wage determination in competitive and non competitive markets Flashcards
(82 cards)
1
Q
how are wages determined in a highly competitive market?
A
- labour market equilibrium is determined
- where the supply for labour equals the demand for labour
- this determines the equilibrium price of labour
2
Q
draw a wage diagram
A
3
Q
what happens when the demand for labour falls -show on diagram
A
when the demand for labour falls for example during a recession, in a free market the wage rate would fall from W to W1 as illustrated in the diagram below
4
Q
what happens when the supply of labour increases- show this on a diagram
A
if the supply of labour increases, the wage rate would fall from W to W1 as shows in the diagram below
5
Q
what are sticky wages?
A
- in the real labour market, wages arent this flexible
- ‘sticky wages’
- wages in an economy do not adjust to changes in demand
- the minimum wage makes wages sticky
6
Q
in reality what would happen during a recession to workers?
A
during a recession, rather than lowering the wages of several workers some workers may get fired
7
Q
recall the current labour market issues
A
wage differentials
impact of migration on labour markets
unemployment
8
Q
what are wage differentials ?
A
sometimes in the same job, people can be paid different amounts
9
Q
why do wage differentials occur
A
- formal education → typically those with a degree earn more over their lifetime than those who gain just A levels
- skills, qualifications and training
higher wages - pay gaps
- wages and skill
- gender
- discrimination
10
Q
how do skills, qualifications and training cause wage differentials
A
- jobs which require more training and education offer higher wages
- training workers is expensive for firms
- so they compensate for this by offering workers who have already undergone education and training higher wages
11
Q
what are pay gaps and why may this happen?
A
- the wage gap between skilled and unskilled workers has increased in the UK recently
- this is due to technological change and globalisation which has shifted production abroad
12
Q
how would a workers skills affect their wages?
A
- skilled workers produce higher outputs than unskilled workers
- are more productive
- demand for their labour is higher so they can demand higher wages
13
Q
how does gender affect wages?
A
- on average women earn less than men even with equal pay laws
- could be due to career breaks, fewer hours worked
- women could also be discriminated against when it comes to promotions which locks out higher paying jobs
14
Q
how may migration affect the labour market?
A
could increase competition to get a job due to rise in the size of working population
migrants tend to bring high quality skills to the domestic workforce
- can inc productivity and skillset of labour market
- could increase global competitiveness
migrant labour could decrease the wages of the lowest paid in the domestic labour market
The skills of migrant labour could substitute those of the domestic market
-if the skills complement the domestic labour
market, there could be a welfare gain through higher productivities
15
Q
what is the affect of migration on wages?
A
- could decrease the wages of the lowest paid in the domestic labour market
- however this impact is small
- for the high/medium income households is hard to find evidence of worker displacement or depressed wages
16
Q
what are the effects of unemployment?
A
standard of living may dec
opportunity cost to society
negative externalities
hysteresis due to youth unemployment
opportunity cost to govt
17
Q
what is the got target for UK unemployment rate?
A
- They account for frictional unemployment by aiming for an unemployment rate of around 3%
- labour force should also be employed in productive work
18
Q
why is unemployment a problem
A
- if consumers are unemployed they have less disposable income
- standard of living may therefore dec
- losing job → psychological effect
19
Q
why does unemployment create an opportunity cost to society?
A
workers could have produced goods and services if they were employed
20
Q
what kind of negative externalities does unemployment create
A
crime
vandalism
21
Q
how could unemployment lead to hysteresis?
A
- structural unemployment due to someone being out of work for a long time so their skills deteriorate
- makes it harder to find a job and leads to long term unemployment
- if young people find it hard to get a job, then they might be discouraged from participating in the labour market as an adult
22
Q
why does unemployment create an opportunity cost to the govt
A
- if the unemployment rate inc, the govt may have to spend more on JSA
- opportunity cost as money could be invested elsewhere
- decreased tax revenue for govt from income tax and indirect taxes on expenditure
- due to the unemployed having less disposable income to spend
23
Q
what are the examples of govt intervention in the labour market?
A
minimum and maximum wage
24
Q
where is a minimum wage set?
