Market failure and the role of the government and unions Flashcards
When does Labour market failure occur?
Occurs when market forces of demand and supply don’t result in an efficient allocation of labour resources
Evidence of LMF
- Surpluses and shortages of forms of labour
- Workers in ill-suiting jobs
- Lack of training
- Wages above or below equilibrium rate
Causes of LMF
- Abuse of labour market power
- Imperfect information (employers and workers)
- Economic inactivity
- Unemployment
- Discrimination
- Segmented labour markets
- Immobility of labour
Trade union abuse of market power
- Push wage rate above equilibrium (causing unemp.)
- Restrictive practices such as job demarcation - workers will only do tasks outlined in original job description
- Such actions lower the flexibility of the labour force
Monopsonist
A single buyer of labour e.g. NHS
Oligopolist
One of a few dominant buyers of labour e.g. large publishing firms
Determination of wages w/ monopsonists and oligopolists
- Price makers - influence the wage rate
- to employ more they have to raise the WR
- So the MCL will exceed the ACL
When can a TU raise wage rate without causing unemployment?
consult graph on p67
Bilateral monopoly
- When a TU negotiates with a monopsonist employer
- A market with a single buyer and seller
How is the wage rate determined in a bilateral monopoly
- By the relative bargaining strength of the two sides
- If the monopsonist is powerful, WR will be close to that which would exist without union intervention
- If the TU is powerful, WR will be close to the upper limit a monopsonist can pay without threatening the existence of the firm
- TU does take into account possible adverse effect
- Consult graph on p68
Factors influencing an employer’s bargaining strength
- Greater the financial reserves
- Lower the proportion of workers in a union
- Greater degree of substitution between capital/labour
- Higher the rate of unemployment - can replace existing workers with unemployed workers
- Lower public support from the public
- Lower the disruption any industrial action would cause to the production process e.g. train strikes cause a lot of disruption
- More branches the firm has which employ non union labour - can move production process
- More legislation favours employers
Trade unions
Labour organisations that seek to promote the interests of their members
Functions of TUs
Negotiate pay and conditions of employment
Provide a channel of communication
Presence may reduce labour turnover and increase level of training
Tend to reduce income inequality
Financial services and legal advice
Lobbying national government
Setting minimum qualification standards (bid to increase pay)
Effect of TUs on wages and unemployment
Setting a minimum wage for union members - alters supply curve to W1XS (p69) - in this case it reduces employment
Seek to raise WR by pressing employers to raise qualifications required (shift SoL to the left)
Effect that TU has on employment in different market structures?
Perfect & Monopolistic competition - adverse effect, these firms can only earn normal profit in the LR; rise in costs will cause marginal firms to leave the industry causing output and employment to fall
Any type of market structure:
Seek to raise employment while raising wage rate through supporting measures to increase productivity
e.g. training initiatives
OR: measures to increase demand for the product e.g. investing in an advertising campaign
Successful: MRP will shift to the right and hence the demand curve
Factors influencing a TU’s bargaining power
Greater financial reserves
Higher proportion of workers in organisation
More inelastic the demand for the firm’s product
Lower the degree of substitution between C/L
Lower the proportion of labour costs in total costs
Lower the rate of unemp.
