3.5 - Labour market Content Flashcards
What is the demand for labour definition
- how many workers an employer/business is willing and able to hire at a given wage rate in each period
- Inverse relationship between demand for labour & the wage rate
- If the wage rate is high, then it becomes costly for a businesses to hire extra employees – Feb 2025 Relative real wage rates are rising
- When wages are lower, labour becomes relatively cheaper than capital inputs. A fall in the wage rate might create a substitution effect and lead to an expansion in labour demand with more people employed
What are causes of a shift in labour demand
- Consumer Demand & Product Price: Increased consumer demand and higher product prices boost firm revenues, leading to a higher demand for labour.
- Labour Productivity: Improvements in efficiency make labour more cost-effective compared to capital, influencing hiring decisions.
- Employment Subsidies/Tax Incentives: Financial incentives lower non-wage costs, encouraging firms to employ more workers.
- Capital Equipment Costs & Technological Advancements: Cheaper, advanced capital (e.g., robotics) can substitute for labour, reducing the need for human workers.
- Legislation: Regulatory requirements (like mandated benefits or pensions) raise employment costs, thereby dampening labour demand.
Why does demand for labour increase when workers become more productive?
- Because workers are better skilled, firms can choose to between labour and capital
- So if capital becomes more expensive then firms will demand more labour
- Workers will generate higher marginal revenue product so firms will want to hire more workers
How is labour derived demand?
Firms hire workers in order to produce goods / services. (Outward shift in steel demand = outward shift in steel workers demand).
During boom many businesess will look to hire extra workers to supply increased ouptut
During recession, the demand for labour tends to fall causing a rise in cyclical unemployment
What is the definition for Elasticity of labour demand
The responsiveness of demand after a change in the wage rate
What are the determinants of Elasticity of demand for labour
- Labour costs as % of total costs: Higher % makes demand more wage elastic due to significant impact on costs.
- Ease & cost of substitution: More elastic if labour can be replaced cheaply (e.g., cameras replacing guards).
- Price elasticity of final product: Inelastic product demand lets firms pass on higher labour costs to consumers.
- Time period: Long run allows firms to switch inputs more easily, increasing elasticity.
What does elastic and inelastic demand for labour look like
What is labour supply
the number of hours that people are willing and able to work at a given wage rate
What does labour supply look like
- Labour supply is from workers and is upwards sloping
- As wages rise other workers enter this industry attracted by the incentive of higher pay
- The extent to which a rise in the prevailing wage or salary in an occupation leads to an expansion in the supply of labour depends on the elasticity of labour supply
Factors causing shifts in the supply of labour to an occupation/industry
- Real Wage Rates: Higher pay (base, bonuses, overtime) attracts more workers. For example, overtime incentives in manufacturing can boost labour supply.
- Wages in Substitute Occupations: If a similar job offers better wages, workers may switch fields (e.g., electricians moving to plumbing when pay improves).
- Barriers to Entry: Strict qualifications or licensing requirements (like medical degrees) limit entry, decreasing the available labour pool.
- Non-Monetary Job Characteristics: Job risk, flexibility, benefits, and career prospects influence a worker’s choice; more demanding or hazardous jobs often require higher compensation.
- Occupational Mobility & Skills Training: Access to training and apprenticeships (such as coding bootcamps in tech) increases the supply of skilled workers.
What are the stats for the university labour market as of March 2025
- 206,000 academic staff
- 246,000 non-academic staff
- 10,000 jobs are at risk due to funding crisis
- Linguistics, Arts departments at risk
What are some non-wage factors affecting labour supply
[8]
- Job risk and job security
- Career opportunities
- Anti-social hours
- Generosity of occupational pensions
- Strength of vocation - degree of passion, commitment, and purpose an individual feels towards their chosen profession or life path. - don’t care about the money
- Working conditions – terms of contract
- Quality in-work training/professional development
- Living and working overseas
What is the definition for the elasticity of labour supply
Responsiveness of the quantity of labour supplied in response to a wage change
What does inelastic and elastic labour supply look like
Factors affecting elasticity of supply of labour
- Skill Requirements: Specialized skills and costly, lengthy training make labour supply more inelastic. Conversely, when minimal skills are needed, the available labour pool is larger and more elastic.
