labour market issues and imperfections (which impact wage determinaton) Flashcards
what are the labour market failures
disincentives
monopsonys
immobility of labour
labour isnt homogenous
wage differentials e.g gender pay gap
what policies can be used to tackle labour market failure
NMW
maximum wages
what policies cant he government use to overcome the gender pay gap
subsidise childcare
equal pay legislation
give fathers longer paternal leave
why may the gender pay gap exist
women may take more career breaks compared to men-> may have a lower MRP as men take less time off work so they have more time to accumulate their skills
they may use this to justify the gap between their pay
access to education
patterns of employment of women - may take on more vocational roles
how would you show discrimination on a labour market diagram
demand for labour dhifts inwards
lower wage for those who are discriminated against
what could be the impacts of NMW + ev
incentivises people to work
reduce poverty
reduce income inequality gap
more tax rev for the govt
encourages firms to train their workers
could improve productivity
depends on the level at which the NMW has been set
could reduce employment
depends on PED of demand for labour
should all occupations have the same NMW?
different costs of living in different regions
depends on the state of the economy and whether firms are sufficiently profitable to be able to absorb a higher minimum wage
what impact would NMW have if the demand for labour was inelastic
demand for labour wont fall by much
workers cant be replaced by machinery or there may not be many of these workers available
fall in (involuntary) unemployment wont be as large
what arguments can be made against the NMW
may increase unemployment as it would increase cost of p for firms
may make products less internationally competitive
inflation due to higher labour costs - reduces real incomes for households
many of the poorest in society arent in work so NMW may not reduce poverty
excess supply of labour leads to unemployment
hysteresis argument for the youth
different costs of living in different regions
arguments for the maximum wage
rato pay of executives to ordinary workers has grown to unacceptable levels
lnk between executive pay and perfomance is hard to tell
bnus culture encourages short term decision taking rather than fpcusinf on long term strategic direction of the busieness
rise in wages can cause inflation
can lower income inequality
arguments against max wage
may lead to businesses re locating overseas
could lead to less inward migration as peoples pay will be capped
higher pay can provide motivation tow work harder
brain train
higher marginal tax rates may be a better option
what are the current labour market issues
zero hour contracts
gig economy
robotics and AI
gender pay gap
labour migration
trade unions
what is the gig economy
fragmented work where someone is given a task for a certain amount of time
short term contracts and free lance work
for example uber
what are the benefits of the gig economy
for worker:
flexible hours
can work from home
another source of income
less risk of being stuck in routine jobs
for firms:
reduced fixed costs for firms due to lower payroll expenses
reduced investment
flexibility in managing hours to expected demand for their products
what are the drawbacks of the gig economy
for workers:
doubts over true flexibility of hours
lack of paid vacation, sick leave, employment rights
difficult to obtain a mortgage due to job and income uncertainty
inadequate investment in training
workers bear most of the risk- incomes tend to be lower for the self employed
wider downsides:
less tax rev for the govt
reductions in road safety
the delivery drivers using unlicsenced vehicles
what are zero hour contracts
while some workers may have a permanents contract they arent guaranteed a minimum number of working hours each week
what are the arguments for zero hour contracts
good for businesses where demand for labour is seasonal- allows businesses to better control their costs
benefits people who want high levels of flexibility in choosing when they want to work
what are the arguments against zero hour contracts
contributed to ‘in-work poverty’ - reliance on top up welfare benefits
uncertain incomes make it difficult for people to obtain loans, mortgages etc
what are the benefits of an ageing population
wage increases for younger people as they become more scarce
more jobs in caring for the elderly - changes in employment patterns
what are the drawbacks of an ageing population
reduction in working age population which leads to reduction in supply for labour so theres less people paying taxes -> makes it difficult to fund pensions/the nhs
a greater proportion of the working age being older could reduce productivity and competitiveness
need for more migration of young and skilled workers
tax rate increases to cover the cost of increasing the number of elderly people which could reduce the incentive to work
decrease availability of houses as people are living longer
people may not have saved for their retirement
how can the issue of funding pensions be resolved
auto enrolment into pensions
more people would have a private pension
less need for increases in state pensions provided for by the government as the elderly can support themselves
what micro and macro policies can be used to address an ageing population in the UK
labour market reforms
auto enrolment into occupational pensions
new taxes on soacial care
incentives to increase the supply of sheltered housing
investment in life long learning especially for over 55s
what impacts could robotics and AI have
impacts on productivity, costs and profits of firms ?
impact on demand and supply for labour
could lead to lower prices for consumers
structural unemployment or new jobs may be created?
competitiveness and exports and changing patterns of trade
effects on govt finances
what micro and macro impacts can labour migration have
micro:
shortages of skilled labour
impact on demand for and prices of properties to buy and rent
brain train
macro:
fal in net outflow of remittances
impact on employment if labour supply falls
slower growth of AD and possible fall in LRAS
what are the benefits of new inward migration
migrants provide skills and higher labur productivity
an increase in the size of the active labour supply
could increase LRAS
positive multiplier effects if migrants find paid work
reducing skilled labour shortages in growing industries
remittances sent home by migrants increase which could lead to rising exports
legal migrants pay direct and indirect tax -> increase tax rev for the govt
what are the costs of inward migration
increasing cost of providin gpublic services
displacement of domestic workers in employment
social tensions arising from the problems of integrating thousands of extra workers into local areas and regions
rising demand for houses which push up prices
could worsen level of relative poverty in a society
migrant workers may be exploited by buesinesses that have monopsony power
how can you evaluate the effects of labour migration
types of people and their skills
whether they find regular jobs
could a rise in migration stimulate extra capital speninding on e.g new schools, hospitals etx
dynamic effects - gains in innovation due to migrant entrepreneurs?
