3.5.3 Wage determination in competitive and non-competitive markets

Question 1

Wage discrimination

Answer 1

Wage rates differ within an occupation due to age, education, training, work experience, skill/talent/ability to perform tasks, sex and ethnic background. These last two are illegal but average wages suggest that this still can be an issue.
For the highest paid workers, there will be a low supply and a high MRP.
The immobility of labour means that there may be excess supply in one area/occupation, causing low wages, and not enough workers in another, meaning high wages.
The lower the elasticity of supply/demand, the greater the change in the real wage rate and the smaller the change in employment as a result of a change in demand/supply for labour.
- The effect will also depend on the size of the shift.

Question 2

Labour market issues

Answer 2

There are a number of current issues in the labour market which you need to be aware of. The best way to do this is to do some research close to the exam but some of the issues include:
- Skills shortages
- Young workers
- Retirement
- Wage inequality
- Zero-hour contracts
- The “Gig economy”
- Migration
There are also issues over the correct level of unemployment, underemployment, the minimum wage, conditions in work etc.

Question 3

Skills shortages

Answer 3

The UK suffers from geographical and occupational immobility, which means that even if there are enough engineers, there aren’t enough engineers in certain areas.

Question 4

Young workers

Answer 4

Workers who join the workforce during recessions tend to receive lower lifetime earnings than those who enter the labour force in better times. Youth unemployment can be a particular issue; during hard times, firms are unlikely to employ new workers but are reluctant to let go of their current workers and so the young struggle to get a job.

Question 5

Retirement

Answer 5

Rising life expectancy and an increase in the number of people reaching retirement age, as the ‘baby boomers’ reach retirement, has negative effects on the government budget. Pensioners now makeup over 50% of welfare spending. The retirement age will have to continue to rise and the government is trying to encourage people to save for their own pensions.

Question 6

Wage inequality

Answer 6

Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages. This is a contentious issue and raises questions over relative poverty and the level of redistribution required.

Question 7

Zero-hour contracts

Answer 7

There has been a rise in zero-hour contracts and this causes problems for employees who do not know how much they will earn a week and receive little notice of when they will be required to work.

Question 8

The “Gig economy”

Answer 8

Many more people are now self-employed and undertake short term contracts, working for companies such as Uber and Deliveroo. There are concerns over the rights of these workers and the unreliability of their pay each week.

Question 9

Migration

Answer 9

Many people suggest that migration causes a fall in wages but it allows employers to recruit from a larger pool of workers and helps to fill skills shortages.

Question 10

Government intervention in the labour market

Answer 10

Minimum and Maximum wages (and National minimum wage)
Public sector wage setting
Tackling immobility

Question 11

National minimum wage context

Answer 11

Labour introduced the National Minimum Wage in April 1999 to raise people out of poverty and decent minimum standards in the workplace. ​It changes every April, all workers over school leaving age receive their minimum wage and a failure to pay employees can lead to the firm being fined. The National Living Wage has been introduced for over 25 year olds, and the government pledge for it to be £9 by 2020.

Question 12

Arguments for the National minimum wage

Answer 12

● The wage is able to ​reduce poverty as it mainly impacts the lowest wages and ensures that these people have enough to live on.
● It can ​reduce male/female wage differentials as women are more likely to take up lower paid jobs (because they are vocational, offer more flexible hours etc.) and so a minimum wage is able to decrease the gaps between men and women.
● It may make employees less likely to leave their job as they feel more ​loyal to the businesses​, which will decrease labour turnover, and therefore recruitment and training costs. This will increase profit but is a ​weak argument since if they are offered a higher wage elsewhere, then they will leave.
● There could also be a ​more content workforce ​who will be more motivated and, thus making the business more productive and increasing its profits. However, this assumes all people are ​motivated by money​ and this is not necessarily the case.
● Moreover, a minimum wage provides an incentive to work and prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive.
● It ensures everyone receives a ​fair wage, ​and is not exploited by being drastically underpaid.

