in kind - e.g. healthcare, school meals, education Labour market policy - NMW, anti discrimination, subsidising of training Macro policy - e.g. SS policies to reduce unemployment will benefit the unemployed, regional policy may reduce geographical inequalities

Question 63

Absolute poverty

Answer 63

The inability to purchase basic necessities of life e.g. food, shelter

Question 64

Relative poverty

Answer 64

A situation of being poor relative to other people

Question 65

UN on poverty

Answer 65

People lack material goods and also access to items to enjoy life e.g. self-esteem and respect of others