Theme 3, 3.5 Global Labour markets

Question 1

Define Primary sector

Answer 1

Includes any industry involved in the extraction and collection of natural resources: such as farming, forestry, mining and fishing.

Question 2

Define Secondary sector

Answer 2

Manufacturing and Industry sector known as the secondary sector, sometimes as the production sector, includes all branches of human activities that transform raw materials into products or goods.

Question 3

Define Tertiary Sector

Answer 3

Provides services to the other sectors of the economy.Banks, supermarkets, cinemas

Question 4

Define Human capital

Answer 4

Refers to the skills, experience and knowledge acquired by individuals. Human capital is created through education, on-the-job training, apprenticeships, vocational courses and relevant experience.

Question 5

Define Structural change

Answer 5

Involves reallocation of resources. Less is produced of goods and services that face falling demand: output of those for which demand is increasing rises. Technological change, and international competition, play a part in this.

Question 6

Define Labour intensive production.

Answer 6

This type of production uses large amounts of labour and relatively little capital. Many services are labour intensive, e.g. hairdressing.

Question 7

Define Capital intensive production

Answer 7

This type of production uses large amounts of capital equipment and relatively little labour. Productivity will usually be high.

Question 7

Define Geographical mobility

Answer 7

Refers to the ability of workers to move from one area to another.

Question 8

Define Occupational mobility

Answer 8

The ability of workers to move from one type of work to another.

Question 9

Define Birth rates

Answer 9

Measure the average number of live births per year, per thousand of population.

Question 10

Define Mortality rates

Answer 10

Measure the number of deaths per year, per thousands.

Question 11

OECD

Answer 11

These are mainly developed countries, with some emerging economies. It aims to promote economic and social development around the world. Organisation for Economic Co-operation and Development.

Question 12

Define underemployment

Answer 12

Occurs when people work but do not have enough opportunities to work-full-time

Question 12

Define The Knowledge economy

Answer 12

As its heart is a combination of knowledge, skills and innovative technology, driving economic activity and creating a competitive advantage. The quaternary sector plays a major part in it.

Question 13

Define Derived Demand

Answer 13

Refers to the employers’ demand for labour, because they do not want labour for its own sake but for what it might be able to produce. The demand is derived from demand for the final product.

Question 14

Define Voluntary unemployment

Answer 14

means choosing not work. This can be short run if frictionally unemployed take a break before seeing work. Disaffected workers could be long term voluntary unemployed. Free market economists argue that cutting benefits ( raising wages) will make voluntary unemployment less attractive. Most unemployment is not voluntary.

Question 15

Define Monopsony Power

Answer 15

Occurs where there is a single buyer, just as a single seller has a monopoly.

Question 16

Define Countervailing Power

Answer 16

Is the idea that imperfections in markets can produce better outcomes where there is both monopoly power and monopsony power. Reducing the power of one side could make such markets operate less well.

Question 17

How has globalisation contributed to the increase in the size of the labour force?

Answer 17

With ease of travel and less restrictions between borders, people have been able to find jobs more easily.

Question 18

Why has production shifted from developed to developing countries?

Answer 18

Companies can take advantage of the low labour costs in developing countries.

Question 19

Why might unemployment in developed countries increase as a result of globalisation?

Answer 19

Firms shift their operations to countries with low labour costs, leaving those in developed countries with no scope for employment.

Question 20

List 4 factors affecting the demand for labour.

Answer 20

1. Wage rate
2. Demand for products
3. Productivity of labour
4. Substitutes for labour.

Question 21

Why do firms employ less workers as wage rises?

Answer 21

It may be easier for firms to invest in capital, which is cheaper and more productive than manual labour, so less workers are required.

Question 22

If workers are more productive, will their wages be high or low?

Answer 22

Their wages will be high.

Question 23

If the market is unsaturated, how will this affect wages, and why?

Answer 23

The firm is the only one in that market, and so has more bargaining power than workers, and will therefore offer lower wages .

Question 24

How is the supply of labour calculated?

Answer 24

By multiplying the number of people who can work at the current wage rate by the number of hours the can work.

Question 25

Describe the relationship between the wage rate and the number of workers willing to work

Answer 25

As the wage rate increases, the number of people willing to work increases (proportional).

