3.5 the labour market 3.5.3 wage determination in competitive and non-competitive markets Flashcards
what are some reasons for as to why wage rates differ within an occupation, give an example that is illegal but average wages still proves to be an issue
for the highest paid workers, there is a ___ supply and a high ___
the more inelastic the supply/demand curves, the ____ the change in the real wage rate and the ______ the change in employment as a result of a change in demand/supply for labour. this will also depend on the ____ of the shift
-age
-education
-training
-work experience
-skill/talent
-sex/ethnicity
-for the highest paid workers there is a low supply of labour and a high MRP
-the more inelastic the demand/supply curves, the greater the change in the real wage rates and the smaller the change in employment as a result of a change in the demand/supply for labour. this will also depend on the size of the shift
wage determination: perfectly competitive labour market
what are the 4 assumptions made in the parfectly competitive labour market (the smae as perfect competition for products)
what is the key charcteristic of this market, if this was not occuring then what would happen?
how does this differ to an imperfectly competitive market
assumptions:
-many workers and many employers, no single emlpoyer can influence the wage rate, workers and firms are price takers
-labour is homogenous, all workers have the same skills and productivity
-perfect information, workers know all about job opportunities and wage rates
-no barriers to entry and exit, workers can freely enter and exit a job, no training
key characteristic:
-wages are determined purely by supply and demand and all workers are paid the same.
-if workers were not paid the same, they would simply move elsewhere where all workers are paid the same
-in an imperfectly competitive market, wages will not always be set where demand equals supply
wage determination: monopsony in the labour market
what does it mean when there is a monopsony in the labour market
how would a firm increase their labour force in this market, what are the implications of this
how does a firm determine how many workers to employ
how is this compared to a perfectly competitive market
-it means that there is a single buyer of the labour
-if the firm wants to hire more workers, it must increase wages, to attrect more workers
-when they raise wages for one woker they must raise wages for all workers (because if they don’t then existing workers that are being paid less will leave orbe unhappy), this makes the cost of hiring one woker (MC) higher than the actual wage paid to the worker, this is why the MC curve is above the AC curve
-the firm decided to hire a certain amount of workers. the firm hires workers until the cost of hiring one more worker (MC) equals the value that worker brings (D = MRP - marginal revenue product)
-they produce at MC=D, but will pay their labour at W1, the S=AC curve.
-they employ less people than in a perfectly competitive market, but at a lower wage rate
Current labour market issues in the UK:
what are the 7 current issues with the UK labour market
-skill shortages
-young workers
-retirement
-wage inequality
-zero-hour contracts
-the gig economy
-migration
current labour market issues in the UK:
what are the skill shortages like in the UK labour market
how do young workers affect the uk labour market
how does retirement affect the uk labour market
-uk faces significant skill shortages, 4 million shortage in high skilled workers post brexit, will cost the UK £90bn per year
-UK faces significant shortages in healthcare, technology and engineering
-in 2020, measured one million job vacancies
-the UK suffers from geographical and occupational immobility, meaning that there are both a lack of workers with an adequate skillset, and there are nit enough highly skilled workers distributed equally
young workers:
-young workers are experiencing employment challenges, inluding reduced job opportunities
-employment for young workers aged bewteen 16-24 fell by 1.8% in feb 2025
retirement:
-an ageing population leads to a higher number of retirements, reducing the workforce and increasing government spending. pensioners now account for 50% of welfare spending
wage determination: monopoly in the labour market
what is a trade union
how do trade unions act like a monopoly in the labour market
what are the 2 ways in which trade unions could increase wages
if a firm wanted to hire more than QS, what must they do
how do these methods affect the wages and employment rates compared to the perfectly competitive labour market
Eval point:
-what are 2 strategies used by the government to reduce the power of trade unions,
-what was the most recent act passed by the government, what did it state, what was the most recent voting turnout
-a trade union is an organisation with memebers who are usually workers or employees
-a trade union can cotrol the supply of labour and negotiate higher praces or better conditions for workers, this is achved through collective bargaining
-they could set barreirs to entry which would reduce supply, e.g. teachers unions lobbied for a rule which means that all teachers must have degrees.
-they could set a specific wage rate that workers are not willing to work less than, this means that workers will refuse to work for less than the wage, meaning that firms can no longer hire at a lower wage, and can only hire new labour at that higher wage.
-if a firm wanted to hire more than QS, they must increase the wage further to attract new workers.