- Nature of Work: In vocations like nursing or caring roles, workers tend to be less responsive to wage changes, leading to inelastic supply.
- Time & Occupational Mobility: In the short run, labour supply is inelastic due to the time required for retraining. Greater ease of retraining increases elasticity over time.
- Geographical Mobility: Barriers such as high housing costs or poor transport limit workers’ ability to relocate for better wages, reducing supply elasticity.
What are different market failures in labour markets
- Geographical immobility
- Occupational immobility
- Employer discrimination
- Monopsony employers
- Disincentives to work
- Training Gaps
What policies could be used to resolve geographical immobility? With evaluation
[3]
- Subsidies/ investment in housing in expensive areas
- Opportunity cost and time lag
- Investment in transport links
- Excessive administration costs, bureacracy - HS2.
- Opportunity cost and time lag.
- Recruit from abroad - free restrictions on immigration.
- Language/qualification barriers.
- May return home eventually
What policies could the government use to solve occupational immobility?
- Raise retirement age
- Older workers may be less productive
- Firms may not be willing to hire older workers
- Government run/subsidise vocational training/schemes to boost human capital. Equip with skills to boost productivity.
- Asymmetric information, excessive administration costs,
Reasons why geographical immobility exists and persists
[5]
- Family Ties and Social Networks: Individuals may be reluctant to move due to strong connections with family, friends, and their community, which provide emotional support and stability.
- Housing Market Constraints: High housing costs, lack of affordable options, or challenges in selling property can make relocating financially unfeasible.
- Cultural or Regional Preferences: People often have a sense of belonging or attachment to their local culture, environment, or lifestyle that discourages relocation.
- Limited Knowledge of Opportunities: A lack of awareness about better job prospects or living conditions in other areas may prevent people from considering a move.
- Resistance to Change A natural reluctance to disrupt familiar routines often deters individuals from moving, even when better opportunities are available.
What is occupational immobility of labour
Barriers to the mobility of factors of production between different industries in the economy
What are some key causes of occupational immobility of labour
- Skills gaps: New jobs may require different skills from those that unemployed worker can offer.
- Training gaps: Unemployed workers may not have access to affordable training schemes that would allow them to improve their human capital and improve employability.
- Experience gaps: The long term structurally unemployed often have gaps in their CVs that makes people less attractive to potential employers.
- Confidence and motivation: The longer someone is unemployed, the harder it is to find fresh work. Skills decline and so too does confidence and motivation to look for a job.
What market failures are caused by immoblity
- Structural Unemployment and Economic Vulnerability: Occupational immobility prevents people from finding work, leaving towns with low mobility more exposed to external economic shocks.
- Persistent Relative Poverty: Long-term unemployment reduces lifetime earnings, and areas with low mobility face higher risks of economic deprivation, lower incomes, and increased debt levels.
- Loss of Economic Efficiency and Social Welfare: Immobility leads to inefficient use of scarce resources, reducing potential output and increasing social costs from unemployment and rising relative poverty.
Diagram of monopsony in labour market
- In a competitive labour market, the equilibrium will be where D=S at Q1, W1.
- However, a monopsony can pay lower wages (W2) and employ fewer workers (Q2)
Why do monopsonists pay less than firms in a competitive market?
- The marginal cost of employing one more worker will be higher than the average cost – because to employ one extra worker the firm has to increase the wages of all workers.
- To maximise the level of profit, the firm employs Q2 of workers where the marginal cost of labour equals the marginal revenue product MRP = D
- In a competitive labour market, the firm would be a wage taker. If they tried to pay only W2, workers would go to other firms willing to pay a higher wage.
How is a monopsony in a labour market a potential cause of market failure
Because a monopsonist may pay lower wages than if the labour market was more competitive. Lower wages increase the risk of people being in working poverty
How would a minimum wage help workers in a monopsony recieve higher wages?
- A monopsony pays a wage of W2 and employs Q2.
- If a minimum wage was placed equal to W1, it would increase employment to Q1.
- A minimum wage of W3 would keep employment at Q2.
What are the problems of monopsony in labour markets?
- Lower wages for workers. This increases inequality in society. Lower tax revenue
- Workers are paid less than their marginal revenue product.
