3.5.3 - wage determination Flashcards
what Is the labour market equilibrium
In a perfectly competitive labour market, we make the same assumptions as in a perfectly competitive product market. Therefore, 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. For example, a waiter in Liverpool would move to be a waiter in Portsmouth if the wage rate was higher. This would reduce supply and lead to an increase in wages in Liverpool, and increase supply and lead to a fall in wages in Portsmouth.
what are the current issues in the labour market
● Skills shortages: The UK suffers from geographical and occupational immobility, which means that even if there are enough engineers, there aren’t enough engineers in certain areas.
● Young workers: Workers who join the workforce during recessions tend to receive lower lifetime earnings than those who enter the labour force in better times. Youth unemployment can be a particular issue; during hard times, firms are unlikely to employ new workers but are reluctant to let go of their current workers and so the young struggle to get a job.
● Retirement: Rising life expectancy and an increase in the number of people reaching retirement age, as the ‘baby boomers’ reach retirement, has negative effects on the government budget. Pensioners now makeup over 50% of welfare spending.
Wage inequality: Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages. This is a contentious issue and raises questions over relative poverty and the level of redistribution required.
● Zero-hour contracts: There has been a rise in zero-hour contracts and this causes problems for employees who do not know how much they will earn a week and receive little notice of when they will be required to work.
● The ‘Gig economy”: Many more people are now self-employed and undertake short term contracts, working for companies such as Uber and Deliveroo. There are concerns over the rights of these workers and the unreliability of their pay each week.
● Migration: Many people suggest that migration causes a fall in wages but it allows employers to recruit from a larger pool of workers and helps to fill skills shortages.
how does the government intervene in the labour market using minimum wage
a wage set by the government that is above the equilibrium wage.
what are the arguments for a minimum wage
● The wage is able to reduce poverty as it mainly impacts the lowest wages and ensures that these people have enough to live on.
● It can reduce male/female wage differentials as women are more likely to take up lower paid jobs (because they are vocational, offer more flexible hours etc.) and so a minimum wage is able to decrease the gaps between men and women.
● It may make employees less likely to leave their job as they feel more loyal to the businesses, which will decrease labour turnover, and therefore recruitment and training costs. This will increase profit but is a weak argument since if they are offered a higher wage elsewhere, then they will leave.
● There could also be a more content workforce who will be more motivated and, thus making the business more productive and increasing its profits. However, this assumes all people are motivated by money and this is not necessarily the case.
Moreover, a minimum wage provides an incentive to work and prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive.
● It ensures everyone receives a fair wage, and is not exploited by being drastically underpaid.
Arguments against the national mi
what are the arguments against a minimum wage
● The most notable negative consequence is the potential loss of jobs in the industry (or unemployment on a macro level).
● Moreover, the minimum wage will raise costs for the companies and so may increase their prices, which is liking to lead to a fall in profit.
● Another negative impact could be the wage spiral as individuals will try to protect wage differentials between them and the lowest price workers. An increase in the wage of the lowest paid will mean that others expect theirs to rise too. This will reduce profit and further reduce competitiveness.
● There is no consideration of regional differences, and so this, alongside the fact many people on minimum wages are secondary earners, means the minimum wage may be ineffective at reducing poverty.
what is a max wage
a wage level that is set below the equilibrium.
what are the effects of having a maximum wage
● Minimum wages are fairly common but few places set maximum wages. Some people suggest there should be a maximum wage for chief executives or a maximum pay ratio compared to the lowest wage earners. The government can set maximum pay limits for public sector workers in order to keep public sector spending down. It will help to reduce inequality.
● The introduction of maximum wages will lead to excess demand within the industry, since people may not put themselves forward for the job if they don’t think the salary matches the stress and responsibilities or they know they could get higher wages abroad. The UK may suffer from a loss of the best workers, which will reduce the quality of businesses and decrease competitiveness.
● The impact of this depends on the elasticities of supply and demand: inelastic means there will be little impact. It is argued that supply and demand for the highest paid workers, such as chief executives, is very inelastic since there is a small supply of chief executives and firms only need one chief executive so their cost is a very small part of total costs. This could mean maximum wages will have almost no effect on the market, other than causing a reduction in wages.