Question 26

Why do firms fear trade unions?

Answer 26

Trade unions have the power to increase wages and working conditions, thus raising costs for firms.

Question 27

If taxes are too high, how will this affect the supply of labour?

Answer 27

This will reduce the supply of labour, because less people are willing to work knowing that more of their income is deducted with taxes.

Question 28

What happens if trade unions push wages too high?

Answer 28

It will cost too much for to maintain their employment level, so they will cut down on the number of workers required.

Question 29

Describe the difference between individual and collective bargaining

Answer 29

Individual bargaining is between an employer and an employee, whereas collective bargaining is between employers and a group of employees.

Question 30

What is productivity bargaining?

Answer 30

Occurs when employers and employees meet to discuss wage rises given an increase in productivity.

Question 31

Do minimum wages have to be set above or below the free market price?

Answer 31

Above the market price, else they will prove ineffective.

Question 32

How will a minimum wage effect the demand for labour?

Answer 32

It will reduce the demand for labour.

Question 33

If the demand for labour is inelastic, how will a minimum wage affect the demand level

Answer 33

There will be a smaller contraction in demand than there will an increase in the supply of labour with a minimum wage.

Question 34

How would a minimum wage benefit tax revenues?

Answer 34

It will increase tax revenues, because consumers will be earning higher wages and will therefore have to pay higher income tax.

Question 35

How would a minimum wage affect competitiveness?

Answer 35

Countries would become less attractive to foreign firms as higher wages would mean higher costs for those firms.

Question 36

What is international competitiveness

Answer 36

This is when firms can successfully compete overseas whilst sustaining improvements in real output and living standards.

Question 37

Employment patterns:Population and labour growth (Slowing population growth)

Answer 37

Populations grow when the birth rate is greater than the mortality rate. Less developed societies traditionally had both high birth rates and high mortality rates, sometimes measured as more than 30 per
thousand of the population per year. Development brings better food quality and reliability plus improved medical knowledge and health care. Infant mortality falls and life expectancy increases. Many developed
countries have mortality rates below 10 per thousand per year.

Many Northern European countries now
have little or no population growth. Emerging economies in Asia still have population growth, at around 0.5% p.a. in China and 1.2% p.a. in India, for example. The fastest growing populations at present are in much of Africa and parts of the Middle East, with population growth at around 3% per year. A decline in the birth rate in these countries could still be decades away. Migration brings some redistribution between countries but generally has limited impact.

The world population grew beyond 7bn people in 2011 and is expected to reach 8bn by around 2025. India’s population is expected to overtake China’s around 2030. More people mean more consumers and
also a growing labour force. The global labour force in 1980 was around 1.7bn, rising to 2.9bn in 2010 and expected to be 3.5bn in 2030. There is a contrast between developed countries with falling birth rates and rising elderly populations and developing economies with growing populations and higher proportions of
young people in much of Africa, Asia and South America.

Question 38

Employment patterns: structural change

Answer 38

Three stages can be identified in the development process. Developing economies depend heavily on the
primary sector; emerging economies gain from an expanding secondary sector and developed economies are dominated by tertiary activity. Over time, countries grow richer and acquire both more physical capital (productive physical assets) and more human capital (skills and abilities). Many unskilled jobs become mechanised and then automated. Skill shortages are common as development brings change and the labour
force takes time to adjust. Some analysts distinguish quaternary activity (knowledge, ICT and research based) from tertiary, in order to emphasise its growing importance.

Question 39

Employment patterns: Structural change (urbanisation)

Answer 39

Urbanisation, with rising numbers of paid jobs in the secondary and tertiary sectors, is associated with economic development because productivity increases. Uttarakhand provides a good example. Similarly, the
scale of urbanisation in China is without precedent in human history. In 1950, 13% of people in China lived in cities. By 2010, the urban share of the population had grown to 45%; it’s projected to reach 60% by 2030.
Twenty-five of the world’s largest 100 cities are in China. China has 14 cities with over 5 million people. Shanghai, with more than 22 million people, is currently the largest and wealthiest city in China. Around 500m Chinese people have moved out of poverty, despite administrative systems which disadvantage rural to urban migrants.