- Firms with monopsony power often have a degree of monopoly selling power. This enables them to make high profits at the expense of consumers and workers.
- Firms with monopsony power may also care less about working conditions because workers don’t have many alternatives to the main firm.
What are the problems with monopsony in product markets?
- Lower profits, producer surplus - might have to cut back on investment and employment to save money.
- Suppliers might reach their shut down point
- Delayed payment
- Driven out of market due to losses
- Workers face job losses.
What is labour market monopsony
- A type of labour market failure - imperfectly competitive labour market
- Firms that are dominant buyers of labour have the state power to reduce wages and employ fewer workers e.g. NHS, State Education, Rail Companies, Uber
- This may also mean unssafe working conditions, poor job security or significant disparities of pay between managers
How could the government prevenet monopsonist employers from exploiting their workers?
- Minimum wage £10.42
- Maximum working hours (48 hour work week)
- Health and safety legislation, paid holiday/breaks. sick pay, pension.
- Right to be in a trade union - industrial action to argue for better wages/working conditions to balance out monopsony power.
- Government owned (nationalised) organisations should be able to protect workers with fair pay, safety standards and job security.
- Groceries code adjudicator can fine 1% of revenue
Why might government intervention to resolve monopsony power be ineffective?
- ‘Self employed’ do not recieve any of the legal protections mentioned
- Tactic used by ‘gig economy’ firms like Uber and Deliveroo to avoid paying workers fairly.
- Minimum wages are different for different ages - £10.42 only applies to those aged 23 and above.(£10.42) 16-18 year olds earn £5.28.
- Governments may lack the information that rules are being broken (employees may not report due to fear of retaliation.
- Regulatory capture - government is excessively sympathetic to business and free market.
- Threat of firms shutting down - Uber suspends service in Tanzania over price regulations
- Synoptic links - Creates unemployment, wage price spiral
What is the poverty trap
disincentive in the labour market
- The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system.
- Working more hours means some welfare benefits are cut.
- Earning extra income means that people now pay national insurance and income taxes.
- The overall marginal rate of tax (including benefit withdrawal) may be high – perhaps close to 100%
What is the unemployment trap
disincentives in the labour market
This happens when the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – this creates a disincentives problem in the labour market.
What is labour market discrimination
Labour market discrimination occurs when an employer uses metrics/characteristics other than the measured productivity of a worker to judge their attractiveness for a job/role. Discrimination can be based on:
- Gender
- Ethnicity / racial profile /faith
- Sexuality
- Age
- Height / Size
- Social (class) background
- Language
- Disability
- Any other characteristic
What are some potential solutions to resolve labour market failure?
- Remove migration restrctions, create visa schemes.
- Retraining subsidies,
- Improve public health -
- Increase minimum wage
- Lower benefits/income tax
- Government is forcing benefits claimaints fo apply for jobs in different industries after 4 weeks instead of 3 months
What is the equilibrium wage rate
- The equilibrium wage rate in the industry is set by the meeting point of the industry supply and industry demand curves.
- In a competitive market, firms are wage takers because if they set lower wages, workers would not accept the wage.
- Therefore they have to set the equilibrium wage We.
- Because firms are wage takers, the supply curve of labour is perfectly elastic therefore AC = MC.
- The firm will maximise profits by employing at Q1 where MRP of Labour = MC of Labour
- Wages will rise more quickly if the supply of labour is wage inelastic. This is because there might be shortages of skilled and trained staff available to work when they are needed by businesses
What are the main causes of differentials between occupations
- Compensating wage differentials – these might be a reward for risk-taking, working in poor conditions and during unsocial hours.
- Reward for human capital – differentials compensate workers for (opportunity and direct) costs of human capital acquisition.
- Different skill levels – market demand for skilled labour (with inelastic supply) grows more quickly than for semi-skilled workers.
- Differences in labour productivity and revenue creation - workers whose efficiency is high and generate revenue for a firm often have higher pay.
- Trade unions who might use their collective bargaining power – to achieve a mark-up on wages compared to non-union members.
- Artificial barriers to labour supply such as professional exams, cross-border migration controls.