Greater public support
Favourable legislation
More disruption industrial action would cause
Imperfect information
Workers and employers
Less well paid & not suited for skill-set
Employers incur costs - obtaining information, interviewing
Workers incur costs - jobsearching, attending interviews
Skill shortages
Occur when firms have difficulties recruiting required skilled people
Result in an increase in costs of production - bid up wage rate to get the skilled workers, or fill vacancies with less skilled workers - higher ULC
Cause - lack of training, training is a merit good
If left to market forces it’d be under-consumed - workers and firms take a short term view
Economic inactivity
Influences the size of LF and so AS
Some isn’t market failure - full time students have long term benefits, people looking after family
Discouraged workers/long term sick (but could work a bit) considered a taxpayer burden
Unemployment
Means that LMs are not clearing
Some of those willing to work can’t get a job
Means a country has a negative output gap
Unemployment causes
Cyclical unemployment - lack of AD (derived demand)
Frictional unemployment - unaware of vacancies
Voluntary unemployment - unwilling
Structural unemployment - unsuited for jobs in the labour market due to economic changes e.g. manufacturing decline
Equilibrium unemployment
Unemployment that exists when the LM is in D/S equilibrium - voluntary, frictional, structural
Disequilibrium unemployment
Cyclical - due to a lack of AD
Discrimination & LMF
Results in an inefficient allocation of resources and
inequitable wage differentials
-Group discriminated against suffer - lower pay, harder to gain unemp., settle for ill-fitting jobs
-Producers who discrim. have a smaller labour pool, may not make best use of e.g. black workers they employ
-Consumers experience higher prices if producers discriminate, or if they discriminate against firms for employing an ethnic/gender group
-Govt. more welfare benefits
Segmented labour markets
Barriers that exist to free movement of workers between LMs
No barriers - workers would move from low to high wage jobs, equalising wages
Some barriers improve LM efficiency e.g. surgeons need the qualifications
Some are unnecessary, may have been introduced to push up wages and keep groups out
Immobility of labour
GEOGRAPHICAL - barriers to movement of workers e.g. family ties, prices of housing; shortages and surpluses of workers in different areas, regional unemployment, geog. wage differentials
OCCUPATIONAL - barriers to workers changing occupations e.g. qualifications, skills, social barriers
contribute to occu. wage differentials and structural unemp.
Other causes of LMF
Attachment between workers and employers
Inertia - laziness (employers and employees)
Economic effects of LMF
micro = unemp. and skills shortages, workers in wrong jobs
misallocation of resources increases cost of production and reduces consumer surplus
MACRO = reduces int. comp., adverse effect on net trade
also raise govt. costs - state benefit, LM legislation, spending on education, training and regional policy
Trends in UK TU membership
As in many other countries, downwards
Decline in union power (legislation, companies deciding not to recognise unions)
Stronger within professional occupations e.g. teachers
Higher proportion of women workers in TUs
Labour disputes trends
Last 4 decades - decline
Forms of bargaining
National collective bargaining - unions favour this, gives them greater power & negotiation EoS
EU - collective bargaining on the basis of multi-employer bargaining - unions negotiating with associations of employers
UK - trend towards performance-related pay agreements
e.g. 3% pay rise, 2% rise in productivity
Types of labour market flexibility
Numerical flexibility - ability to change no. of workers
Temporal flexibility - ability to change hours worked
Locational flexibility - ability to change place of work e.g. home, different office
Functional flexibility - ability to change tasks performed
Wage flexibility - ability to change wages paid
Consequences of flexibility
GOOD: keeps firms ACs low; wont be overstaffed during periods of falling D
able to raise output when D increases by easily hiring
Low labour costs = factor in int. competitiveness
for workers - some enjoy working casually, part time, freelance, from home
Create employment - firms more likely to hire during periods of rising D; particularly case w. young workers
Attracts FDI - boost employment
BAD: for workers
Chance of being out of work higher
Less job security
Need to be more mobile (OCC. and GEOG.)
Can put stress on workers
Wage flexibility = wage inequality??
UK LM flexibility?
more than most of EU
Increase in temporary, part time, flexible hours, jobsharing etc.
80s - LM reforms, fewer restrictions on hiring and firing
Govt. measures to achive LM flex.
Increased LM information, training and education to make L more mobile
Cut marginal income tax rates & unemployment benefit - link JSA more closely to the search for employment
Removing employment protection legislation - make LMs more efficient in responding to changing market conditions
Welfare-to-work in the UK = support while actively seeking unemployment
Government intervention in LMs
May intervene to correct LMF & raise efficiency, promote equity and social cohesion
Affects wages and employment in various ways - govts employment of public sector workers, provision of information, regional policy, training & edu, NMW, anti-discrim. legislation and TU legislation
Government as an employer
UK govt. = major employer e.g. NHS
Direct and indirect on LMs
Direct : government raising wages of nurses in NHS will have a direct effect on wages
Indirect: increasing public sector teacher wage will put upwards pressure on private sector teachers wages
Labour market information & government
State funded careers service, Job center plus, careers education in schools etc.