-it leads to higher wages but a fall in employment compared to the perfectly competitve labour market
Eval:
-outlawed secondary picketing ( banned protests at other workplaces)
-set a limit on the number of wokrers at picket lined (protestors that stand outside a workplace whilst protesting)
-The trade union act of 2016 was the most recent act
-this included a clause which stated at least 50% of people must vote in the ballot to strike
-the most recent teachers union ballot to strike only had a 28% voting turnout
wage detrmination: bilateral monopoly
what is a bilateral monoply labour market
give an example
-it is a market where both a monopoly and a monopsony are present, negotiating wages
-the NHS and the BMA (british medical association)
-the NHS want to kee wages low whilst the BMA wants to raise tem leading to tough negotiations.
current labour market issues:
how is wage inequality an issue in the UK labour market
how are zero hour contracts an issue in the UK labour market
how is the Gig economy currently currently an issue the UK labour market
how is migration an issue in the UK labour market
2 other concerns
wage inequality:
-wage inequality has been increasing with disparities between high and low earners widening over time, this raises questions over relative overty and the redistribution of income
-in 2019, 20% of low paid workers were in insecure jobs, including zer-hour contracts, compared to 6% of non low paid workers
zero-hour contracts:
-zero-hour contracts offer no guaranteed working hours, leading to job insecurity for many workers. workers do not know how much they will earn a week
-over 1 million workers in the UK are on zero hour ontracts as their main job
the gig economy:
-the gig economy involves short term contracts, working for firms such as uber and deliveroo
-there are concerns over the rights of these workers and the unreliability of their weekly pay
migration:
-many argue that increased levels of migration lead to a lower wage rate
-but it allows employers to recruit from a larger pool of workers, this hels to reduce skill shortages
other concerns:
-underemployment
-workers conditions
government intervention in th elabour market:
what are the 3 ways that the government may intervene in the UK labour market
-through setting maximum and minimum wages (national minimum wage)
-through public sector wage setting
-through policies that hep tackle immobility
government intervention: national minimum wage
when did labour introduce the national minimum wage, why
when does it change, what are the implications to firms who do not adhere and pay the NMW
what are 3 arguments FOR the NMW (male/female wage differentials / impact on existing workers / unemployment trap)
what are 3 arguments against the NMW (impact on costs ,price,number of labour / wage spiral / regional differences, secondary earners)
what will the impact of the NMW depend on
what will the level of job losses depend on
what will hapen if both are ineastic/elastic, provide examples
-give an example of an industry that is likely to have elastic demand of labour
-give an example of an industry that is likely to have an inelastic supply of labour
-labour introduced the NMW in 1999, to reduce the poverty levels
-it changes every april, all workers over school leaving age receive their NMW
-firms who choose to pay below the NMW, can be fined.
FOR:
-it will potentially lead to a decrease in male/female wage differentials. This is because the NMW mainly affect those on lower paid jobs, women are more likely to take up these jobs (they are vocational, offer more flexible hours). and so a minimum wage decreases the gap between male and female wages
-the NMW may make it less likely for employees to leave their jobs, this is because there is an increase in business loyalty as they are being paid more, this will decrease labour turnover, and therefore decrease training and recruitment costs, leading to an cinrease in profits. However, this is a weak argument as if the workers are offered a higher patying job elsewehere they will leave.
-the minimum wage provides an incentive to work since the potential amount of income to be made increases, this is likely to prevent the unemployment trap
Against:
-it will lead to an increase in labour costs, this may cause firms to increase their prices, which may reduce profit/ sales. Also firms will be unable hire as many workers leading to them hiring less employess, as well as making some redundant
-can lead to a wage spiral, because the implementation of the NMW means that the lowest paid see an increase in wages, those who are earning more expect to see an increase to maintain the wage differnetial, thise spirals up to the higher paid workers ultimately leading to a chain reaction that results in an increase in labour costs, decreasing profit margins, therefore reducing competitiveness
-NMW does not take into account regional differences, so it may not be effective at reducing poverty, as the cost of living in some areas (london) is higher than that in others (plymouth)
-most workers impacted by the NMW are secondary earners, meanng that it may not help the primary earner/household earner, thus making it less effective at reducing poverty.
Impact of the NMW depends on where it is set, whether it is above or below the current wage,
-if it is set above, employers may be less able and wiling to pay the new wage, potentially leading to job losses. -if set below/ around the current wage then things may not change much and the loss of jobs will be smaller
-the level of job losses depends on the elasticity of supply/demand.
-elastic means that both employers and labour are sensetive to a change in wages
-inelastic means that employers abd workers are less sensetive to wage changes
-if both are elastic, then there will be a large number of jobs lost, e.g if employers can easily swap labour for automation or cant afford the higher wages.