- Employer discrimination - a factor that cannot be ignored despite many years of equal pay legislation in place.
What is the gig economy
The Gig Economy refers to a labor market dominated by short-term contracts and freelance work, where tasks are assigned via digital platforms. Companies like Uber, Deliveroo, and Amazon hire contingent (non-permanent) workers for specific services. In the UK, 4% of working adults (around 1.1 million) participate in this sector. Its growth surged after the last recession, as employers turned to short-term contracts to minimize risks during economic uncertainty. This model allows flexibility but relies heavily on temporary, platform-mediated labor.
What are the benefits of the Gig economy for businesses
- Reduces the fixed costs for business – lower payroll expenses
- Reduced need for capital investment – as an example, an Uber driver usually owns their own vehicles
- Flexibility in managing hours to expected and changing demand for their products
What are the benefits of the gig economy for workers
- Flexible hours / control over when to work
- Ability to work from home (offering more autonomy)
- A common way for people to earn extra income perhaps because their main job is relatively low paid
- Less risk of getting stuck in routine jobs
What are some downsides of the gig economy for workers
- Doubts over the true flexibility of hours offered by employers
- Lack of paid vacation/sick leave/employment rights (this is now being challenged in the courts)
- Job and income uncertainty make it harder to get a mortgage – many people are in precarious jobs
- Inadequate investment in worker training which ultimately limits the growth of people’s human capital
- Workers bear most of the risk in their job – often incomes are lower for the self-employed and many of those with gig economy jobs remain reliant on some welfare benefits and are classed as being in “working poverty”.
What are some of the wider downsides of the gig economy
- Shrinking of the tax base from self-employment will hit revenues for the government
- Reductions in road safety / more accidents, for example, from delivery drivers using un-licenced vehicles
- Are platform businesses creating sufficiently high-quality jobs? There are worries about inadequate training
What are some current labour market issues
- The Gig Economy
- Ageing Population in the UK
- Robotics and Artificial Intelligence
- Labour Migration
- Zero Hours Contracts
- Gender Pay Gap
What are the states of the ageing population in the UK
- 2024 median UK age = 40
- 15 millions of pensionable age 2024
- Government can increase pension age – as they did raised it to 67
What are some possible microeconomic effects of an ageing population
- Changing patterns of consumer demand in markets / affecting profits of businesses in particular sectors
- Impact on housing market especially if people can live in their own homes for longer
- Impact on labour market for different jobs – labour demand and labour supply consequences to consider
What are the possible macroeconomic effects of an ageing population
- Impact on government welfare spending and future tax revenues, increased spending on NHS care
- Impact on the rate of growth of productivity and long-term GDP growth
- Impact on UK competitiveness if the median age continues to rise rapidly
What are the possible microeconomic effects of robotics
- Impact on productivity, costs, and profits of firms/industries at cutting edge
- Impact on demand for, supply of labour in specific jobs and the real wages paid
- Impact on consumer welfare through lower prices, higher real disposable incomes, economic well-being
What are the possible macroecnomic effects of robotics
- Effects on employment & unemployment from extensive capital-labour substitution
- Effects on competitiveness and exports and changing patterns of trade
- Effects on government finances if tax revenues from employment fall
Current UK labour migration situation
After several years of high levels of net inward migration of labour, the net flow of workers entering the UK labour market has slowed which was in part the result of the 2016 Brexit referendum
What are the possible microeconomic effects of a fall in net labour migration
Shortages of skilled labour such as in the National Health Service, construction, and farming
Impact on demand for and prices of properties to buy and to rent
Effects on dynamic efficiency with a possible brain drain of entrepreneurs / scientists
What are the possible macroeconomic effects of a fall in labour migration
- Fall in net outflow of remittances –will have an impact on UK current account of BoP
- Impact on employment and unemployment if aggregate labour supply contracts
- Consequences for economic growth and inflation from slower growth of AD + possible fall in LRAS
How many people in trade unions 2024
2024 5.5 million workers are in the TUC’s 48 affiliated unions
Why has there been a long term decline in union membership
- Impact of legislation that has reduced/removed many of their powers to engage in industrial action.
- Rise in flexible labour markets with short term contracts, zero hours, part time working, self-employment.
