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Economics A2 > Micro - Market Failure and the Role of the Government and Unions in the Labour Market > Flashcards

Micro - Market Failure and the Role of the Government and Unions in the Labour Market Flashcards

1
Q

Labour Market Failure

A

The situation which occurs when the market forces of supply and demand fail to produce an efficient allocation of labour resources. Types of labour market failure are surpluses/shortages in the supply of workers to a particular occupation, workers being in occupations they are not suited to, a lack of training/skills, and wages above or below the equilibrium rate

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2
Q

Monopsony

A

A market in which there is only one buyer, or one that is dominant - in the case of a labour market, there is only one employer, e.g. NHS for doctors, nurses, etc.

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3
Q

Allocative efficiency

A

Producing goods and services which match the changing needs and preferences of consumers - essentially, maximising consumer satisfaction.

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4
Q

Equilibrium position for a monopsonist

A

Employ at quantity of labour at which MCL = MRPL, but wages are set where that quantity meets the ACL curve.

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5
Q

Factors favouring a trade union

A
  • Wage-inelastic demand for labour - this can occur due to inelastic D for the product being produced, inelastic S of other factors, wage costs making up a small proportion of firm’s costs.
  • High union density
  • Firm making large profits
  • Economy in the boom phase of the economic cycle
  • Difficult to substitute K for L
  • Low unemployment
  • Public support
  • Favourable legislation
  • Strike action causing large-scale disruption
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6
Q

Union tactics - wage rate imposition

A

Union forces firm to pay workers a higher wage than they currently receive. Result is an improved wage rate but decreased employment and introduction of inequilibrium unemployment - shown by diagram.

HOWEVER decrease in employment is small if DL is inelastic, or if firm absorbs costs into profit margin.

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7
Q

Union tactics - reduced SL

A

Unions can boost the wage rate by changing the conditions of supply, e.g. by increasing necessary qualifications in order to restrict supply of labour to the profession. Thus, the wage rate is increased - show on diagram - but fewer jobs are available.

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8
Q

Union tactics - increased DL

A

Unions can work to improve their workers’ MRP, most likely by doing productivity deals with firms - this will force firms to improve their productivity in order to receive a higher wage. Thus, MRP increases, DL increases, wage rate and employment increase.

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9
Q

Bilateral Monopoly

A

A situation whereby a monopsonistic employer recruits workers from a monopolistic seller of labour - this occurs when the monopolist is a union with high density - can work as a countervailing power to that of the employer, thus achieving acceptable wages and conditions. E.g. NHS vs. Royal College of Nurses. The two sides have opposite aims, so a compromise much be reached, the position of which depends on their relative strength.

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10
Q

Factors favouring employers

A
  • Financial reserves - can afford to withstand strike action, cover legal costs
  • Low proportion of workers in the TU
  • Ability to substitute K for L
  • High unemployment - large recruiting pool
  • Low public support for TU
  • Minimal disruption resulting from strike action
  • Ability to outsource/offshore production
  • Favourable legislation
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11
Q

Bilateral monopoly - wage imposition

A

Theoretically, in a bilateral monopoly situation, a union can impose a new wage rate and increase employment at the same time. Imposition of wage creates new SL curve from WU along to old SL, then up it. Employers still employ at MRP = MCL, but this meets the new SL curve and employers move along the flat section, as they can employ more workers at the same wage rate. Thus, employment reaches QU. In theory, this can continue up to the equilibrium position.

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12
Q

Collective bargaining - positive

A
  • Better working conditions - better productivity?
  • Achieves fairer and more efficient wage outcomes in bilateral monopoly situations
  • Power of big business is checked
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13
Q

Collective bargaining - negative

A
  • Pay may not reflect the value of work done
  • May cause redundancies
  • May lead to inefficient allocation of resources and unproductive workers
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14
Q

National Bargaining

A

Appropriate when pay scales are set on a national level or decided by government, e.g. teachers, doctors.