whether migrants stay for long term or short term
what are the characteristics of a perfectly competitve labour market
many potential workers and employers
labour is homogenous
perfect info
firms are wage takers
no barriers t entry/exit
draw a diagram to show where wages are determined in a firm in a perfectly competitive labour market
draw a diagram to show where wages are determined in an industry in a perfectly competitive labour market
where do firm hire up to in a perfectly competitive labour market to maximise revenue from workers
firms will hire workers up to where MRP=MC
what do perfectly competitive labour markets assume
if all labour markets were perfectly competitive there will be no differences in wages between professions at all due to two assumptions:
1. all workers are homogenous
2. all workers have perfect mobility
what are the 5 labour market imperfections
labour isnt homogenous
assumes wage only affects the supply of labour - non monetary factors may also affect this
labour isnt perfectly mobile
trade union and supply restriction
monopsony and wage setting ability
why is labour not homogenous
workers have different MRPs
different industries have different supply for labour
lack of perfect knowledge
what are the 3 causes of immobility of labour
occupational immobility
geographical immobility
lack of perfect knowledge
how does a trade union distort wages
they bargain for higher wages through collective bargaining
the bigger the trade union the more power they have to distort wages
members of trade unions get higher wages because of this which leads to wage differentials
what impact does a monopsony have on wages
monopsony- one dominant employer of labour in the profession
monopsony has wage setting power
they can use this power to lower wages
so this profession may have lower wages than others
what are the characteristics for a monopsony employer
wage maker
maxiise revenue from workers by hiring up to where MRP=MCL
draw the diagram for a monopsony employer
Wc,Qc - wage for competitIve firm which is where S=D
W1, Q1 - monopsonist. where MRP=MC
why is the MC of labour greater than the AC of labour for a monopsony
have to increase wages for all workers when hiring new ones otherwise existing workers will strike
where is wage determined on a monopsony diagram
wage is AC of labour
so go down from MRP=MC to where it meets the AC curve -> read the wage off here
how does the monopsonist equilibrium compare to that of a perfectly competitive labour market
monopsonists reduce employment compared to perfectly competitive labour market
wages is a monopsony is reduced compared to perfect comp
why do footballers earn more than e.g nurses
MRP of footballers is very high and their skills are unique
low supply of footballers so theres inelastic supply of labour and high demand for them
monopsonist state employer of nurses
also theres a vocational element which compensates for the wage differential
why do minority groups have a lower MRP
theyre less qualified on average due to poor education
this means they have low employment prospects
so they cant bargain for higher wages
why does the level of language proficiency ac as a barrier to higher incomes for certain ethnic groups
reduces productivity and employability especially in higher paid occupations
what are the 3 reasons for why certain ethnic groups earn more than others
minority groups have a lower MRP
language barriers
minority groups tend to end up in low paid sectors where its predominantly manual work
reluctance to migrate
why may certain ethnic groups be reluctant to migrate
stay close to family - cultural idea
even though there may be less job prospects where they live they wont move due to family so theyll accept low paying jobs
what are the advantages of wage differentials
acts as an incentive to access high paying jobs through training and education
trickle down effect
incentive to get off welfare benefits because if everyone is paid the same there is no incentive - also beneficial for the govt
workers end up where theyre most productive so wages act as a signal
what are the disadvantages of wage differentials
income inequality
govt has to spend more on welfare payments
depression - govt has to spend more on healthcare
trickle down effect may not occur as the rich has a high MPS or may engage in tax avoidance
solutions may be limited if theres a monopsonist employer
how can you evaluate wage differentials
how much inequality is there?
costs v benefits?
risk of govt failure from govt intervention? e.g Laffer curve
SR and LR effects?
what is meant by a closed shop trade union
in a given profession al workers belong to one union
one union has all of the power and all of the workers
trade union is a monopoly supplier of labour
controls labour supply at a given wage rate
are illegal
draw the diagram to show the impact of a trade union in a perfectly competitive labour market
explain the trade union kinked supply for labour curve
those who are paid Wc and below would be happy with the trade unions wage rate so they will only be willing to work at that wage rate (Wtu)
workers who will only supply their labour above Wtu wont work at this wage rate so supply curve continues as normal
-> to attract these workers the firm would have to offer a higher wage
this wage will hold as the trade union an organise a strike
what effect foes the trade union have on wages and employment
they increase wages compared to competitive outcomes
they decrease employment as theres excess supply
what is union density
the proportion of a workforce that is in a trade union
bigger trade union = more power and therefore bigger union density
what is meant by union mark up
the difference in wage between what workers who are part of a trade union in a given profession are getting compared to what workers who arent part of a trade union are getting in a similar profession
draw a diagram to show the impact of a trade union in a monopsony labour market
kinked supply curve as workers no longer willing to work below Wm which is the monoposny wage
explain the impacts of a trade union in a monopsony labour market
wage < MRP in a monopsony
trade unions control the supply of labour at a given wage rate
strong trade unions make the monopsonist a wage taker
wages increase for everyone closer to competitive outcomes and employment increases aswell
what do the impacts of a trade union of a monopsony labour market depend on
effect depends on size of monopony
bigger monopsony = bigger impact of trade union
why is the MCL curve for a trade union in a monopsony labour market kinked
when monoposnist increases wages it has to do so for all workers