- De-industrialisation – there are fewer jobs in industries where unions tended to be stronger – there are less jobs in heavy manufacturing and many more in services.
- Impact of globalisation which has reduced the bargaining power of employees.
What are the key roles of trade unions
- Collective bargaining – protecting and improving the real living standards/real wages of their members
- Employee rights – protecting against unfair dismissal
- Pension entitlements – protecting pension for union members
- Protecting jobs
- Health & safety
- Workplace training – promoting better workplace training and education, helping the accumulation of human capital
How to trade unions affect wages and employment
Unions may bid for employers to pay a premium wage above the normal competitive market wage.
This might lead to an excess supply of labour and a contraction of total employment.
What will cause a trade union to be more successful
- Unions will have more success in raising wages for members if demand for labour is relatively wage inelastic – skilled workers
- Unions are more influential when they represent a high % of all workers in each industry/occupation.
What does a productiviy improvement agreement look like
It is a positve sum game, as workers benefit from increased pay, and firms benefit from increased productivity
What is the trade union wage premium
The percentage difference between the average hourly earnings of employees who are union members and those who are not – 4.2% in 2023
What are some evaluations for trade unions in labour markets
- Long term decline in union membership – which reflects the growing flexibility of the UK labour market including zero-hour contracts + decline of heavy industry and shrinking public sector.
- Trade union influence on pay depends in part on trade union density in an industry and the credible threat power they have with possible industrial action (for example, London Tube drivers).
- New Unionism focuses less on wage bargaining and more on protecting employment, pension rights, health and safety, workplace training, addressing gender & other discrimination.
- Don’t assume that trade unions successfully negotiating higher wages will inevitably lead to a contraction in employment / jobs (this is lazy economics) – challenge theoretical assumptions.
- Trade Unions may negotiate a combined pay and productivity deal with employers – a positive-sum game! Use some game theory to score higher analysis and evaluation marks.
What are zero hours contracts
Zero hours contracts do not guarantee a minimum number of working hours each week. In the UK labour market, people on zero-hours contracts are more likely to be young, part time, women, or in full-time education when compared with others in employment.
What are some zero hours contract stats
- Oct-Dec 2024 – 1.134 million
- Employment Rights Bill 2024 – employers will be required to offer a guaranteed number of hours to workers after that worker has worked there for a period of time, suggested to 12 weeks
What are some arguments in favour of zero-hour contracts
- Supporters of flexible employment contracts argue that they are good for businesses where demand and production is highly seasonal - for example in retailing, brewing, tourism, and catering. Employing people on a zero-hour contract may allow businesses to better control their costs.
- Zero-hours contracts might benefit some people who want a high level of flexibility in choosing when they want to work. It might suit younger people for example.
What are some arguments against zero hours
- A counter argument is that zero-hour contracts have contributed to an increase in “in-work poverty” where people are not able to work enough hours each week (often at relatively low wage rates) to earn sufficient to avoid remaining in poverty and reliant on top-up welfare benefits.
- Uncertain incomes make it harder for people to be given loans, mortgages, and mobile phone contracts.
What is the gender pay gap
The gender pay gap is the measured difference between male and female earnings, usually expressed as a percentage of male earnings.
What are some Underlying causes of the (persistent) gender pay gap
-
Breaks from the labour market:
- When women take maternity leave to raise a family, it is harder to achieve promotion when re-entering the jobs market.
- Age at which many women take a break from the labour force is often the point when careers take off and wages rise at a fast pace
- Access to education: In many lower and middle-income countries, opportunity for women to take qualifications and gain experience is limited, this is affected by social norms and high fertility rates
-
Patterns of employment: In developed countries:
- Women are disproportionately represented in part time work
- Many females are clustered in services jobs that pay less such as clerical, caring, catering, and cleaning
- Many women work in vocations where wages are relatively lower
- Gender pay gap remains affected by continued employer discrimination
- Increased female participation rates in economies has increased the supply of labour which may have contributed to lower relative wages
What are some policies to improve mobility and incentives might focus on
- Providing access to better quality training within firms – a good example is the Workplace Levy.
- Better funding for technical / vocational education – a good example is the new T-level qualifications.