Question 40

Employment patterns: Structural change (changing employment patterns)

Answer 40

Employment data for the UK in Figure 1 shows how structural changes lead to service sector growth. In 1841 the industrial revolution was largely complete. The decline in the proportion of manufacturing employment is higher in the UK than in most developed economies, e.g. Germany, partly because of the growth in financial services. The fall in employment in the energy sector reflects the rapid decline in coal mining.

Agriculture in developing economies can use labour intensive methods with little capital or fertiliser and limited irrigation. Unemployment goes largely unrecognised as families share the work, but under employment is common. If some workers move to towns, incomes improve, new methods are adopted and yields rise.

Globally, the proportion of people living in towns grew from 30% in 1930 to 54% in 2014. By 2030, an estimated 60% will be in urban areas. 1980 estimates of the proportion of Chinese people living in poverty varied between 60% and 81%, depending on the definition used. The 2014 United Nations estimate of poverty in China was 11.8%, predominantly found in rural areas.

Question 41

Employment patterns: structural change (the knowledge economy)

Answer 41

In developed, mature, economies around 70% of the workforce will be in the service sector. Primary and secondary products can be produced in capital intensive ways or imported. Even Australia’s mineral mining,
for example, employs relatively few people and is capital intensive. Production involves mechanisation, automation and relatively little human labour. Technological advances (and creative destruction) play an important role. The knowledge economy and service industries provide the most jobs.

Structural change involves retraining and life-time learning as employers’ needs change. People who are made redundant from declining industries need help to become more mobile. Training schemes reduce occupational immobility. Better local transport helps with geographical immobility. In the UK, high housing
costs in areas where there is dynamic change make geographical immobility a real problem. Failure to address these issues creates unemployment and underemployment.

Question 42

Employment patterns: Interdependence (offshoring)

Answer 42

Globalisation plays an important role in structural change, with countries developing strengths that shift global employment patterns. Offshoring of labour intensive unskilled work can boost employment and
development in low wage economies with plentiful and cheap labour. At the same time, the mix of demand for labour will change in richer countries. Declining demand for unskilled labour is likely to contribute to a
widening gap between skilled and unskilled earnings.

Question 43

Employment patterns: interdependence (costs)

Answer 43

With relatively plentiful physical and human capital, developed economies can focus more on high technology and high value-added products, such as those found in the knowledge economy and the work of creative industries. Rising incomes increase demand for such products. Increasing specialisation raises productivity. However, problems with occupational and geographical immobility create unemployment in declining industries, whilst expanding industries face skills shortages. These problems are significant in many developed economies.

Question 44

Employment patterns: interdependence (interdependence)

Answer 44

Over time, there is growing interdependence as countries or regions develop new strengths in skilled areas, e.g. IT and software development in parts of India. Demographic change also has an impact. For example, the EU workforce may fall significantly in coming years due to low birth rates and ageing populations (although migration may help to redress the imbalance). Whilst many emerging Asian economies made rapid progress in the second half of the 20th century, many African economies lagged behind. Improvements to infrastructure and better conditions for business have seen economic growth rise to average 5% p.a. in
Africa this century.

Question 45

Employment patterns: Interdependence (Human capital)

Answer 45

China’s industrial expansion used cheap labour, high rates of investment, rapid growth in manufactured export sales as trade barriers fell, and often also foreign direct investment (FDI). Wages in the industrialised coastal regions have grown significantly. The challenge for China now is to rebalance its economy by developing skills for high added value goods and services whilst also expanding home consumption and reducing reliance on exports.

Question 46

Employment patterns: Changing labour requirements (transferable skills)

Answer 46

Correctly anticipating future requirements becomes harder as the pace of economic change increases. People have their own interests and ambitions; their education and training choices may or may not be based on expected earnings. Whilst planning and training can be improved, new workers may not precisely fit current needs. This increases the importance of mobility in the existing workforce. There is growing emphasis on transferable skills, continuous learning and geographical mobility. Demand and technology change, so workers must respond.

The experience of South Korea shows that rapid change is possible. In 1960 GDP per capita in South Korea was comparable to current levels in sub-Saharan Africa. Manufacturing jobs were relatively few and mainly unskilled. Industrialisation first brought many unskilled ‘sweatshop’ jobs with poor wages and conditions.
Investment, in physical and human capital, made it a prosperous country and a member of the G-20 group of major economies.

