3.5.3 - wage determination in competitive and non-competitive markets Flashcards
Define geographical immobility
- workers unable to move to diff places to seek and find work possibly due to social reasons, such as not wanting to move away from family or the cost of travel/accomodation
Define occupational immobility
workers being unable to move between jobs as they lack appropiate skills/training. As an economy shifts from havign a manufacturing to a service-sector base, many manu workers find it difficult to transfer to jobs in service sector as they lack the required skills
Define elasticity of labour demand
Elasticity of labour demand measures the responsiveness of demand for labour (employment) when there is a change in the wage rate.
Reasons for labour market failure
discrimination, economic inactivity, skill shoratges, action of trade unions, action of monopsony employers, labour immobility
Define maximum wage
A wage that is set below the equilibrium wage rate. In theory, the outcome would be an excess demand for labour, or a labour shortage.
Define national living wage
A wage that is set above the equilibrium wage rate. In theory, the outcome
would be an excess supply of labour, or unemployment – called the National
Living Wage since 2016. For 23 years above
-outside of london; £12
- inside of london 13.15
Define poverty trap
A situation in which there is little incentive for workers in low-paid jobs to
earn extra income, because it would result in having to either pay higher direct tax and/or losing some of their welfare benefit payments.
Define real wages
The hourly rate of pay adjusted for inflation.
Define replacement ratio
The proportion of your income in your working life that you need to maintain
the same level of living standards in your retirement.
Define unit labour costs
The average cost of labour per unit of output; effectively, the proportion of
the cost of production of a product accounted for by labour costs. Calculated
using the formula: Unit labour cost = total labour cost ÷ total level of output.
(ULC = TLC/Q)
Define wage elasticity of demand for labour
The responsiveness of the demand for labour to a change in the wage rate
of labour. Calculated using the formula: %ΔDL ÷ %ΔW.
Define wage elasticity of supply of labour
The responsiveness of the supply of labour to a change in the wage rate of
labour. Calculated using the formula: %ΔSL ÷ %ΔW.
Define trade union
An organised group of employees who work together to represent and protect the rights of workers, usually by using collective bargaining techniques.
Define strike
Action taken by a trade union in which members do not work, usually due to
grievances or concerns over working conditions or pay. Also known as
industrial action. (wildcat strike is one without official approval)
Define pension
A pension is a payment made to people who have retired from work.
Effects of a minimumwage diagrammatically
- Min wage ste at w1 results in wage above market equilibrium wage
- results in extension of supply but contraction of demand, thus cretaing excess supply and q-q1 will be unemployed
- introducing nmw when d and s of labour is fairly elastic results in greater unemployment than when d and s is inelastic
Aims of an NMW
- prevents exploitation of workers due to payment of unfairly low wages
- increasing pay of poorest through NMW = more equitable distribution of income
- increase incentives to work bc people get a job rather than claim benefits, improving replacement ratio
- increases participation rates
Evaluate taxes
- make regressive taxes more progressive; increase taxes on richer or increase income allowance for poorer so poorer have more to spend/ reduce regressive taxes like VAT and fuel duty
- but by raising taxes, you distort incentives to work, less incentive for rich to work and invest/take risks so less gov revenue. reducing rgereesive taxes reduces gov revenue - more austerity polcies
evaluate benefits
- raise benefits (universal means tested) - increasing means tested leads to increased poverty trap - unintended consequences and excessvie costs
evaluate min/max wages
- min wages helps those on lowest wages, increase SOL as they meet needs
- max wages are a price ceiling
- max wages reduce incentives
- min wages:
evaluate legislation
- costly enforcement and gov failure due to it being too strict so firms shut down/relocate to countries where it is less strict - unintended consequences
- anti-discrimination, hiring/firing, min wage, leave
- cost of interevention outweigh benefits
evaluate gov spending on education/training/healthcare
- spending on education reduce skill shortages,improves labour productivity, higher MRP, higher wages etc
- spending on healthcare - increase productiviyt, less people out of work, closer to full employment
- but very expensive, contradicts austerity
- ## time lage
Evaluate policies to redistribute income/wealth
- incentives; can it distort incentives
- state of gov finances; affordable?
- equity/efficiency; distorted incentives by min wage reduces efficiency but increases equity
- policies are based normative judgement; may lead to gov failure bc increased risk of inefficiency.
- does gov even need to intervene? if it just an acceptable level of inequality, we can avoid risk of intervention
Arguments for NMW
- poverty alleviation
- reduce wage differentials; wage above equilbirum wage level means those on low wage see a boost to eanring. reducing gap
- increase incentive to work for volutary unemployment
- fiscal benefit to gov bc less spending on benefits and mroe tax revenue
- increase productivity, increased morale
- incentive for firms to boost human capital
- counter monopsonist employer
costs of nmw
- unemployment created depends on elasticty of labour demand/supply
- youth lose out the most; wages dep on MRP, youth less likely to have MRP, skills that justifies there employment at NMW so long term unemployment
- those not on NMW bc on higher wage may ask for higher wages to maintain differential as they have harder job -WAGE PRICE SPIRAL
- cost to biz; shut down, reduce competitiveness internationally
- regional differences; NMW should be higher in south. this may not be considered
- hit to gov finance
Determinants of wage elasticity of demand
- Susbtitutability of capital for labour: higher sub, more elastic demad for labour bc if wages get higher, they jsut sack workers and use capital
- Elasticity of demand for the product; more inelastic for final product, increase in wages jsut passed on in the form of higher price fo product
- Cost of labour as percentage of total cost: higher costs, more elastic demand
Time period: all FOP are variabl in long term to its is elastic but in short term it is fixed so inelastic
Elasticity of labour supply determinants
1) nature of skills required for job; more specific skills, harder to it is for people to enter so inelastic
2) length of training period; longer time period, less likely people enter an industry, so wage inelastic
3) vocation; if wages fall, supply is inelastic as people are unemployed for the vocational element not monetary benefit
4) time; SR means supply is inelastic if wages fall bc people have to give notice, see if the change is permanent
Pros and cons of max wage
- rise in wages above productivity leads to inflation, so setting max wage limits how much prices can rise, preventing wage price spiral
- limit inequality
- reduce labour csts and increase incentive to hire more workers
BUT - unfair not to reward greater effort with higher income
- higher pay increases motivation to work
- people might move abroad
Describe recent issues with public sector wage setting
● Between 2010 and 2015, public sector workers experienced a pay freeze. This put
downward pressure on private sector wages since few people were likely to leave
the private sector for the public sector and private sector employers could use this as
evidence to limit pay rises for their workers
Importance of effective public sector wage setting
● However, in the long run, if private sector workers receive pay rises and public
sector workers don’t, people will move from the public sector to the private sector and
this will force the government to increase public sector wages in order to expand
supply.
- As a result, the wages of public and private sector workers tend to rise by the same
percentage over a long period of time but in the short term they can rise by different
rates.