- Improving the affordability and reliability of transportation – perhaps using subsidies for bus & rail travel.
- Addressing chronic housing shortages / expensive rents – perhaps through a maximum rent. - Renters rights bill
- Creating a bigger difference between pay/earnings in work and welfare benefits for those without a job.
- Lowering the burden of direct taxes especially for families on low incomes to encourage work incentives.
- Raising the level of the statutory national minimum wage.
- Providing tax-free child-care for all children aged 3 and over.
What is a minimum wage
A minimum wage is a legally enforced pay floor in the labour market. The National Minimum Wage (NMW) applies to most workers and sets minimum hourly rates of pay, which are updated annually. The National Living Wage (NLW) was introduced in 2016 and is the new name for the NMW rate that applies to workers aged 25 and over. - April 2025 - £12.21
What does a minimum wage do when imposed
The free-market equilibrium wage is W1 with employment level of E1. If a minimum wage of W2 is introduced – other factors remaining the same – employment contracts to E2 and the supply of labour expands to E3
What does a minimum wage to a market with inelastic labour demand
Smaller decrease in unemployment
What are some arugments for a minimum wage
- Equity justification: Every job should give fair pay linked with skills/experience of an employee.
- Poverty reduction: A minimum wage boosts the take-home pay of thousands of lower paid workers
- Training: It encourages firms to up-skill their workers and can lead to higher labour productivity
- Incentives: Will improve incentives for people to look for paid work rather than stay on benefits
- Anti-discrimination: A way of tackling discrimination of low-paid female / younger workers
- Workers may feel more valued and therefore more productive
- Can be used to prevent employers from exploiting monopsony power
What are some arguments against a rise in the minimum wage
- Jobs: Higher minimum wage adds to the costs of employing workers and might cause higher unemployment
- Small businesses: Many smaller businesses struggle to make a profit - risk of a rise in business closures
- Training: There are better incentives for training than a minimum wage including for example, offering businesses tax relief on apprenticeships
- Competitiveness: Might make many UK businesses less competitive in some global markets
- Inflation: Higher labour costs might cause higher inflation which lowers real incomes for households
- Employers tend to cut other benefits such as additional pay for weekends/evenings or holiday pay
- Does not apply to the self-employed or those employed informally ‘gig economy’
- Different minimum wages for different ages - firms might shift employment to younger people
Judgement for minimum wage - The unemployment created depends on the elasticity of supply and demand for labour
- Inelastic demand and supply is less likely to create unemploymen
In which labour market diagram does a minimum wage not cause unemployment?
In a monopsony
Arguments for executive pay ceilings
- Equity and fairness:
- Damages social cohesion when the super-rich see their pay and earnings soar
- Shareholders are reluctant to impose controls on pay at the AGM, many are passive investors
- The high bonus culture encourages short-term decision-taking rather than focusing on the long-term strategic direction of a business
- Huge levels of executive pay contribute to growing income and wealth inequality in society
- The average FTSE 100 CEO earns 109x the mediam UK worker (2021)
- Proposal - cap CEO earnings at a ratio of 20:1 compared to their average employee’s salary
- Idea is to limit executive pay and use the money for increasing salaries of other employees
Arguments against executive pay ceilings
- Ceiling might prevent talented executives moving to the UK – high rate of pay is a price signal within the market or top talent from the UK might leave themselves
- Might lead to businesses re-locating overseas to countries with lower top-rate taxes
- Capping pay and bonuses could lead to rewarding executives in other ways e.g. using complex share options
- Introducing higher marginal income tax rates on top executive pay might be a better option than capping
- Caps of say 12 or 20 x the pay of the average worker will impact differently across industries – for example, average pay is low in the hotel industry compared to financial services in the City of London
- The extent of the excess demand depends on elasticity of supply and demand
Factors that influence labour demand in an industry such as construction
- Price of the good or service: The higher the price of the final product, the more profitable it is for firms to produce it, and the more labour they will demand. Linked to economic growth
- Productivity of labour: The more productive workers are, the more output they can produce per hour, and the more labour firms will demand. Linked to marginal revenue product theory.
- Cost and availability of substitutes: If there are good substitutes for labour, such as robotics, firms will be less likely to demand labour at a given wage. Cost of substitution is also important.