Question 47

Employment patterns: changing labour requirements (skills)

Answer 47

As trade liberalisation has increased trade, it has created a global labour market. Offshoring has depressed the earnings of some unskilled employees in the developed economies. Wherever production costs have
fallen, uncompetitive businesses have made employees redundant. Developed countries have high GDP per capita because of their large stocks of capital and their skilled workforces. However, history has many
examples of countries and industries that have been overtaken and gone into relative decline.

The demographic shift in many developed countries will leave them with shrinking and ageing working populations. Emerging economies are capable of future pre-eminence; China already leads in large sections of manufacturing. The ability to excel involves being at the forefront of innovation in specialist activities
that can attain future success.

Question 48

What determines rates of pay?: Supply and demand

Answer 48

Wages are the price paid for labour. Like any price, wages depend on supply, demand and the impact of any market failure. In any labour market, the supply of labour depends on the number of workers available with
the required knowledge, skills, qualifications and experience. In addition, workers need the motivation to find a particular job attractive. For example, many people dislike night shifts so higher pay might be
necessary to compensate for this. Divers working on North Sea oilrigs spend long periods away from home in a dangerous job; their pay is relatively high.

Question 49

What determines rates of pay?: Supply and demand (derived demand)

Answer 49

The demand for labour is a derived demand which depends on the value (revenue) that workers can create for the employer. The value of sales assistants depends on how much revenue their sales add, beyond the
cost of goods sold. A barrister or solicitor adds value by promoting client interests in the context of the law. Clients put a high value on being successfully defended against criminal charges, for example; if they have
enough money they will pay well for top lawyers. It is reasonable to assume that more workers will be attracted to a job by higher pay.

As higher wages add to costs for employers, they will reduce the profit from each worker and can make some workers unprofitable. This is likely to lead firms to employ fewer workers when wages rise.

Question 50

What determines rates of pay?: Supply and demand (Scarce skills)

Answer 50

● If there is a shortage of labour in a specific occupation, a big increase in the wage rate will be needed to attract more employees. This happens when there are few people with the necessary skills, perhaps
because of occupational immobility or voluntary unemployment.

● Elasticity of demand depends on employers knowing exactly what each worker will add to revenue. There
are sub-markets which vary widely. In the UK, for example, the High Pay Centre suggests that CEOs of FTSE 100 companies had 130 times the average pay of their employees in 2014.

● Opinions vary on how much this is due to their scarce abilities, the value they add, or market failure. As one point of evidence, company profits have certainly not risen in line with CEO incomes.

Question 51

What determines rates of pay?: Supply and demand (occupational immobility)

Answer 51

Dynamic economies have many changing factors which influence wage rates. For example, during a boom labour is likely to be relatively scarce so wages might increase relatively quickly, and vice versa. Structural
changes in the economy tend to first alter the demand for labour and then the supply. When the demand for UK coal fell, for example, many miners found it difficult to transfer to other jobs. A big increase in
demand for a newly fashionable product signals firms to supply more as revenue and profit are available. If they require skilled people to do this, they are likely to have to increase pay

Question 52

What determines rates of pay?: Pay-skills, education and training (demand for skills)

Answer 52

The urbanisation and industrialisation of China would not have taken place without the attraction of higher wages to stimulate migration to cities and manufacturing jobs. People in rural areas tend to have lower
incomes. China is now increasing output of more complex products that require more skills, so more skilled workers are needed and their pay has increased faster than average earnings. Products of skilled
workers tend to sell for higher prices, bringing more revenue, so employers can gain despite paying higher wages.

Question 53

What determines rates of pay?: Pay-skills, education and training (New technologies)

Answer 53

As countries grow richer, capital becomes more plentiful and cheaper compared to labour. Progress in technology increases the potential and the productivity of capital. Increasing mechanisation and automation take over from many unskilled and semi-skilled jobs.

