3.5.3: Wage Determination In Competitive & Non-Competitive Markets

Question 1

What is labour market equilibrium?

Answer 1

Where demand for labour is equal to supply for labour.

Question 2

Labour market equilibrium for perfect competition:

Answer 2

Question 3

What does the labour market equilibrium for perfect competition assume?

Answer 3

Wages are determined purely by supply and demand, and that all workers are paid the same.

Question 4

Monopsony in the labour market graph:

Answer 4

Question 5

Profit maximisation for monopsony in the labour market:

Answer 5

W2Q2.

Question 6

Wages for monopsony in the labour market:
-Explanation:

Answer 6

W1.
-Monopsony has buying power over potential employees.

Question 7

Trade union in a competitive market graph:

Answer 7

Question 8

Profit maximisation for trade union in a competitive market:

Answer 8

W1Q1.

Question 9

Wages for trade union in a competitive market:
-Explanation:

Answer 9

W2.
-Trade unions could lobby for a rise in their minimum wage.
-Trade unions could also set barriers to entry to increase wages (e.g. teachers lobbied for a rule that required teachers to acquire a degree).

Question 10

What are the conditions for a successful trade union?

Answer 10

-Representation of high % of all industry workers.
-Demand for labour is wage inelastic.
-High profitability of the employer.

Question 11

What are the current labour market issues?

Answer 11

• Skills shortages: 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.
• Young workers: Workers who join the workforce during recessions tend to receive lower lifetime earnings than those who enter the labour force in better times.
• Zero-hour contracts: ​Employees do not know how much they will earn a week, and receive little notice of when they will be required to work.
• Wage inequality: Those on higher wages have seen their wages grow by a bigger % than those on lower wages.

Question 12

How does the government intervene in the labour market?

Answer 12

-Minimum wage.
-Maximum wage.
-Public sector wage setting.
-Policies to tackle labour market immobility.

Question 13

What are advantages of a minimum wage?

Answer 13

-Prevents exploitation.
-Lowers poverty levels.
-Incentivises people to work rather than claim benefits.

Question 14

What are disadvantages of a minimum wage?

Answer 14

-No consideration for regional differences.
-Rises labour costs for firms.
-Causes job losses.

Question 15

How does public sector wage setting work in the short run?

Answer 15

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

Question 16

How does public sector wage setting work in the long run?

Answer 16

If private sector workers receive pay rises and public sector workers don’t, people will move from the public sector to the private sector, ​forcing the government to increase public sector wages in order to expand supply.

Question 17

How can geographical immobility be tackled?

Answer 17

-Improved transport links.
-National advertising.
-Subsidising areas with labour shortages.

Question 18

How can occupational immobility be tackled?

Answer 18

-Encouraging further education.
-Subsidising on-the-job training.