A
- national minimum wage is an example of a minimum price
- minimum wage has to be set above free market price otherwise it wont work
its the minimum wage rate that employers are legally allowed to pay workers
25
show a minimum wage diagrammatically
26
what does the minimum wage diagram suggest and what does this suggestion depend on
- the diagram above suggests that a minimum wage leads to a fall in the employment rate
- depends on what level the wage is set at
27
draw an inelastic labour diagram- what does it show
an inelastic labour diagram as shown above will mean there is only a small contraction in demand for labour
28
why may there be no evidence of a rise in unemployment with a rise in national minimum wage?
- theres been no evidence of a rise in unemployment with a rise in NMW in the UK
- some firms say that this is because the NMW is still relatively low
29
what are the effects of a national minimum wage?
- NMW will yield positive externalities of a decent wage
- will inc standard of living of the poorest
- provide an incentive to work
- could make it harder for young people to find a job because their lack of experience might not be valuable to firms who are paying more for their labour
- the govt might make more tax revenue due to more people earning higher wages
- a higher wage could make the country less competitive globally as they cant compete with countries that have lower wages
30
what is a maximum wage and what can it be used for?
- a maximum wage aka wage ceiling limits how much income someone can earn
- can be used to redistribute wealth more equitably in society
- should limit inflation as wages and therefore consumer demand is limited
31
where should a maximum wage be set
maximum wages must be set below the free market equilibrium wage to be effective
32
what is a criticism for maximum wages?
- it could be a disincentive to innovate
- workers may opt for less demanding work
33
show a maximum wage diagrammatically
34
how can a maximum wage led to gov failure?
- Maximum wages control the market wage, but this could lead to government failure if they misjudge where the optimum wage should be
- It can lead to a more equal distribution of wealth in society
35
what is the public sector?
- The public sector is the compilation of industries owned by the government
- In the UK, public sector pay is higher than the private sector, in raw terms
- About half of government spending goes towards public sector pay
36
what does the flexibility of the labour market refer to?
- The flexibility of the labour market is how willing and able labour is to respond to changes in the conditions of the market
- its important for labour to be able to adjust to changes in demand
37
recall the policies can be used to tackle labour market immobility?
trade union power
regulation
welfare payments and income tax rates
training
infrastructure
housing
38
how does trade union power affect market labour immobility?
- If trade unions are pushing for higher wages, the labour market is likely to be more flexible
- can also inc job security
- however if trade unions limit the rights of a worker to strike there could be a decline in flexibility
39
how does regulation affect labour market flexibility?
- the more freedom firms have to hire and fire workers and the more freedom workers have in terms of their rights, the more flexible the labour market is
- excessive regulation will limit flexibility
40
how do welfare payments and income tax rates affect labour market flexibility?
- The reward for working should be high
- If welfare payments are generous and income tax rates are high, labour market flexibility is likely to be lower
41
how does training affect labour market flexibility?
- More widely available training opportunities and a more skilled workforce makes the labour market more flexible
- The quality and price of education should be
improved, so more people can afford a good education
42
how does infrastructure affect labour market flexibility?
- Improving infrastructure might help the geographical immobility of labour
- since it becomes easier to move around the country
43
how does housing affect labour market flexibility?
- If housing became more affordable, then people might be more able to move around the country for work
- improves the geographical mobility of labour
44
what is the wage rate and level of employment affected by?
The wage rate and level of employment is affected by shifting the demand or supply curve differently, depending on how elastic the other curve is
45
what happens to the wage rate if labour demand is inelastic?
If labour demand is inelastic, because there are few or no substitutes, strikes will increase the wage rate but not affect the employment rate significantly
46
what happens to the wage rate if theres a low supply of workers when theres an inelastic demand for labour?
Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate (P1 to P3), than where there is a more elastic demand (P1 to P2)
47
draw a diagram to show the effect of low supply when theres inelastic demand
48
what does the elasticity of demand for labour measure?
The elasticity of demand for labour measures how responsive the demand for labour is when the market wage rate changes
49
what is the elasticity of demand for labour affected by ?