Question 54

What determines the rates of pay?: Pay-skills, education and training (Unskilled jobs)

Answer 54

Globalisation encourages the offshoring of some remaining less skilled jobs to countries with lower wages and linked costs. Demand for unskilled workers in developed economies has consequently fallen. Unskilled jobs are also open to everyone, even skilled workers unable to find work which uses their skills. Falling demand and plentiful supply keep pay for unskilled jobs down; the gap between skilled and unskilled earnings has widened.

Educational requirements in sectors such as the knowledge economy have risen. Education and training are seen as vital for a successful economy. General education can aim beyond literacy and numeracy to develop judgement and problem solving abilities. Training linked to specific tasks is increasingly seen as important for personal development throughout a lifetime, rather than as a one-off preparation for a permanent role. Skill levels are increasing.

Question 55

What determines rates of pay?: Pay- skills, education and training (Human capital)

Answer 55

The UK school leaving age is nominally 16, but everyone must be in at least part-time training or education until at least 18. This means sacrificing earnings in the short run for higher rewards later. As a generalisation,
graduates can earn around £100,000 more than non-graduates during their life time. This varies by subject, with students of medicine, architecture, engineering and law tending to earn most. Benefits can extend
beyond incomes; many graduates find that education also prepares them for more satisfying work. Almost 40% of working age people in the UK are now graduates. Two thirds of South Koreans aged 25-34 have a degree and the average proportion of graduates in OECD country workforces has risen above 40%.

Question 56

What determines rates of pay?: The impact of global competition, recession and redundancies

Answer 56

Industries and the jobs they provide can be hit hard by overseas competition, by recessions and by changing technology. Many manufacturing industries have found competition from imports overwhelming. Initial
success in China came in mass production of items such as cheap basic clothing and simple durable items.
Subsequently Chinese firms have moved up the value chain, now producing cars and telecommunications
equipment. In 2015 China overtook Japan as the leading Asian exporter of high-technology products.
Competing countries cannot afford to stand still.

Question 57

What determines rates of pay?: The impact of global competition, recession and redundancies (excess supply of labour)

Answer 57

The recession from 2008/9 onwards reduced employment and wages in many countries. Lower aggregate
demand meant less output could be sold so fewer workers were needed. There was an excess supply of
labour. Although the fall in the UK employment level was smaller than in some recessions, earlier expectations
of gradually improving living standards were suspended. On average, workers’ pay took around six years
to return to pre-recession real income levels. Recovery has been slower than in previous recessions and
some types of employment had not fully recovered in 2016. Between them, manufacturing, construction,
wholesale/retail services and public services employ over a million fewer workers in 2016 than in 2008.

Question 58

What determines rates of pay?: The impact of global competition, recession and redundancies (shrinking public sector)

Answer 58

Recession perhaps accelerated the long term downward trend in UK manufacturing and construction. Recently, for example, the steel industry has seen many redundancies. Public sector job losses reflect a combination of spending cuts to reduce deficits and a political choice to shrink the size of the public sector. Employment has grown in healthcare and social work (influenced by demographic change), in professional scientific and technical work and in education. The number of adult social care workers, for example, has risen by more than 15% since 2009, to a total of around 1.5 million.

Question 59

What determines rates of pay?: Workforce planning (skill shortages)

Answer 59

Whilst the supply of labour exceeded demand after the recession, there were still skill shortages in some
areas. While innate ability is needed for some jobs, the availability of suitable training is crucial. A shortage
of highly skilled engineers, for example, is also likely to restrict the availability of inspiring teachers and
trainers for future engineers.

Planning training needs is difficult. When economic change is rapid, the time lags between identifying a
need, organising provision and completing training courses make it hard to keep up with requirements.
Many education and training choices are based on personal preferences more than on potential earnings
or job prospects. So, for example, most actors are poorly paid yet there is no shortage of new entrants to
the profession.

Question 60

What determines rates of pay?: Workforce planning (International labour mobility)

Answer 60

Workers are increasingly mobile geographically, even between continents, and some UK industries have
come to rely on attracting migrant labour from overseas to tackle skill shortages. Both inward and outward
migration will have an impact on the labour force

Question 61

What determines rates of pay?: The impact of trade unions and professional bodies

Answer 61

There are around 6.5 million trade union members in the UK, half the membership level of 1979. This
reflects a decline in employment in industries that were highly unionised, such as steel, coal and
shipbuilding. There has also been a fall in enthusiasm for union membership with fewer workers wanting
union representation to protect their rights. Professional bodies such as chartered institutes and associations
help to regulate professions such as medicine, the law and engineering whilst also representing their
members’ interests. Membership is compulsory in some professions.

