3.5.3 wage determination Flashcards
What is the price of labour?
The wage rate
What happens in the labour market if wages are too high?
There will be excess supply of labour, leading to unemployment. In a competitive market, workers will have to accept lower wages or be unemployed, meaning the wage rate should fall to the equilibrium/market clearing wage rate.
What happens in the labour market if wages are too low?
There will be excess demand of labour and a shortage. Workers are not willing to work if they are not being paid enough. Firms will have to pay more to encourage more people to work, wage rate should rise to the equilibrium rate.
What are some current issues in the labour market?
- skills shortages
- young workers
- retirement
- wage inequality
- zero hour contracts
- the gig economy
- migration
Why are skills shortages a problem in the labour market?
The UK suffers from geographical and occupational immobility. Even if there are enough engineers throughout the whole of the UK, there won’t be enough in certain areas.
Why are young workers are problem in the labour market?
Workers who join the workforce during recessions receive lower lifetime earnings than those who enter the labour market at better times. This makes youth unemployment an issue as firms are unlikely to hire new workers during harder economic times
Why is retirement a problem in the labour market?
Rising life expectancy and increased number of people at retirement age has negative effects of the fiscal budget, due to higher welfare spending.
Why is wage inequality a problem in labour markets?
Over time, those on higher wages see their wages grow more than those on lower wages. This raises questions over relative poverty and redistribution of income required.
Why are zero hour contracts a problem in labour markets?
This causes problems as employees are unaware how much they will earn in a week and receive little notice before they have to work.
Why is the gig economy a problem in labour markets?
Many more are self-employed and undertake short term contracts, eg. with Uber or Deliveroo There are concerns over rights of these workers and unreliability of their pay each week.
Why is migration a problem in labour markets?
Many people suggest that migration causes a fall in wages but allows employers to recruit from a larger pool of workers, reducing skills shortages.
What is the National Minimum Wage?
Wage floor set above the equilibrium wage rate. This results in an extension in quantity supplied of labour bur quantity demand contracts, leading to unemployment.
What are the advantages of minimum wages?
- reduces poverty as it impacts the lowest wages and ensures higher incomes
- can reduce male and female wage differences, women are more likely to take low paid jobs and so a minimum wage can help to decrease the wage gap between women and men
- employees may be more loyal to a firm, decreasing labour turnover, reducing training and recruitment costs. however, if they are offered a higher wage elsewhere they may leave
- workforce may be more content, increasing motivation, leading to higher productivity and profits for firms. however, people may not be motivated by money
- provides an incentive to work, preventing the unemployment trap, when benefits are higher than wage they could receive
- ensures everyone is paid a fair wage and not being exploited by firms
What are the disadvantages of minimum wages?
- potential loss of jobs in the industry
- higher costs for firms, increasing prices or reduced profits
- wage spiral caused as individuals try to protect wage differences between them and lower income earners. An increase in the lowest incomes means other expect higher incomes also, reducing profit and competitiveness
- no consideration of regional differences, may be ineffective at reducing poverty
What are maximum wages?
The government can set maximum pay limits for public sector workers to reduce spending and decrease inequality. Maximum wages lead to excess demand and the UK may lose their most highly skilled workers, reducing quality of g/s and decreasing competitiveness. The impact depends on elasticities of demand and supply - there is little impact when inelastic
What is public sector wage setting?
Since trade unions are fairly weak, the government can make whatever wage decisions they want to improve the budget. Between 2010 and 2015, there was a pay freeze for public sector workers. This put downward pressure on private sector wages since few people were likely to leave for the public sector. However, in the long run, people may move from the public sector to the private sector, forcing the government to increase public sector wages to increase labour supply. Therefore, public and private sector wages tend to rise by the same percentage over a long period of time.
What policies can the government use to tackle geographical immobility?
- improve supply of housing and reduce prices so that it becomes more affordable for people to move
- improved transport links allow people to work further away from where they live
- national advertising of jobs
- subsidies on housing, taxes, etc in areas where there are labour shortages to encourage people to take up jobs there
- public agencies could be moved out of London to prevent excess demand for labour in one area and excess supply in another
What policies can the government use to tackle occupational immobility?
- increased vocational training for younger students
- encouraging further study eg. university or technical courses at college
- encouraging greater spending on training within employment
- education could be targeted at improving skills shortages and helping with job application eg. interview skills