- How much labour costs as a proportion of total costs
- The higher the cost of labour as a proportion of total costs, the more elastic the demand.
- Labour costs are high as a proportion of total costs in the services
- The easier it is to substitute factors, the more elastic the demand for labour
- firms can easily to switch to cheaper forms of production, such as capital
- The PED of the product also affects labour
- The more price elastic the product, the more price elastic the demand for labour
50
what is the elasticity of supply of labour?
The elasticity of supply of labour is the responsiveness of the quantity of labour supplied to a change in the wage rate
51
what is the elasticity of supply affected by?
- The skills of the workforce
- Skilled jobs have lower elasticities than unskilled jobs
- it is more difficult to attract workers, since only a few have the necessary skills
- Length of training
- The longer the training period for a job, the lower elasticity of labour supply
- Sense of vocation
- Some jobs have rewards which are not financial, such as teaching.
- These will have inelastic supplies
- Time period
- In the short run, the supply of labour is more inelastic than in the long run
52
what does the supply/demand for labour diagram facing the individual firm look like
once the market has decide the going wage rate, an individual firm is powerless to change it but may buy as much labour as it likes at that rat
53
show MRP, MC and AC on a labour supply/demand diagram
supply curve is the wage rate
the wage rate is also the AC of labour and the MC of labour
this is because the cost of one more worker is the same as the cost of each current worker
demand for labour will match its marginal revenue product curve
the equilibrium is found where MRP=MC
54
why does MRP=MC
to maximise profits firms will demand labour up to the point where:
extra rev achieved by employing one more worker = extra costs entailed by employing the extra worker
also because MC= wage rate, then MRP must equal wage rate for profit maximisation
55
what happens if MRP
if MRP is less than the wage rate then the firm would be losing money on the last units produced
the revenue being brought in being less than the wages paid out
the firm should employ fewer workers
56
what happens if MRP>W in the labour market and show this on a diagram
if MRP is greater than wage rate the firm is missing out by not employing more workers and so achieving more revenue in excess of wages and so achieving more profit
therefore the firm should employ more workers
57
what are the characteristics of a perfectly competitive labour market
homogenous workers -> workers have the same skills and capabilities
perfect knowledge- all workers and employers are fully aware of jobs in the economy and their wages
buyers and sellers are price takers - equilibrium wage is determined by supply/demand of labour
perfectly mobility- labour can move freely between jobs and geographical areas
maximisation- workers aim to maximise their wages and employers aim to maximise their profits by minimising costs
58
what are the imperfections in the labour market
monopsony -> in the labour market this means a single employer who has a high influence on employing workers and wages
imperfect information -> employees are unaware of potential jobs and wage rates so may make irrational decisions. also due to time constrains unemployed workers my accept jobs quickly even with unfavourable conditions
bilateral monopoly -> monopsony and monopoly power means buyers and sellers can negotiate pay amongst themselves
monopoly power exerted by trade unions -> trade unions will effectively be the only seller of labour and will therefore have high monopoly power and can use this to influence wages
59
what is the most imperfectly competitive type of labour market
monopsony
where a large buyer is able to influence the market price for a particular good because of their size
60
what is the AC of labour in a monopsony
in a monopsony a firms AC of labour = market supply of labour
in perfect competition each firm is so small that it had to be a price taker but could get as much labour as it wanted at this price
61
draw a monopsonists labour supply diagram and explain it
to employ more labour (moving from L1 to L2) -> can only be achieved by offering a higher wage which means AC per worker rises
however you cant offer your new worker a higher wage than existing workers or else theyd leave/ strike
62
what is the impact of employing one more worker on marginal costs
have to increase the wage of every other worker
MC rises more steeply
63
where does profit maximisation and equilibrium wage rate occur on an imperfectly competitive labour market diagram
profit max - MRP(L)=MC(L)
equilibrium wage rate is found from the AC curve
(go down from profit max point to where it meets AC curve)
64
what is a trade union in the Labour market
a trade union is formed when a group of workers join together in order to seek to improve or at least maintain their pay and conditions of employment
65
what is the ideal case for a union
the ideal case for a union is to be the monopoly supplier of labour in a given market (only union can be employed and union members are bound to follow union rules so they cant offer their lower wage rate