Both trade unions and professional associations are involved in wage and salary negotiations on behalf of
their members. A union or association with control over the supply of labour gains monopoly power. Limiting
entrance to a profession is likely to push up earnings.
Examples:

● The lengthy and demanding process of qualifying as an actuary restricts supply and raises
earnings.

● The British Dental Association wants unqualified teeth whitening businesses closed down. They
point to dangers for patients but also want the work for their members.

Where a union or association negotiates incomes, monopoly power could enable them to secure a higher
wage than individual workers could negotiate for themselves. However this may entail fewer jobs being
available for members if the demand curve slopes downwards.

Question 62

What determines rates of pay?: The impact of trade unions and professional bodies (Public sector employment)

Answer 62

As single sellers, major employers have monopsony power. The best illustration of this in the UK is that
the public sector employs 5.7 million people, over 17% of all UK workers. This includes all of the police and
armed forces, plus most medical staff and teachers. The government can, for example, simply impose a pay
freeze. Many towns have a dominant local employer with monopsony power. Many industries have
agreements or understandings between employers about pay levels for workers.

Question 63

What determines rates of pay?: The impact of trade unions and professional bodies (Monopsony
power)

Answer 63

The combination of monopsony employers with monopoly unions or associations produces countervailing
power. In an ideal world, the power of these two sides might balance out, but in reality this is rare.
Employers such as Foxconn have far more power than their workers. Some powerful unions can exert
monopoly power, such as the London tube drivers, members of RMT.

Many labour markets are fragmented by location, occupation, skills, training and experience. Unions and
associations can have some monopoly power and some employers have monopsony power. Governments
are major employers and also intervene in national labour markets. Demand and supply are still significant
in wage determination, along with a complex mix of other factors that will influence wage levels.

Question 64

Making minimum wage legislation work: Introduction (Market power)

Answer 64

The term ‘minimum wage’ does not mean keeping wages down to a minimum. Where a minimum wage is
set, nobody can legally be paid below this level, so wages are pushed up to the minimum in situations
where employers might otherwise pay less. The first reason for setting a minimum wage is to reduce poverty
by increasing earnings for those who are paid least. A second motive in many countries is to reduce the
impact of uneven market power where unskilled workers have little or no negotiating strength whilst
employers have monopsony power.

Developing countries typically have people working outside the formal economy, not working for a recorded
wage, sometimes in large numbers. A minimum wage can widen the gap between those with a paid and
recognised job and others who are self-employed or whose activities are restricted to an unrecorded
‘informal’ economy.

Question 65

Making minimum wage legislation work: Introduction (Possible impact on employment)

Answer 65

Free market supporters tend to see a minimum wage as interfering with market forces. They point out that
setting a minimum wage above the equilibrium level for unskilled workers might simply distort the market
and result in job losses because higher wages make employing some people unprofitable. So, a measure
aimed at reducing poverty might simply increase it.

Supply and demand are unlikely to be this elastic. If monopsony power has allowed employers to keep
wages well below the value of work, their demand for labour is likely to be inelastic. Most governments are
cautious and push minimum wages up gently, not wanting to cause mass unemployment. Empirical evidence from many countries suggests that minimum wages have had very little impact on employment levels.
Despite this, minimum wages remain controversial.

Question 66

Making minimum wage legislation work: Introduction (Possible impact on employment) 2

Answer 66

Advantages of minimum wage rates:

-Can lift people out of poverty if main earners in poor households benefit.

-Possible knock-on effects could benefit workers in informal sectors.

-Higher incomes and spending for the poor might boost consumption and growth.

Disadvantages of minimum wage rates:

-Can lead to unemployment if the level set is above the value of many workers’ output.

-Where poor are mainly in informal sectors there might be little impact on poverty.

-Higher labour costs might make export industries less competitive overseas.