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15
Q

Local Bargaining

A

Some view national bargaining as overly inflexible, and argue that some situations call for more focused local bargaining. E.g. it is generally acknowledged that public sector workers in London enjoy a lower standard of living than in areas where the cost of living is lower.

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16
Q

Individual bargaining

A

Appropriate in a profession in which each worker clearly contributes a different amount to the firm, e.g. footballers.

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17
Q

Wage Rate

A

The amount a firm pays its workers per unit of time or output

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18
Q

Earnings

A

Wages plus bonuses/commission/overtime

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19
Q

Remunerations

A

Earnings plus non-pecuniary benefits

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20
Q

Imperfect Information - The Applicant

A
  • What you know about the employer: what you see in brochures/hear from other employees you know (if you know any)
  • What you don’t: any negative aspects about the firm that it chooses not to advertise, e.g. stress, long hours
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21
Q

Imperfect Information - The Employer

A
  • What they know about the applicant: what the applicant puts on their application, e.g. qualifications
  • What they don’t: anything which the applicant chooses to omit - usually negative personal characteristics - e.g. laziness
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22
Q

Consequences of imperfect information - applicant

A

Stress, boredom, long hours

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23
Q

Consequences of imperfect information - employer

A

Poor work, low productivity, loss of customers, loss of profits

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24
Q

Consequences of imperfect information - economy

A

Inefficiency, wasted resources, falling output, increased prices, unemployment

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25
Q

Problems arising from skills shortages for - individual worker

A

Low pay, difficulty in obtaining employment, vulnerability to long-term unemployment, vicious cycle - low-skilled, can’t get work, can’t get training, low-skilled, etc

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26
Q

Problems arising from skills shortages for - firms

A

Recruitment difficulty/unfilled vacancies, high wage costs, inefficiency (affects profits), difficult to grow/diversify

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27
Q

Problems arising from skills shortages for - the macroeconomy

A

Problems with growth, trade and tax revenue, lack of FDI

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28
Q

Cyclical unemployment

A

Unemployment caused by a lack of AD in the economy - usually occurs during an economic downturn

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29
Q

Frictional unemployment

A

Short-term unemployment, such as when workers are between jobs, or a graduate is looking for their first job

30
Q

Structural unemployment

A

Caused by a change in the nature of the economy - applies to both supply- and demand-side factors. Most commonly refers to the collapse of a particular industry, e.g. coal mines in the 1980s, or the mechanisation of certain industries, e.g. manufacturing.

31
Q

Is unemployment a problem?

A
  • Disequilibrium is more worrying than voluntary/frictional, as is more likely to persist
  • Depends on level of unemployment
  • Short-term unemployment can be tolerated far more easily than long-term
  • Depends who is affected - youth unemployment most significant
  • Unemployment figures could hide other problems, e.g. underemployment (short hours, zero hours, low pay).
32
Q

Numerical Flexibility

A

Ability of the firm to hire and fire easily

33
Q

Temporal flexibility

A

Ability to internally control working hours - full-time, part-time, overtime, zero hours, etc.

34
Q

Locational flexibility

A

Ability to move workers

35
Q

Functional flexibility

A

Ability to rotate workers between different tasks, dependent on where their labour is required - requires workers to be multiskilled

36
Q

Wage flexibility

A

Ability to change wages easily and vary pay from worker to worker - e.g. performance-related pay, bonuses, individual negotiation.

37
Q

Theories of Negative Discrimination - Becker’s Theory

A

States that firms are willing to experience higher costs in order to avoid contact with members of a particular demographic groups - this may be in the form of lower profits resulting from under-skilled or under-qualified workers, or higher prices resulting from declining to purchase from firms who do employ members of such groups.

38
Q

Theories of Negative Discrimination - Statistical Discrimination

A

States that discrimination arises due to imperfect information - employers do not know in advance how productive workers will be, and may therefore rely on generalisations about particular groups of workers. For example, the firm may assume that older workers are likely to be less productive, and thus may be less likely to employ or promote older workers.

