Labour Market Failure

Question 1

What is labour market failure?

Answer 1

This is when a labour market fails to to reach an efficient / equitable output from society’s point of view.

Question 2

What are the types of labour market failure?

Answer 2

1. Labour immobility
2. Discrimination (imperfect information)
3. Skills gaps
4. Monopsony power of employers
5. Trade Unions

THERE ARE MORE BUT CBA

Question 3

What are the causes of labour immobility?

Answer 3

Occupational
1. Loss of skills and motivation through long term unemployment
2. Barriers to entry for certain occupations e.g qualifications
Geographical
1. Regional house price differences
2. Family and social ties
3. Differences in living costs

Question 4

Consequences of labour immobility?

Answer 4

1. Structural unemployment
2. Inflexibilities in the labour market
3. Deepens regional divides
4. Unemployment has economic and social costs

Question 5

Policy action to prevent labour immobility?

Answer 5

1. Investment in education and training to boost human capital of the labour force
2. Employment subsidies for long term employed
3. Extra spending on apprenticeships
4. Financial assistance for groups aiming to get on the housing ladder

Question 6

Causes of discrimination?

Answer 6

1. Information failure - undervalue contribution from certain groups
2. Built on deeply held prejudices
3. employers unable to directly observe productive ability of individuals & only observe characteristics

Question 7

Consequences of discrimination?

Answer 7

1. Widening gaps of pay between different groups
2. Loss of economic efficiency as the right people are often prevented from progressing
3. Many discriminated against may choose to leave the labour market - brain drain
4. Widening inequality

Question 8

Policy action to prevent discrimination?

Answer 8

1. Equal pay act
2. Race relations act
3. Employment laws relating to rights within workplace

Question 9

Causes of skills gap in the labour market?

Answer 9

1. Workers may not fully understand the private costs and benefits of investing in their education / training
2. Feel under-rewarded for training
3. Lack of funding

Question 10

Consequences of skills gap?

Answer 10

1. Limits the growth of productivity in an economy
2. Creates labour shortages of skilled workers
3. Lower productivity has negative impacts on standard of living
4. Lower real wages damages gov revenue

Question 11

Causes of monopsony power of employers?

Answer 11

1. Dominant employers in an industry or local town might use their ‘buying power’ to drive wages below a level that might exist in a competitive market

Question 12

Consequences of monopsony?

Answer 12

1. Some degree of worker exploitation if their pay / earnings are below value of their marginal product
2. Contribute to relative poverty and weakening of work incentives

Question 13

Policy action to prevent monopsony power?

Answer 13

1. Role for trade unions to act as a counter-balance to the monopsony power of en employer
2. National minimum wage to create a pay floor

Question 14

What is a trade union and how does it create labour market failure?

Answer 14

A trade union is an organisation which represents the interests of its workers in negotiations about pay and working conditions

1. Unions demand a wage above market equilibrium - can refuse to supply labour below the desired wage rate.
2. This equals employment being lower and wage being higher = unemployment

However this depends on the unions bargaining power.

1. BUT being part of a union can also increase productivity which increases demand for labour however. see notes

Question 15

Government action to reduce bargaining power of trade unions?

Answer 15

1. General trend of natural decline of size & importance of unions - more part time work etc
2. Introduction of secret ballots
3. Closed shop now illegal

Question 16

Factors effecting a unions bargaining power?

Answer 16

1. Financial reserves of the organisation
2. Proportion of workers in the organisation
3. Degree of substitution of capital for labour
4. Rate of unemployment
5. Support of public (junior doctors)

Question 17

Advantages of minimum wage?

Answer 17

1. Helps alleviate poverty whos pay it increases
2. Offers incentive to work - increases potential earnings over benefits = raises rewards for working
3. Generates greater tax receipts for gov
4. Workers receive morale boost with higher wages - increase productivity - increase demand for labour
5. Generates a multiplier on consumption - lower paid have high MPC

Question 18

Disadvantages of minimum wage?

Answer 18

1. Economic theory demonstrates it leads to a loss of jobs (book p37)
2. Higher costs of NMW may be passed onto consumers and reduce international competitiveness
3. Doesn’t take into account regional costs of living and local labour market conditions

Question 19

Policy action to solve skills gap?

Answer 19

1. Tax credits for businesses investing in training programmes
2. Expansion of government apprenticeship scheme
3. More investment into education
4. Tax those who do not train