66
what happens when unions are strong
they are able to engage in collective bargaining
this is when the union negotiates with the employer on behalf of al its members
67
what happens when a trade union is introduced into a perfectly competitive labour market.. draw this on a diagram
if the union through collective bargaining successfully negotiates a wage rate above he previous equilibrium rate (assuming the trade union is a monopoly supplier of labour so theres no way of getting around the paying wages at a higher level)
this is what the new supply curve looks like as no one is willing to work for less than W2
at this wage rate the demand for labour is less than supply
the level of unemployment L1- L3 since the equilibrium wouldve been at L1 so the gap is smaller
68
how would right wing economists view trade unions
they would think that this shows that unions demand for better wages lead to unemployment
69
what is the counterargument for the right wing economists view on trade unions
higher wages will lead to greater demand for good which will lead to greater demand for labour
better relations with the workforce will make them more receptive to adopting new technology
more efficient working practices practices which increase MRP which determines demand for labour
70
what is a 'closed shop' labour market
is a labour market in which only union workers may employed
by creating barriers to free movement of workers, the labour supply is shifted to the left and wage elasticity of supply decreased -> leading to an increase in wages and a decrease in levels of employment
these practices are now illegal so it difficult for trade unions to increase wages by restricting labour supply
71
what does a 'closed shop' labour diagram look like
72
what happens when a trade union is introduced into a monopolistic labour market... draw this on a diagram
the new wage rate gives a new kinked supply curve
the effect on the MCL curve is to create a double kink
the union action has resulted in an increase in the wage rate and and increase in the employment
73
what arguments can be made for a national minimum wage
normative argument
reduces exploitation of already low paid workers by employers
could reduce poverty and income
74
what arguments can be made against the national minimum wage
pro-free market economists would argue that NMW is not the way to reduce poverty and income inequality
they argue that it may disincentivise employers from hiring new, young, unskilled or inexperienced when more experienced staff will cost the same
75
what can a NMW be used to do .. show this on a diagram
can be used to create a wage rate between the extremes of W1, an exploitative rate determined by an employer with complete monopsony power, an dW2 the rate determined by the market where employers are price takers only
76
what are the alternatives to the national minimum wage
subsidies to low wage groups
tax breaks for low income
provides an incentive to seek and then hold a job
improves MRP through supply side (education/training)
77
what may be the main causes of the gender pay gap?
the undervaluing of womens work
segregation in the labour market
underrepresentation at senior management level
traditions and stereotypes
work like balance- family care and domestic responsibilities mean women work few hours
78
what are the conditions necessary for wage discrimination
firms have to have a degree of monopsony power
employers are able to identify and seperate different groups of workers
a person selling their labour cannot operate through a secondary market
workers can discriminated against if their supply of labour differs from other groups
79
what is the impact of discrimination on wages levels and types of employment
workers experience discrimination will be forced into less favourable working terms such as part time or temporary jobs
employers will face restricted supply -> will overvalue other employees increasing their level of employment and wages whereas discriminated groups will face lower wages and a decline in their level of employment
supply of labour of these discriminated groups may decrease -> their applications may be discarded and discourage them to apply
employers may underestimate the worth of discriminated groups so demand for their labour falls - therefore employment falls
80
why may an employer wage discriminate and show this on a diagram
wage discrimination reduces costs and therefore increases profits
without discrimination the total wage costs in a market would be the area of the pink rectangle as all of the workers would be paid the going wage rate
81
how can you evaluate the reason why an employer may wage discrimination and show this on a diagram
if an employer can get away with paying each worker only the minimum for which they are prepared to work then the, then the total wage
costs reduce to the purple area
wage discrimination can increase a firms profits by cutting costs
82
what is the impact of wage discrimination on economic agents
discriminated groups may earn lower wages, face lower levels of employment and fewer opportunities
increase in profits is employees offer their labour at a wage rate lower than its value
market failure suboptimal allocation resources
