3.5.3 Wage Determination

Question 1

What are some current labour market issues?

Answer 1

1. Unemployment rates, Youth unemployment, and regional unemployment
2. Skills shortages and recruitment difficulties
3. Gender pay gaps
4. Wage differentials, minimum wage and living wage increases
5. Trade union membership percentages
6. Migration flows

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.
3. 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.

Question 5

Describe the following labour market issue: Unemployment rates, Youth unemployment, and regional unemployment

Answer 5

1. Unemployment rates: from 2009-2013 unemployment averaged 8%, it decreased to 4% in 2019. However in January 2021, it rose to 5.3% due to the Covid pandemic. Unemployment rates grew again in **2024 and are projected to reach 5% in 2025 as the UK enters a technical recession.
2. Youth unemployment: currently at around 15% youth unemployment has been on the rise this may be due to increases in national insurance as well as as successive rises in the minimum wage. Youths can’t get into entry-level jobs.
3. Regional unemployment: unemployment rates also vary by region and as a percentage of labour force: London has the highest unemployment rate of 5.9% closely followed by Northeast England at 5.5%. London has a high concentration of service-based industries, particularly finance, hospitality, and retail, which are more vulnerable to economic downturns and automation. London also has a highly competitive labor market with many job seekers, including international migrants. Meanwhile, Northeast England has historically relied on manufacturing and heavy industry, sectors that have faced long-term decline. The lowest unemployment rate is Northern Ireland at 2% and the second lowest is Scotland at 3.3%. Northern Ireland and Scotland have a mix of public sector employment and industries that may offer more stability. Northern Ireland, may have lower labor force participation rates, meaning fewer people are actively looking for work, which can contribute to a lower unemployment rate.

Question 6

Describe the following labour market issue: Skills shortages and recruitment difficulties

Answer 6

Skills shortages: Approximately 987,000 individuals aged 16-24 in the UK were not in education, employment, or training (NEET) as of early 2025. This situation poses challenges for sectors like health, social care, and the green economy, which require a skilled workforce. Proposed solutions include public-private collaborations, apprenticeship reforms, and localized training initiatives.
recruitment difficulties: the number of job vacancies in the UK from 2022 (June) to September 2024 has decreased by around 500,000. This indicates that employers may be scaling back hiring due to increases in the minimum wage as well as increases in national insurance rates.

Question 7

Describe the following labour market issue: Gender pay gaps

Answer 7

As of 2024:
- In the financial and insurance sector the pay gap was 29.8%. This sector boasted the highest gender pay gap.
- The sector with the lowest pay gap of 4.7% was transportation and storage.

Question 8

Describe the following labour market issue: Wage differentials, minimum wage and living wage increases

Answer 8

Wage differentials: in 2023 the lowest paid jobs based on median full-time gross weekly pay were retail cashiers and checkout operators who earned £382.7 as well as childminders who earned £385.4. This is before tax.
minimum wage increases: in 2010 the minimum wage per hour for under 18s was £3.64 however in 2025 it is £7.55. This may be due to the high cost of living in the UK. It could also be because the government wants to encourage people to join the labour force.
living wage increases: the living wage has also increased from £6 an hour to £12.21 per hour from 2010 to 2025.

Question 9

Describe the following labour market issue: Trade union membership percentages

Answer 9

From 1995 two 2023 the percentage of employees that are members of a trade union in the UK has fallen from 32.4% to 22.4% this means less than a quarter of workers are part of a trade union in 2023 and this may limit their ability to counter monopsony employer power. The biggest employers in the UK in 2024 by number of employees was the compass group, Tesco, and HSBC holdings. With a combined workforce of over 1 million employees.

Question 10

Describe the following labour market issue: migration flows

Answer 10

There have been over 600,000 people migrating into the UK in 2024 which is a small decrease from 2022 and 2023 which were just over 800,000 each. The amount of work visas being granted also increased from 2020 at 114,528 to 2024 at 605,264. However this may be due to post Brexit changes in the rules for movement of workers who may now have to apply for work visas where they previously did not.