39
Q

Gov’t Intervention - Monopsony

A
  • Imposition of NMW at equilibrium wage rate, though this severely impairs labour market flexibility.
40
Q

Gov’t Intervention - TU Intervention

A
  • Legislation to curb union power, though the lessening of TU power will also occur naturally due to the shift away from industry in the UK economy. This improves labour market flexibility
41
Q

Gov’t Intervention - Skills Shortages

A
  • Provision of education and training in areas in which there are shortages. Improves occupational mobility, efficiency, productivity and international competitiveness, whilst reducing the number of unfilled vacancies.
42
Q

Gov’t Intervention - Economic Inactivity/Unemployment

A
  • Gov’t could make changes to the benefits system in order to ensure that work is more profitable than life on benefits.
  • Provision of information can correct info failure both on supply-side (unemployed people know about all opportunities, e.g. job centres) and demand-side (correcting misconceptions that give rise to discrimination, e.g. that disabled people cannot contribute).
43
Q

Potential changes to the nature of compulsory education

A
  • Quotas could be set for education in different areas (e.g. academic, vocational) according to the needs of employers, thus ensuring that the system produces a workforce that is well-suited to the needs of the economy.
  • Alternatively, students could be allowed to choose their own paths earlier in the educational process - this would promote mutual trust between students and the system, and could result in a greater net skills yield.
44
Q

Why does structural unemployment tend to be long-term?

A

History has shown that an industry, once it has significantly declined, is unlikely to flourish again - the coal mining industry in the UK is a clear example of this. Workers in this industry may well lack the skills necessary to succeed in other occupations, and are unlikely to find another job in their own. This is a particular problem as the long-term unemployed often lose what skills they do have over time.

45
Q

Solutions to structural unemployment - regional policy

A

Governments can attempt to incentivise firms to relocate to deprived areas, via the following methods:

  • Tax breaks
  • Subsidised premises and capital goods
  • Subsidised training for workers
  • Covering the costs of relocation
46
Q

Migration - Losses for country of origin

A
  • Brain drain
  • Creates unfillable vacancies for firms
  • Falling tax revenue for government
47
Q

Migration - Losses for country of destination

A
  • Pressure on public services
  • Social unrest
  • Incomes may be sent home as remittances
  • Housing shortages/rising prices
  • Displacement of domestic workers from jobs (maybe)
  • Pressure on the benefits system/NHS
48
Q

UK Labour Market - Improving?

A
  • Persistent rise in employment and fall in unemployment since 2012 (Y)
  • Increase in the proportion of those employed in full-time work compared to part-time (Y - more output, N - less flexible).
  • Slight increases in the number of economically inactive people, hovering around 9m (N)
  • ULCs rising (N)
49
Q

Employment definition

A

Having completed paid work in the previous week.

50
Q

Income Distribution - By Function

A

Which factor of production gets the biggest share of total revenue (GDP):

  • Labour - earnings
  • Capital - interest
  • Enterprise - profits/dividends

The general trend is for the percentage of total GDP allocated to labour to decrease, most drastically in newly developed economies, e.g. S. Korea, Mexico.

51
Q

Income Distribution - By Income Group

A

A popular way to measure income inequality is by income percentile/decile/quartile, etc.

  • World top percentile owns more than 50% of world wealth.
  • In the UK, top 20% has more wealth than bottom 50%
  • Applied most often to wealth, but can be applied to income also - e.g. in the last 10 years, top 10% have seen real incomes increase by 40%, whilst those of the bottom 10% have fallen by 10%
52
Q

Arguments in favour of inequality

A
  • Allows for incentives/ambition
  • Creates efficiency, as people are rewarded according to their economic contribution
  • Trickle-down - having wealthy individuals at the top allows for the setup of businesses, job creation
53
Q