Regional policy & government
Seeks to influence the distribution of firms and people
Reduce problem of geog. immobility & regional unemployment - variety of measures
Financial assistance given to workers to relocate to areas where their particular skills are required
Work is taken to the workers - subsidies/tax holidays to firms that set up in areas of high unemployment
Training & government
- Provide training directly to its own employees, the unemployed, those changing jobs
- Subsidise individuals to engage in training/subsidise firms to provide training
- Pass training based legislation
Education & government
Increases/improvements in state education provision should raise qualifications/skill levels of workers
Increase the occu. mobility of the LF, reduce skills shortages, raise productivity of labour
Measures to raise skills and qualifications = INVESTMENT IN HUMAN CAPITAL
investment in developing the ability of wide range of people, social exclusion will be reduced
Minimum wage legislation & government
To help raise the pay of low paid workers
To have an effect = has to be set above equilibrium WR
Some economists argue it causes higher unemployment - much like a trade union increasing the wage rate
Raises the SoL, reduces the demand for L
Risks of NMW
May encourage firms to seek lower cost of employing low skilled workers by cutting fringe benefits
Encourage workers who previously earned near the NMW to press for a wage rise
Reduce wage differentials - affect labour mobility
NMW = good?
May not result in higher unemployment
Low paid workers often have low bargaining power against their employers (usually olig. and monop.)
Rise in demand from increased Disp. income = shift right in demand curve
Discrimination legislation
UK - illegal on grounds of gender, marital status, race, colour, disabilities, age
May change social/employer attitudes over time
However, difficult to see if it is still happening
TU legislation
-Thought that TU power too weak from previous legislation, government may repeal some legislation
Vice versa
Income distribution
Income & wealth are unevenly distributed in the UK
Functional distribution of income
Income can be earned by each FoP - labour = wages, capital = interest, land = rent, entrepreneurs = profits
Wages = largest % of total income
In UK, share of profits has been increasing at expense of wages
Size distribution of income
Division of income among individuals
Inequality between highest earners and lowest earners
Causes of geographical distribution of income
Unemployment rate
Proportion of population claiming benefits
Qualifications and skills of the LF
Industrial structure
Occupational structure
Living costs that give rise to differences in pay
There are variations within regions e.g. London
Causes of income inequality between households
Unequal holdings of wealth - wealth generates income in form of profit, dividends, interest
Differences in the composition of households e.g. some have 1 worker, some have 4
Differences in skills and qualifications
Differences in educational opportunities
Discrimination
Differences in hours worked
Wealth
A stock of assets that have financial value
Marketable wealth
Wealth that can be transferred to another person e.g. shares, homes
Non-marketable wealth
Specific to a person, can’t be transferred e.g. pension rights
UK size distribution of wealth
Very unevenly distributed
A fifth of the country’s wealth is owned by the top 1% of the population
Wealth distribution between assets
Some forms of wealth e.g. life insurance, housing and pension funds are more evenly distributed
Some are not e.g. land, shares
Wealth distribution between groups
People on 40s/50s have had more time to accumulate savings and wealth
Group that currently has the lowest holding of wealth is Bangladeshi in UK
Men more than women
Causes of wealth inequality
Inequality of income - work overtook inheritance as a source of wealth in the UK; high income = easier to save and make interest on savings
Differences in entrepreneurial skills
Pattern of inheritance - large houses etc. passed on in family to one son, keeps largest estates in the same small population
Marriage patterns of the wealthy - rich marry rich
Gini coefficient
Used to make international comparisons of income inequality - found using the Lorenz curve
Ratio of the area between the lorenz curve and the line of equity, and the total area under the line of equity
Lorenz curve
A diagram used to measure the level of income inequality
Graph w/ line of equity at 45 degrees, lorenz curve varying levels underneath the line
P88
Ways in which governments affect the distribution
Progressive taxation rates
regressive taxes e.g. VAT make distribution more unequal
Provision of state benefits - 2 types
means tested: available under certain conditions e.g. income under a certain level
universal: available to all e.g. pensioners all allowed winter fuel allowance
Provision of benefits in kind - e.g. healthcare, school meals, education
Labour market policy - NMW, anti discrimination, subsidising of training
Macro policy - e.g. SS policies to reduce unemployment will benefit the unemployed, regional policy may reduce geographical inequalities
Absolute poverty
The inability to purchase basic necessities of life e.g. food, shelter
Relative poverty
A situation of being poor relative to other people
UN on poverty
People lack material goods and also access to items to enjoy life e.g. self-esteem and respect of others
