3.5.3 Wage determination in competitive and non-competitive markets Flashcards
What is the equilibrium wage rate?
- The equilibrium market wage rate is at the intersection of the supply and demand for labour.
- Employees are hired up to the point where the extra cost of hiring an employee is equal to the extra sales
revenue from selling their output
What are the main causes of differentials in wages between occupations?
- Compensating wage differentials – these might be a reward for risk-taking, working in poor conditions and
during unsocial hours. - Reward for human capital – differentials compensate workers for (opportunity and direct) costs of human
capital acquisition. - Different skill levels – market demand for skilled labour (with inelastic supply) grows more quickly than for
semi-skilled workers. - Differences in labour productivity and revenue creation - workers whose efficiency is high and generate
revenue for a firm often have higher pay. - Trade unions who might use their collective bargaining power – to achieve a mark-up on wages compared
to non-union members - Artificial barriers to labour supply e.g. professional exams, migration controls
- Employer discrimination - a factor that cannot be ignored despite many years of equal pay legislation in place
What is the Gig Economy?
The Gig Economy is a labour market characterised by the prevalence of short-term contracts or freelance
work
What are well known gig economy businesses?
Uber, Amazon, UberEATS, TaskRabbit, Hermes and Deliveroo.
Explain how much of the UK works in gig economies and why there is a rapid growth in the gig economy.
- 4% of UK working adults aged between 18 and 70 are working in the ‘gig economy’ according to a recent
report - equivalent to around 1.1 million people. - Some of the rapid growth of the GIG economy can be traced to the impact of the last recession. Many
employers now see short term contract work as a way of de-risking in an age of economic uncertainty.
What are the benefits of the gig economy for businesses?
- Reduces fixed costs – lower payroll expenses
- Reduced investment – e.g. Uber drivers own their own vehicles
- Flexibility in managing hours to expected demand for their products
What are the benefits of the gig economy for workers?
- Flexible hours / control over when to work
- Ability to work from home (more autonomy)
- A common way for people to earn extra income
- Less risk of getting stuck in routine jobs
What are the drawbacks of the gig economy for workers?
- Doubts over the true flexibility of hours offered by employers
- Lack of paid vacation/sick leave/employment rights
- Job and income uncertainty make it harder to get a mortgage – many people are in precarious jobs
- Inadequate investment in worker training
- Workers bear most of the risk in their job – often incomes are lower for the self-employed
What are the drawbacks of the gig economy as a whole?
- Shrinking of the tax base will hit revenues
- Reductions in road safety / more accidents e.g. from delivery drivers using un-licenced vehicles
What are the possible microeconomic effects of an ageing population?
Changing patterns of consumer demand in markets / affecting profits of businesses in particular sectors Impact on housing market e.g. if people can live in their own homes for longer
Impact on labour market for different jobs - labour demand and labour supply consequences to consider
What are the possible macroeconomic effects of an ageing population?
Impact on government welfare spending and future tax revenues e.g. NHS care
Impact on the rate of growth of productivity and long-term GDP growth
Impact on UK competitiveness if the median age continues to rise rapidly
What are the possible microeconomic effects of robotics?
- Impact on productivity, costs and profits of firms/industries at cutting edge
- Impact on demand for, supply of labour in specific jobs and the real wages paid
- Impact on consumer welfare e.g. through lower prices, higher real disposable incomes, economic-wellbeing
What are the possible macroeconomic effects of robotics?
Effects on employment & unemployment from extensive capital-labour substitution
Effects on competitiveness and exports and changing
patterns of trade
Effects on government finances e.g. if tax revenues from
employment fall
What is net inward migration of labour?
The net flow of workers entering a country
What are the possible microeconomic effects of a fall in net labour migration?
- Shortages of skilled labour e.g. in the National Health Service, construction
- Impact on demand for and prices of properties to buy and to rent
- Effects on dynamic efficiency e.g. with a brain drain of entrepreneurs / scientists
What are the possible macroeconomic effects of a fall in net labour migration?
- Fall in net outflow of remittances - impact on UK current account of BoP
- Impact on employment and unemployment if aggregate labour supply contracts
- Consequences for economic growth and inflation e.g. from slower growth of AD + possible fall in LAS
What are the factors behind trade union decline?
- Impact of legislation that has reduced/removed many of their powers to engage in industrial action
- Rise in flexible labour markets e.g. with short term contracts, zero hours, part time working, self-employment
- De-industrialisation – there are fewer jobs in industries where unions tended to be stronger – e.g. less jobs in
heavy manufacturing and many more in services - Impact of globalisation which has reduced the bargaining power of employees
What are the key roles for trade unions?
- Protecting and improving the real living standards / real wages of their members
- Protecting workers against unfair dismissal (i.e. upholding employment rights)
- Promoting improvements in working conditions, work-life balance & related health and safety issues
- Promoting better workplace training and education, i.e. the accumulation of human capital
- Protection of pension rights for union members
How do trade unions affect the supply of labour?
- Trade Unions may bid for employers to pay a premium wage above the normal competitive market wage.
- This might lead to an excess supply of labour and a contraction of total employment
- Unions will have more success in raising wages for members if demand for labour is relatively wage inelastic
- Unions also more influential when they represent a high % of all workers in a given industry/occupation
- Pay might also rise if unions and employers agree a pay deal based on better productivity
Describe how trade unions use collective bargaining power to increase wages
Trade unions are better placed to
negotiate better pay for their
members when the wage elasticity of
demand for labour is low.
E.g. when it is costly or difficult for an
employer to replace labour with
capital if wages are pushed too high
and threaten operating profits.
What are key evaluation points of trade unions and the labour market?
- Long term decline in union membership – which reflects the growing flexibility of the UK labour market
including zero-hour contracts + decline of heavy industry and shrinking public sector - Trade union influence on pay depends in part on trade union density in an industry and also the credible
threat power they have with possible industrial action (e.g. London Tube drivers)
What are zero hour contracts?
Zero hours contracts do not guarantee a minimum number of working hours each week. In the UK labour market,
people on “zero-hours contracts” are more likely to be young, part time, women, or in full-time education when
compared with others in employment.
What are arguments in favour of zero hours?
- Supporters of flexible employment contracts argue that they are good for businesses where demand and
production is highly seasonal - for example in retailing, brewing, tourism and catering. Employing people on
a zero-hour contract may allow businesses to better control their costs. - Zero-hours contracts might also benefit some people who want a high level of flexibility in choosing when
they want to work.
What are arguments against zero hours?
- A counter argument is that zero-hour contracts have contributed to an increase in “in-work poverty” where
people are not able to work enough hours each week (often at relatively low wage rates) to earn sufficient to
avoid remaining in poverty and reliant on top-up welfare benefits. - Uncertain incomes also make it harder for people to be given loans, mortgages and mobile phone contracts