Arguments against inequality

A
  • It is a form of market failure, as it demonstrates that the labour market is segmented
  • Trickle-down, in reality, does not work, as shown by the prevailing trend of concentration of wealth in the hands of the owners of capital
  • Wealth/income trends perpetuated across generations via inheritance, private schooling - damaging to social mobility, and therefore to economic efficiency
  • Unfairness - many factors which affect an individual’s career success and income are undeserved - e.g. private schooling, growing up in a rough area, accident/illness, or even intelligence
54
Q

Causes of income inequality

A
  • Discrimination
  • Level of education/skills/qualifications
  • Access to education
  • Access to employment - labour market segmentation
  • Lack of available jobs
  • Trade Union power
  • Wealth inequality
55
Q

Causes of wealth inequality

A
  • Inheritance
  • Marriage patterns - assortative mating
  • Differences in MPS
  • Skill/talent/enterprise/luck
  • Effect of long-term asset price trends - esp. housing
56
Q

Causes of poverty

A
  • Unemployment
  • Inherited - being born into poverty, subsequent lack of opportunities
  • Lack of education/skills
  • Ill health/disability
  • Having dependents to care for
57
Q

Policies to reduce inequality/alleviate poverty

A
  • NMW
  • Means-tested benefits (doesn’t address the causes of poverty)
  • Benefits in kind - can work to address the causes of poverty (ill health, poor education)
58
Q

Marketable Wealth

A

Assets that can be sold, e.g. houses, stocks, shares

59
Q

Non-Marketable Wealth

A

Assets that contribute to wealth but cannot be sold, e.g. pension fund, savings, some gov’t bonds.

60
Q

Gini coefficient

A

A/(A+B), where A is the area closest to the line of perfect equality. A high Gini coefficient is indicative of a high level of inequality.

61
Q

Negative impacts of increasing the top rate of income tax

A

Brain drain - high-flying individuals may not feel incentivised to remain in the UK, and may leave for another country with lower rates, such as the USA. In this way, the labour force loses some of its most talented/able members.

62
Q

Negative impacts of decreasing the personal allowance

A

Disproportionately affects low earners, and removes incentive to work by making a life on benefits more profitable by comparison.

63
Q

Solutions for poverty - NMW

A

Will remove people from extremely poorly paid employment. However, may result in increased unemployment - detrimental to the overall level of poverty.

64
Q

Solutions for poverty - cuts in bottom income tax rate

A

More people would be incentivised to seek work, and those in work would keep more of their income. However, reduces funds available to the gov’t for cash benefits/benefits in kind, which would also have been used to combat poverty. May actually benefit high earners more, as they are able to exploit the cut across the whole tax bracket. Thus, may not be helpful in combating income inequality.

65
Q

Solutions for poverty - provision of education and training

A

Increases workers’ MRP, thus increasing wage rates and employment rates. Also has macroeconomic benefits, e.g. international competitiveness. However, is very expensive, and comes with big time lags - changes in nature of the economy during period of time lags may render reforms to education obsolete.

66
Q

Solutions for poverty - trickle-down growth

A

Some argue that the removal of regulations on big business will be conducive to reductions in poverty - larger profits will lead to job creation. However, the effectiveness of trickle down is often disputed - those on low incomes may not see many of the benefits of business profit.

67
Q

Increased benefits

A

Those on the lowest incomes receive a boost, lifting them out of poverty and narrowing the income gap. However, creates a disincentive to work, and may merely be a short-term, unsustainable solution.

68
Q

Provision of affordable childcare

A

Allows parents of young children to continue their careers without missing out on opportunities for promotion, career advancement, whilst also reducing costs for parents who already opt to pay for childcare. However, the policy is expensive, and some research has indicated that the overuse of childcare can have a detrimental impact on children’s quality of life.

69
Q

Work

A

Time spent earning an income/education

70
Q

Maintenance

A

Time spent doing things which do not earn an income, but must be done nevertheless - e.g. eating, sleeping, chores.

71
Q

Leisure

A

Time spent doing things for personal enjoyment - essentially anything that is not work or maintenance.

Economics A2 (6 decks)

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