Question 13

Arguments against the National minimum wage

Answer 13

● The most notable negative consequence is the potential ​loss of jobs in the industry (or unemployment on a macro level).
● Moreover, the minimum wage will ​raise costs for the companies ​and so may increase their prices, which is liking to lead to a fall in profit.
● Another negative impact could be the ​wage spiral as individuals will try to protect wage differentials between them and the lowest price workers. An increase in the wage of the lowest paid will mean that others expect theirs to rise too. This will reduce profit and further reduce competitiveness.
● There is ​no consideration of regional differences​, and so this, alongside the fact many people on minimum wages are ​secondary earners​, means the minimum wage may be ineffective at reducing poverty.

Question 14

Impact of minimum wage

Answer 14

The impact of any minimum wage will depend on where it is set, and whether this is above or below the current wage. The level of job losses is dependent on the elasticity of supply and demand. If both are relatively elastic, there will be large job losses but if both are relatively inelastic, the losses will be small.

Question 15

(Synoptic point) Minimum wages positive macroeconomic effects

Answer 15

• Able to reduce inequality
• Lead to rise in AD, since the poorest people see a rise in income and they have a high MPC, leading to economic growth and employment

Question 16

(Synoptic point) Minimum wages negative macroeconomic effects

Answer 16

• Public finances will be worsened as the government employs many people of the minimum wage
• The rise in business costs will lead to a reduction in competitiveness, which will negatively affect the trade balance and reduce the net trade component of AD. It will also increase SRAS, causing inflation in the short term

Question 17

Maximum wages

Answer 17

Minimum wages are fairly common but few places set maximum wages. Some people suggest there should be a maximum wage for chief executives or a maximum pay ratio ​compared to the lowest wage earners. The government can set maximum pay limits for public sector workers in order to keep public sector spending down. It will help to ​reduce inequality.

Question 18

Maximum wage effect and impact

Answer 18

The introduction of maximum wages will lead to ​excess demand within the industry, since people may not put themselves forward for the job if they don’t think the salary matches the stress and responsibilities or they know they could get higher wages abroad. The UK may suffer from a ​loss of the best workers​, which will reduce the quality of businesses and decrease competitiveness.
- The impact of this depends on the elasticities of supply and demand: inelastic means there will be little impact. It is argued that supply and demand for the highest paid workers, such as chief executives, is ​very inelastic since there is a small supply of chief executives and firms only need one chief executive so their cost is a very small part of total costs. This could mean maximum wages will have ​almost no effect on the market,​ other than causing a reduction in wages.

Question 19

Public sector wage setting

Answer 19

Since trade unions in the UK are weak, in the ​short run​, the government can effectively ​make whatever wage decisions it decides ​in order to improve the budget.
- 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.

Question 20

Public sector wage setting evaluation

Answer 20

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.

Question 21

Tackling geographical immobility

Answer 21

● They could improve the ​supply of houses and reduce the price of properties making it easier for people to move. They could make renting cheaper to help people working in temporary jobs.
● They could ​improve transport links which will allow people to work further away from where they live and if they do move, it will be easier for them to visit family and get to job interviews.
● National advertising​ could be used so people know about jobs all over the country.
● The government could introduce subsidies on houses, taxes etc. in ​areas where there are labour shortages to encourage people to move to the area and take up
jobs.
● One action taken has been to ​move public agencies out of London, for example the
DVLA was moved to Swansea​. Although this doesn’t improve the mobility of labour, it helps to prevent excess demand for labour in one place and excess supply in another.

Question 22

Tackling occupational immobility

Answer 22

They can improve occupational mobility of labour, through education. This will help to make the workforce more employable and better at a wider range of jobs:
● Vocational training​ can be increased, particularly for younger students.
● They could encourage ​further study​, such as university or technical courses at
college. They have been ​encouraging engineering degrees.
● They could encourage greater spending on ​training within work​.
● Education could be targeted at improving skills shortages and helping with job
applications, for example interview skills.
They could also encourage ​flexible work patterns which will allow more parents to work.
On top of this, ​discrimination in the labour market could be reduced and employers who take on unemployed individuals from groups with above average unemployment rates could be subsidised.