3.5.3 Wage Determination Flashcards
1
Q
What does a perfectly competitive labour market mean?
A
All workers are paid the same
2
Q
What conditions are required for a perfectly competitive labour market?
A
- labour is homogeneous (same skill, age, gender etc.)
- perfect knowledge in the market
- perfect mobility of labour (occupational + geographical)
- all workers + employers are price wage takers
- no barriers to prevent wage rates increasing or decreasing if demand or supply changes
- firms aim to maximise profits + workers aim to maximise wages
3
Q
How useful is a perfectly competitive labour market?
A
- this assumption is unrealistic
- however it is a useful starting point = used to compare with real labour markets to identity imperfections
4
Q
How does economic theory explain such differentials in pay?
A
- a nurse is generally employed by NHS + is paid by taxation = govt keen not too borrow too much (National debt 100% of GDP) so will seek to maintain wages at affordable level
- govt acts as a monopsony = nurses can’t go to the highest bidder as NHS is main employer
Where as… - senior bankers are working the the financial sector = private + worth a lot of money —> suggests their MRP is higher than that of nurses who are not involved in commercial acitivities
- this means firms can pay bankers high wages + offer bonuses as rewards
- nurses do not operate in a sector which generates revenue (like teachers/police) so their income is restricted to what tax can pay —> can’t put a numerical value on their output
5
Q
Senior banker vs nurse diagram analysis
A
- senior bankers are highly skilled + experienced = inelastic supply of labour
- demand for bankers of high expertise is very high + inelastic = few substitutes
- nurses qualify sooner then a senior bankers = more elastic supply of labour
- demand will not be as high = more elastic curves = low equilibrium wage
6
Q
What are current labour market issues?
A
- immigration
- gig economy
- trade unions
- over 50s
- economic inactivity
7
Q
Current immigration trends
A
- left brexit = saw the end of free movement of labour for EU residents
- has led to an increase in net immigration of more people coming to the UK than leaving = mostly from non-EU countries
- the number of immigrants from non-EU countries has experienced a significant surge in the last two years
- immigration from EU countries have declined since 2016
8
Q
Influence of immigration on labour supply?
A
- increase in labour = rightward shift = lead to a fall in wages for certain jobs
- could stimulate growth, enhance productivity + diversify the skills available in the work force
- especially true if immigrants are selected to industries where there are currently shortages
- (could also be used on a LRAS diagram)
9
Q
Macro impact of immigration?
A
- increase in demand for education + healthcare = more govt spending needed —> increase in AD
- increased demand for rental properties = could lead to an increase in rent
- increase in consumption = increase in AD
10
Q
Purpose of trade unions?
A
- trade unions allow an increase in collective bargaining power of employees in the public sector
- could counteract monopsony power
11
Q
General trend of trade union membership
A
- general trend is a decline
- more people in unions as a percentage in the public sector rather than private sector
12
Q
Influence of trade unions diagram analysis
A
- trade unions may bid for employers to pay a premium wage (W2) above the market rate (W1)
- however this may lead to a reduction in workers employed = lead to an excess supply of labour
13
Q
When will trade unions be more successful?
A
- unions will have more success in increasing wages for members if the demand for labour is relatively wage inelastic
- this is because fewer people will lose their job following an increase in pay
- unions are also more influential when they represent a higher percentage of all workers in a given industry = TU benefit from stronger bargaining power
14
Q
Impact of changes to retirement age?
A
- currently 68
- workers are expected to remain in the workforce longer = increase in labour supply
- however.. improvements in life expectancy mean there are more pensioners in the system = pressure on govt. spending + healthcare
15
Q
How do govt intervene in labour markets?
A
- maximum + minimum wage
- govt. policies e.g. improved training or subsiding employers, setting up job centres
16
Q
What is the national minimum wage?
A
- lowest hourly rate an employer can pay an employee
- different levels of minimum wage depending on age
- younger workers considered to be less productive due to less experience = lower MRP = true for all industries?
17
Q
Main aims of national minimum wage?
A
- equity justification = reduced inequality + worker exploitation —> BUT does it go far enough? NMW is a starting point but other reforms are necessary
- labour market incentive = improves incentive for people to start looking for work = boosting labour supply = reduce economically inactive = increase economic growth
- labour market discrimination = tool to offset discrimination of low paid females + younger employees = BUT offer cultural change + legislation needed
18
Q
Advantages of NMW?
A
- Keynesian argument = higher wage rates = increased disposable income of lower-paid workers (many of whom having a larger marginal propensity to consume as they can’t afford to save)
- therefore increase consumption + feed through to the circular flow of income creating further jobs from the multiplier effect
- efficiency wage argument = raising pay levels for low paid jobs may increase productivity = psychological benefits + employers may be incentivised to improve training + production processes
- lowers the increase in labour cost
19
Q
Disadvantages of NMW?
A
- competitiveness + jobs = rise in labour costs makes it more expensive to employ people
- can lead to unemployment - some businesses like pubs + hotels worse off
- BUT this will depend on how far the NMW is set above equilibrium + the PED + PED of labour supply
- furthermore an increase in AD which is stimulated from higher wage will increase the demand for labour by firms = thus eradicating unemployment
20
Q
How effective is NMW in reducing relative poverty?
A
- boosts incomes of households where more than one person is already at work BUT the greatest risk of relative poverty is amongst the unemployed —> therefore not very well targeted
- doesn’t take into account regional differences in cost of living
- businesses may feel pressured to maintain wage differentials between those above NMW + those on = labour costs increase more than predicted
