3.5 - Wage determination in competitive and non-competitive markets Flashcards
Labour markets
Why might wage rates differ?
Age, education, training, work experience,
skill/talent/ability to perform tasks, sex and ethnic background
Current Labour Market Issues in the UK
- Skills shortages
- Youth unemployment
- Changes to retirement ages
- School leaving age
- Zero-hour contracts
- Temporary/flexible working
Wage determination in a perfectly competitive market
- In a perfectly competitive labour market, we make the assumption that
- wages are determined purely by demand and supply and all workers are paid the same.
- If workers were not paid the same, they would simply
move somewhere else where the wage rate in the industry was higher.
Current issues in the labour market
- Skills shortages
- In December 2021 more than 50% of firms surveyed reported difficulties in finding skilled workers
- A shortage of skilled labour means that firms are having to increase wage rates to attract labour
- Firms are effectively poaching skilled labour from each other and there is a shortage of new skilled labour entering the market
- Some of the many labour markets experiencing shortages include nursing, engineering, pharmacies, secondary teaching, and graphic design
Current issues in the labour market
- Youth unemployment
Unemployment for 16-24 year olds in April 2022 was at 10.8% compared to the general unemployment rate of 3.8%
This means that it is nearly three times as likely for a young person to be unemployed
Where possible employers prefer to hire workers with more experience as it can lead to higher productivity
The education or skills gap is another reason for youth unemployment. Young people leave school without the skills that employers require
Current issues in the labour market
- Changes to retirement ages
In 1995 the state retirement age was 60 for women and 65 for men
In recent years, State Pension reform has been ongoing and the retirement age is gradually being increased to 68 for both men and women
This means that workers are expected to remain in the workforce for longer
One reason for the change is that with too many pensioners in the system, it is difficult for the government to fund monthly pension payments
An improvement to life expectancy has meant there are more pensioners in the system
Current issues in the labour market
- School leaving age
The earlier a student leaves school the lower their skill level
Different policies are in place in England as compared with Scotland, Northern Ireland and Wales
In the latter three the school leaving age is 16 and there are no further conditions in place
In England, students can leave school at 16 but have to do one of the following until they are 18
Stay in full-time education, e.g. at a college
Start an apprenticeship or traineeship
Spend 20 hours or more a week working or volunteering, while in part-time education or training
This aims to increase the skill level but also puts increased pressure on training providers
There are not enough apprenticeships to match the demand
Current issues in the labour market
- Zero-hour contracts
In 2022, nearly 1 million workers were on zero-hour contracts which is more than five times the number in 2000
These contracts are extremely beneficial to employers
Workers are not guaranteed work and only get paid for the work they do
Workers do not receive many of the benefits that full-time employees receive - this reduces costs for the firm
Some workers do enjoy the flexibility this provides as they can sign contracts with several firms and sometimes enjoy a wider variety of work
These contracts change unemployment figures as workers may not end up receiving much work, but are no longer counted as unemployed
Current issues in the labour market
- Temporary/flexible working
Flexible working is working in such a way that it meets the employee’s needs
Covid19 has driven changes in thinking around where work happens
Many workers now want to work from home
Some employers prefer this as it lowers company costs
Other employers are insisting on a return to the workplace as it is required, or they want more control over their workforce
There is an increasing focus on well-being and more people are opting to work part-time jobs or jobs that offer more flexibility
Maximum and minimum wages
- The UK Government usually intervenes in the labour market in order to improve equity and avoid the exploitation of workers
- A maximum wage is a government imposed price ceiling below the market price and is rarely used
- There has been some discussion recently to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full-time employees
- If CEOs were paid less then the average pay per worker may increase
- A minimum wage is a legally imposed wage level that employers must pay their workers
- It is set above the market rate
- The minimum wage/hour varies based on age
Public sector wage setting
- The UK government is the largest employer in the nation
- In many industries, the UK Government is the dominant employer and so is able to exercise monopsony power in setting the wage rates
- There are several implications of this public sector wage setting
- If the government increases the NMW, they are significantly increasing their own wage bill
- The private sector often uses public sector wages as a benchmark for their own wage calculations
- If public sector wages increase and private sector ones do not, it can create tension between workers in the different sectors
- Increases to public sector pay often have to be paid for by increases in tax rates for the entire working population
- In June 2022, public sector workers were striking due to issues with the pay increases offered by the Government
- Worker’s wages were frozen from 2010 to 2015 after the 2008 global financial crisis
- This was followed by rampant inflation and wage increases well below the level of inflation
Policies to tackle labour market immobility
> There are many individual policies that the UK Government employs in order to reduce labour market immobility and together they help reduce the labour market failures
- Improved education/training
> Education improves skills and a wider skill base allows workers to move more easily between jobs which are not identical - Targeting skills shortages
> Identifying markets with specific skills shortages and training workers in those skills provides some opportunity for workers to switch between occupations - Subsidising employers
> A per hire subsidy from the government provides an incentive for employers to take on workers without the necessary skills (and train them) - or workers from a specific demographic (e.g. disabled workers) and this improves occupational mobility - Relocation subsidies
> Providing relocation subsidies to workers reduces both geographical and occupational immobility - Reducing information asymmetry
> Setting up job centres and improving the flow of information between employers and the unemployed helps workers to quickly identify new opportunities - Reducing discrimination
> Reducing discrimination in hiring practices will help some workers improve occupational mobility
The elasticity of demand for labour
- This refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate)
> If the demand for labour is elastic, then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firms
If the demand for labour is inelastic, then an increase in the wage rate will result in a less than proportional decrease in the quantity demanded of labour demanded by firms
If demand is elastic firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise
If demand is inelastic firms will have a much smaller response to rising or falling wages
Factors That Influence PED of Labour
- The proportion of labour costs to total costs
> The higher these are then the more elastic the demand for labour will be; the lower these are then the more inelastic the demand for labour will be - Ease and cost of factor substitution
> If substituting capital for labour is easy and the cost is comparable to the increase in wages, the demand for labour will be more elastic - and vice versa - PED of the final product
> If the product being produced is price inelastic in demand, then the demand for labour is likely to be more inelastic i.e if wages rise, firms will pass on the increased costs of production to the final consumers - Time period
> In the short-run, demand for labour is likely to be more price inelastic i.e an increase in wages will have a less than proportional decrease in the quantity demanded. However, in the long-run firms can research and employ alternative methods of production and the demand for labour becomes more price elastic
The elasticity of supply of labour
- This refers to how responsive the supply of labour is to a change in the price of labour (wage rate)
> If the supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in the quantity of labour supplied
If the supply of labour is inelastic, then an increase in the wage rate will result in a less than proportional increase in the quantity of labour supplied
Skill levels in occupation and elasticity of supply of labour
- In low skilled occupations the quantity of labour supplied is very responsive to a change in wage rates i.e. supply of labour is elastic
- Occupations which require a longer and higher level of training tend to have an inelastic supply of labour i.e even if wage rates increased significantly, there would be a less than proportional increase in the supply of labour in the short run