-if both are inelastic then there will be a smaller number of job losses, e.g workers cant easily find new jobs or employers have a high demand for labour.
elastic demand of labour:
-a fast food industry may be elastic as workers can easily be replaced by automation, so an increase in the NMW may cause many workers to lose their jobs because employers can switch to automation
inelastic supply of labour:
-the healthcare market, doctors and nurses require high levels of education/qualifacation and training to be hired. they are not easy to replace so firms are willing to accept the higher NMW, so the supply of labour is inelastic.
government intervention in the UK labour market:
what is the unemployment trap
when people are reluctant to work due to the lack of financial incentives, e.g unemployment beenfits + the incme from a low paying job may not be much greater tha just the unemployment benefits, this may be due to a higher income tax rate
government intervention:maximum wages (wage cap)
where is an example of where a maximum wage may be set
why may the government set a maximum wage on ______ sector workers
what are 2 benefits of maximum wages
what is one disadvantage of maximum wages
what does the impact of the maximum wage depend on
what is the evaluation for a wage cap
-a maximum wage may be set on those highly paid individuals like CEO’s
-the government may set maximum pay limits on public sector workers in order to keep public spending (GS) low
Benefits:
-it leads to a reduction in income inequality. this is becasue it limits the amout the highest earners can make, therefore reducing the gap, as they earn less, potentially causing an increase in thoe on lower wages pay as the firm may look to inmprove productivity (increased investment in lower paid labour) with the remaining capital
-it may reduce the unequal distribution of wealth within the economy. As those now earn less income, they are less able to increase their wealth (e.g. thorugh purchasing assets), again incomes may rise for lower paid, allwoing them to potentially purchase assets.
Disadvantage:
-it could potentially lead to a brain drain.this is becasue the max wage will typically impact those on the hghest wages these tend to be the highest skilled/experienced workers. the wage cap would lead to an excess demand for labour since less workers are willing to work for the wage set as they feel that the responsibilities and stress are not worth the pay. This may cause the UK to lose these workers as they realise they can be paid more abroad, leading to a brain drain.
Impact:
-the impact of the wahe cap depends on the elsaticities of supply and demand of labour. If they are inelastic then there will be little impact.
Evaluation for wage caps:
-it is argued that the supply and demand for the highest paid workers (like CEO’s) are very inelastic, since there is a small supply of CEO’s and firms only need 1 CEO. So their cost is a very small part of total costs
-this could mean that maximum wages will have almost no effect on the market other than causing a reduction in wages
government intervention in the labour market: public sector wage setting
what main issue does public sector wage setting aim to fix
because trade unions are weak in the UK, what are the government able to do, is this in the short run or long run
what happened between 2010 and 2015, how did thi simpact the pay of private sector workers
in the long run, if prvate sector wages increase and public sector wages dont, what will the government be forced to do and why
As a result of the aforementioned impacts, what tends to be the trend rates for the public sector wage setting rate in the short and long run.
-public sector wage setting aims to fix the issue of income inequality between private and public sector workers, and ensures that the wage is high enough to attract highy skilled workers in the public sector, e.g teachers and doctors
-because trade unions are weak in the UK, in the short run the government are able to make whatever wage decisions it decides in order to improve the budget
-between 2010 and 2015, public sector workers experienced a pay freeze, this put downward pressures on private sector wages since few people were likely to leave for the public sector
-as a result this lead to private sector employers using it as evidence to limit pay rises for their workers.
-in the log run, if private sector wages increase and public sector wages dont and the gap widens, more workers from the public sector will move to the private sector.this will then force the government to increase public sector wages in ordeer to increase supply
-as a result in the long run, the wages of public sector workers tend to rise by the same percentage over a long period of time
-but in the short run they can rise by different rates
government intervention: tackling immobility
what are 3 ways that the government can improve the geographical mobility of labout (houses/transport/subsidies)
what are 3 ways in which the government could improve the occupational mobility of labour
what is another strategy that could be used to tackle immobiity of labour
how can discrimination in the labour market be reduced
Strategies to improve the geographical immobility of labour:
-the government could improve the supply of houses and reduce the price of properties, makig it easier for people to move. People can better afford housing in the potential areas of jobs, improvig the geographical mobility
-the government could improve transport lnks which will allow peopleto commute further distances to work, allwoing them to accept job offers which are far away as they are able commute easily, f they do move it will be easier for workers to go back and visit family etc too.
-the government could subsidise houses and/or taxes, e,g in areas where there are labour shortages, incentivise people to work there as well as removing the barriers to them entering reducing the geographical immobility of labour
Strategies to improve the occupational immobility of labour:
-vocational training can be increased, particularly for younger students (e.g wek or aprenticships)
-could encourage further study (potentially subsidie it further), they have been encouraging engineering degrees as there is a large labour skill shortage there
-they could encourage training schemes within work
-firms could offer more flexible hours, as this woud allow more parents to work
-discrimination in the labour market could be decreased through the government subsidising those firms that decide to take on unemployed individuals from groups of above average unemployment rates (e.g disabled)
