Labour Market Failure

Question 1

Labour Market Failure definition

Answer 1

When market forces of demand and supply do not result in an efficient allocation of labour resources

Question 2

Monopsony

Answer 2

singly buyer of a good/service (e.g NHS for doctors)

Question 3

How is a monopsony a labour market failure?

Answer 3

Pays at a much lower wage rate

Can do this because of abuse of market power

Question 4

Trade Unions definition

Answer 4

An association that seeks to improve the pay, employment and working conditions of its members

Question 5

Factors that affect a trade unions power

Answer 5

• Size of Union (big = powerful)
• PED of good/service (inelastic = powerful)
• Profitability of firm (high = less powerful)
• Unemployment levels (high = less powerful)
• Financial reserves of union (high = powerful)

Question 6

Two methods Union can affect pay of its members (2):

Answer 6

• implementation of a minimum wage (can cause unemployment)
• Changing conditions of supply of labour (restrict acceptable qualifications, make supply more inelastic. Sometimes can make supply of labour a “closed shop” whereby employer can only employ members of the trade Union)

Question 7

Bilateral monopoly defintion

Answer 7

Where a monopoly buyer of labour encounters a monopoly seller of labour

(Dominant firm encounters powerful Trade Union)

Question 8

Factors that improve firm’s bargaining strength

Answer 8

• possibility of capital substitution
• source labour from abroad
• high profitability levels

Question 9

Outcome of bilateral monopoly

Answer 9

Trade Union can increase wages without decreasing employment

Question 10

How Unions operate (3)

Answer 10

• Collective bargaining (union bargains on behalf of all its workers)
• Local pay deals (allows local factors to be taken into consideration
• performance related pay. If a worker can increase their MRP, they get paid more

Question 11

Cause of Labour Market Failure:

Imperfect information

Answer 11

Workers are in jobs that are less well paid/that they enjoy less. Employers may also not employ the most productive workers as they are not in touch with whole workforce

Question 12

Cause of Labour Market Failure:

Skills shortages

Ways to fix

Answer 12

Vacancies remain unfilled because employed workers have inadequate skills.

Education + training throough government programmes, can also sponsor firms to train workers

Question 13

Cause of Labour Market Failure:

Economic inactivity

Answer 13

People who are of working age who are neither not willing or not able to work

Reduce size of potential workforce and therefore productivity

Question 14

Cause of Labour Market Failure:

Discrimination

Answer 14

A firm may pay workers different wages or refuse to hire certain workers on grounda of race, age, gender, sexuality

Question 15

Effect of discrimination (4)

Answer 15

• group discriminated against suffers
• Producers who discriminate have smaller pool of labour to choose from
• Consumers experience higher prices if firms discriminiate
• Government has to pay out more benefits to those who are discriminated against

Question 16

Theories of discrimination (2)

Answer 16

• Becker’s theory. Some firms are prepared to accept the higher costs of production and lower profits that come with discrimination
• firms discriminate to reduce cost (e.g. assuming older workers are less productive)

Question 17

Other types of labour market failure (5)

Answer 17

1) Firms may not be profit maximisers
2) Geographical immobilities
3) Poor information- unaware of vacancies
4) Skill shortages
5) Economic inactivity