Explain how robotics / artificial intelligence might impact on demand for labour in occupations of your choice.
These technologies have the potential to replace human workers in a variety of occupations. For example, robots can perform tasks such as welding and surgery. AI is being used to develop self-driving cars and trucks, which could reduce the need for human drivers.
Positive effects on labour demand of technologies such as AI
- Derived demand: AI will create new jobs for engineers, programmers, and technicians.
- AI might allow smaller businesses to thrive and grow as they benefit from easily accessible technologies.
- AI might create new markets and industries such as developing new medical treatments and creating new forms of entertainment
Causes of geographical immobility in the UK labour market
- Housing costs: Moving to a new area can be expensive, especially if workers must buy a new home. Rents are high in many towns and cities often taking up a high percentage of disposable income.
- Other living costs: The cost of living varies significantly from one area to another. This includes the costs of commuting, childcare expenses & food prices. A study by the Institute for Fiscal Studies found that the cost of moving to a new area can be up to £10,000.
- Family and social ties: Workers may be reluctant to move away from families and friends. A study by the Joseph Rowntree Foundation found that only 1 in 5 unemployed people is willing to move to find a job.
Policies to improve geographical mobility in the UK labour market
- Rent controls / reforms to rental sector to improve rights of tenants including ban on no-fault evictions
- Increases in new housebuilding with legal requirements for constructing affordable homes
- Infrastructure investment to expand the transport network + possible caps on fares
Why are mean earnings greater than median earnings in the UK?
If the pay of a small fraction of individuals at the top end of the income spectrum are exceptionally high, it can result in a higher mean earnings figure. For example, the super-high earnings of many UK CEOs. Median earnings of FTSE-100 CEOs in 2022 was £3.4 million.
Interventions that might offset or reduce the monopsony power of employers in certain industries / occupations
- Minimum wage laws that set a legally-enforced pay floor in the labour market. When enforced, this can help to ensure that workers are paid a fair wage, even in industries where there is monopsony power.
- Regulations & laws such as allowing trade union representation, outlawing gang-masters, equal pay legislation, employment protection laws
Reasons for the long–run decline in UK trade union membership
- Structural change in employment from heavy manufacturing and large public sector employment to a more flexible labour market dominated by services where unionisation rates are much lower.
- Globalisation and flexible hiring – many multinationals make it harder for trade unions to organise. The rise of the gig-economy has led to a rise in contingent, non-contracted, self-employed workers - most of whom are not TU members
Factors that affect trade union bargaining power in the labour market
- Union density and membership: Higher union density means can provide unions with more negotiating leverage. This links to the credible threat of strike power and the commercial effects of strikes.
- Economic climate: In times of rapid GDP growth, falling unemployment, and skilled labour shortages, unions may have greater bargaining power due to the scarcity of skilled workers. Consider recent pay rises for thousands in logistics
How are wages determined when a monopsony
employer negotiates with a trade union?
Monopsony employer have buying power when hiring labour. They use can this power to pay a wage lower than the MRPL. Trade Unions might help to counter-balance monopsony exploitation.
Factors that might explain the gender pay gap in the UK labour market
- Age and the glass ceiling effect: A substantial gender pay gap emerges among full-time employees aged 40 and over. This links to many women taking a career break. Women may face systemic barriers, such as gender bias, stereotypes – both discriminatory practices – a good example of bounded rationality of employers.
- Occupational clustering effects - In many jobs such as social care, accommodation and food services – pay is relatively low with limited trade union representation – but there is a high concentration of females working in these occupations.
Why might a trade union–induced wage increase in a competitive labor market not lead to decreased employment?
- Efficiency Wage Effects: Higher wages boost productivity—by reducing shirking, lowering turnover, and improving morale—which can offset increased labor costs.
- Inelastic Labor Demand: In roles where labor is hard to replace with capital or technology (e.g., skilled positions), demand remains relatively stable despite wage increases.
- Increased Aggregate Demand: Higher wages raise disposable income, stimulating consumer spending and local demand that supports employment.
- Reduced Turnover Costs: Lower employee attrition saves on recruitment and training expenses, making it easier for firms to manage higher wages without cutting jobs.
