15) interaction of labour markets Flashcards
define wage differentials
the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or locations
define monopsony
a market in which there is single buyer of a good, service or factor of production
define trade union
an organisation of workers that negotiates with employers on behalf of its members
define bilateral monopoly
a situation in which a monopoly seller of labour (a trade union) faces a monopsony buyer of labour (an employer)
where is the market equilibrium wage rate determined?
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
why can wage differentials exist? (6 points)
- 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
Wage differentials can exist because of trade unions, explain
• Trade unions 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
analysis of trade union wage negotiations
A trade union may negotiate higher pay for workers with firms Wtu, such that firms are unable to hire workers below this rate of pay. This leads to a reduction in demand for labour from Lo to LD. The preceding diagram shows wages increasing from W0to to WTu.
This wage price signal leads to more workers entering the market, and supply of labour increases from Lo to Ls. The disequilibrium, Ls-Lo, leads to a surplus of labour, which is unemployment, and allocative inefficiency.
analysis of TU wage negotiations - inelastic WED
The preceding diagram shows the impact of trade union negotiation in a market where wage elasticity of demand is more inelastic, D1, compared to a more elastic demand curve Do. For D1, the trade union negotiation causes unemployment of Lo-D1 for incumbent workers, which is smaller than Lo-Do. The unemployment of new workers, attracted by higher wages to enter the market, Ls-Lo, is unchanged. Therefore, overall surplus labour, or unemployment, is smaller at Ls-Ld1 compared to Ls-Ld0.
evaluation of trade union activity
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.
evaluation: what are the government policies to increase labour flexibility?
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
• 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.
stats of trade unions
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.
why has the government reduced trade union power?
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.
- monopsony labour market
what happens to wages in a perfectly competitive market with a monopsony employer
In a perfectly competitive market with a monopsony employer, workers receive lower wages and fewer are employed.
how does a monopsonist profit maximise
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 MC=MRP., Lo, and pays just Wo based on the supply curve for labour So. 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.
