3.5.3 Wage Determination

Question 1

What are some current labour market issues?

Question 2

What are the four types of government intervention in the labour market?

Answer 2

1. Minimum wage: A legal wage floor to prevent worker exploitation and correct monopsony power. It raises incomes and boosts labor supply but may cause unemployment if set too high.
2. Maximum wage: A wage ceiling to reduce income inequality and prevent excessive pay gaps. It can address social issues but may lead to talent migration or reduced incentives.
3. Public sector wage setting: The government directly sets wages for public sector jobs to correct labour market failures like monopsony power and labour shortages. This ensures fair pay, attracts workers to essential services, and maintains job stability. However, if wages are set too high, it may increase tax burdens, while low wages can cause worker shortages and reduce service quality.
4. Policies to tackle labour immobility:
   - Training & education – Upskilling workers to improve occupational mobility.
   - Relocation support – Housing subsidies or transport investment to aid geographical mobility.
   - Job matching services – Improving information on vacancies to reduce frictional unemployment.

Question 3

Describe factors which can impact elasticity of demand for labour

Answer 3

Elasticity of labour demand measures the responsiveness of demand when there is a change in the wage rate.

1. Labour costs as a % of total costs: When labour expenses are a high % of total costs, then labour demand is more elastic.
   2.Ease and cost of factor substitution: Labour demand is more elastic when a firm can substitute easily between labour and capital inputs.
2. Price elasticity of demand for the final output: This determines whether a firm can pass on higher labour costs to consumers in the form of increased prices.

Question 4

Describe factors which may impact elasticity of supply of labour

Answer 4

1. Skills & Qualifications – Higher skill requirements make supply more inelastic.
2. Training Time – Longer training periods reduce elasticity.
3. Mobility of Labour – Geographical and occupational mobility affect responsiveness.
4. Time Period – Supply is more elastic in the long run as workers adjust.
5. Wages & Incentives – Higher wages attract more workers, increasing elasticity.
6. Availability of Unemployed Workers – A larger pool of unemployed workers makes supply more elastic.
7. Substitutability – If workers can switch jobs easily, supply is more elastic.