3.5.3 Wage determination in competitve and non-competitive markets

Question 1

Wage differentials

Answer 1

The differences in wages between different groups of workers or between workers in the same occupation

Question 2

Why do wage differentials exist

Answer 2

1. High demand for some workers due to their MRP
2. Inelastic demand and supply for some workers

Question 3

What is a monopsony labour market

Answer 3

A labour market where there is one single employer so workers have only one choice of employer to work for

Question 4

How do monopsonist employers set wages

Answer 4

They can set wages below a worker’s MRP and what they would’ve been paid in an competitive market
They can drive down the level of employment that exists in a perfectly competitive labour market

Question 5

Imperfections in the labour market (7)

Answer 5

1. Economic Inactivity
2. Imperfect Information
3. Skill shortages
4. Unemployment
5. Geographical immobility
6. Occupational immobility
7. Discrimination

Question 6

How is economic inactivity a labour market failure?

Answer 6

Economically inactive ppl are considered a waste of a scarce resource (labour) - ppl who are sick or discourage workers
BUT it can be good for some ppl to economically inactive e.g. ppl in full-time education who increase the quality of the workforce, ppl who are looking after family members

Question 7

How is imperfect info a labour market failure?

Answer 7

Many workers end up in jobs that arent the best fit for them or dont pay enough
Employers end up with workers that arent as productive as they could be which increases costs and makes goods less competitive
Increases fricitional unemployment - ppl send time searching for jobs

Question 8

How are skill shortages a labour market failure?

Answer 8

Drives up wage costs for firms which increases their cost of production
Firms may be forced to employ workers who dont have the desired level of qualification/experiences for the job which reduces productivity and quality levels
Firms are relectant to train employees to prevent other firms poaching

Question 9

How is unemployment a labour market failure?

Answer 9

Waste of scarce resources - economy isnt making use of all of its resources efficiently
BUT unemployment helps keep wages down
Is serious if its a high level or long

Question 10

How does unemployment keep wages down

Answer 10

If everyone in the economy had a job and and employer wanted to hire a worker, they would have to offer them a higher wage than their previous job
They could offer non-precuniary benefits but they increase costs

Question 11

What is the unemployment trap?

Answer 11

When ppl are better off by choosing not to work and claiming unemployment benefits rather than working for a low wage
Based off a high replacement ratio

Question 12

What is the replacement ratio?

Answer 12

Th ratio of how much a person would earn if they were unemployed to how much they’d earn if they were employed

Question 13

What is geographical immobility?

Answer 13

When workers arent able/are reluctant to move to different locations to find the best jobs

Question 14

Causes of geographical immobility (2)

Answer 14

1. Ppl dont want to move away from families and friends
2. Its expensive to move house

Question 15

How is geographical immobility a labour market failure?

Answer 15

Leads to labour shortages in one area and surpluses in another
Causes regional wage differences - high with shortages, low with surpluses

Question 16

What is occupational immobility?

Answer 16

When worker’s arent able to move from one occuptation to another with ease

Question 17

Causes of occupational immobility (2)

Answer 17

Age - younger workers are more likely to retrain than older workers
Some occupations require high-level qualifications and certain personality traits

Question 18

How is occupational immobility a labour market failure?

Answer 18

Contributes to unemployment
Means skill shortgaes are harder to fix

Question 19

What is labour market discrimination?

Answer 19

When a specific group of workers is treated differently to other workers in the same job based on their race, gender, sexuality, religon etc

Question 20

How is labour market discrimination a labour market failure

Answer 20

Discriminated workers are forced to accept lower wages
Makes it harder to find jobs - misallocation of resources as they are forced to work in jobs where they are overqualified which means productivity can fall
Puts ppl off from going for promotions which can leave them in low paying jobs with limited career prospects
Incurs higher costs for firms and the government (less tax revenue/more benefits)

Question 21

What is public sector wage setting?

Answer 21

Government is a monopsony employer in the public sector so it ensures public sector workers are paid fair wages but trade unions can act to increase public sector wages and employment by creating a bilateral monopoly

Question 22

What are the issues with public sector wage setting?

Answer 22

Gov has been reducing public sector spending so there has been pay cuts and freezes for public sector workers
Gov has clashed with trade unions which leads to strikes/industrial action
Restricting pay means there will be less high-quality workers in the public sector as they will move to the private sector

Question 23

What is the NMW?

Answer 23

The legal minimum hourly rate of pay for different age groups
First introduced in 1999

Question 24

Benefits of the NMW (4)

Answer 24

1. Increases pay of ppl with low incomes which reduces the level of poverty in a country
2. Boosts the morale of workers which increases more productivity/output
3. Incentivises ppl to get a job as NMW means that there is greater reward for ppl doing a job that pays the NMW
4. Higher tax revenue

Question 25

Costs of the NMW (5)

Answer 25

1. Increases wage costs for firms which might mean they have cut jobs which increases unemployment
2. Could decrease the competiveness of UK firms compared to other countries with lower wage costs
3. UK firms may pass on higher wage costs to consumers through higher prices - leads to inflation
4. Might not decrease poverty - most of the poorest members of society e.g. elderly or the disabled are not in work so they wont benefit
5. May lead to unemployment - diagram

Question 26

What is a maximum wage

Answer 26

A wage set below the market equilibrium which limits a workers wage rate

Question 27

Benefits of maximum wage (3)

Answer 27

1. Prevents wage-price spiral as it limits how much prices can rise
2. Limits the level of inequality in a country
3. Reduces a firms labour costs and increases their willingness to hire more worker - Q2 on diagram

Question 28

Costs of maximum wage (4)

Answer 28

1. May be unfair to not reward greater effort or ability with higher incomes
2. The possibility of higher pay/pay rises provides motivation to work harder
3. Ppl who could earn higher wages might move abroad
4. Ppl may choose to train to work in the industry without the maximum wage

Question 29

What is a flexible labour force?

Answer 29

A labour force where workers can transfer between activities quickly in response to changes in the economy

Question 30

Government policies which increase labour market mobility (5)

Answer 30

1. Training and education schemes or help workers directly through skills training - helps worker gain skills and knowledge that are attractive to employers
2. Increase in apprenticeships and vocational education/restructuring of the exam system - helps young ppl gain skills they need to get a job BUT time lag
3. Reducing the power of trade unions which can cause inflexibility in the labour market
4. More flexible hiring and firing laws - encourages employers to take on more workers + allows firms to change the size of their workforce quickly/cheaply in response to changes in the market
5. Short-term and zero-hour contracts - lower costs for firms + increases the temporal flexibility of labour

Question 31

What is a short-term contract?

Answer 31

A contract which allows a firm to hire a worker for a certain length of time and can be extented to suit their needs

Question 32

What is a zero-hour contract?

Answer 32

A contract where firms can hire workers without guaranteeing them a definite number of hours of work per week. The employer can offer the employees a number of hours which suites the firms needs

Question 33

Problems with zero hour contracts

Answer 33

Can reduce unemployment figures but workers on these contracts dont have guaranteed income so its harder for them to manage their finances

Question 34

What is wage flexibility?

Answer 34

The ability of real wages to change in response to changes in demand and supply of labour
e.g performance related pay or regional pay awards

Question 35

Why is wage flexibility important for a flexible labour market?

Answer 35

Important during a recession - wage cuts and pay freezes can be accepted by workers as an alternative to losing jobs

Question 36

How can the government improve wage flexibility

Answer 36

Scrap the NMW
Limit trade union power