Question 67

Making minimum wage legislation work: The UK experience (Tax credits)

Answer 67

At its introduction in 1999, the first UK adult minimum wage was £3.60 per hour. The first rise of 10p per
hour in 2000 set the tone for modest annual increases; by 2014 it reached £6.50 per hour. Roughly two
thirds of this increase compensated for inflation and the real value of the minimum rose by about a third in
15 years. Younger workers have had a lower minimum; the minimum for apprentices was set particularly low.

The Living Wage Foundation, The Rowntree Foundation and others have argued that the minimum wage
has been inadequate for a reasonable living standard, reflecting the weak bargaining position of unskilled
workers. Governments have used in-work benefits and tax credits to supplement wages for the low paid.
Some commentators have seen this as subsidising powerful employers who would otherwise have been
forced to pay more.

In the July 2015 budget, plans for a new minimum, to be renamed the national living wage, were announced.
This started at £7.20 per hour in 2016, with a target of more than £9 per hour in 2020. The gain for low paid
workers is self-evident and government finances will improve if in-work benefits are phased out.

Question 68

Making minimum wage legislation work: The UK experience (National Living Wage)

Answer 68

The downside of this is the possible effect on unemployment. The Office for Budget Responsibility
suggested that 60,000 jobs could be lost. Employers in low paying industries such as retail and catering have
claimed that far more jobs are at risk. For example, Tesco, the largest UK supermarket chain, suggested that
a sixth of its jobs could be lost and that job losses would have the greatest impact in poorer regions. As Tesco
has around half a million employees, this one firm could cause more unemployment than the OBR estimate
for the entire country, if its claim proves accurate.

In the case of traditional retailing, it seems likely that extra labour costs will add to the impacts of online
sales and more in-store technology, both of which cause job losses. More widely, the state of the economy
and the effect of higher minimum wages on consumer spending will influence the eventual outcome. The
£9 figure is a target; politicians might also modify their plans as time goes on.

Question 69

Making minimum wage legislation work: Skills shortages and their impact on competitiveness (New technologies
and demand for skills)

Answer 69

Most skilled jobs require a blend of aptitude, training and experience. When a new industry grows, there
may initially be a shortage of workers who meet the industry-specific requirements of the new jobs. An
obvious example with the expansion of the knowledge economy is a range of IT skills. Even in existing
industries, changes in demand or the technology used can increase demand for particular skills. We know,
for example, that secondary schools will have record student numbers in a few years’ time so more teachers
will be needed.

Question 70

Making minimum wage legislation work: Skills shortages and their impact on competitiveness (Time lags)

Answer 70

When demand exceeds the supply of scarce skilled workers, competing employers are likely to bid up wages
for that skill. It will take time for the supply of labour to improve. Whether young people train in the required
skills or existing workers ‘upskill’ (take extra training) to meet the need, there will be a time lag before they
are ready to work and a still longer period before they have experience and have proved their competence.
Wage levels in the occupation are likely to stay high for some years. At the same time, there is likely to be
structural unemployment of people with skills that are no longer needed.

Some tasks require exceptional aptitude in addition to training and experience. Brain surgeons are one
example; it can be argued that exceptionally gifted sports players and entertainers can also be in this
category. Without the rare aptitude, no amount of training or experience will prepare people for such roles,
so shortage of these skills is permanent. Consequently, those with exceptional aptitude for a task that is in
demand can command very high earnings almost indefinitely.

At the time of writing, the UK has skills shortages. Engineers, nurses, doctors, IT professionals, construction
workers, accountants and teachers of certain subjects are in short supply.

Question 71

Making minimum wage legislation work: Skills shortages and their impact on competitiveness (Global labour markets)

Answer 71

The examples Mr Green gave are within the UK. However, major engineering projects now have a global
market. UK engineering businesses, struggling to meet demand in their home market, will have limited
capacity to take on work overseas. If they are forced to rely on people working beyond their comfort zone
by tackling unfamiliar skills, the quality of work done could fall, damaging the global reputation of the
industry. Similarly, more UK buyers might look to overseas firms for their projects. The competitiveness of
many industries depends on the skills of their people.

Example:
UK education has a good reputation. Many thousands of children are sent to UK independent schools for the benefits of a British education and good English Language skills. There are English speaking schools in many countries (frequently using UK teachers). UK GCE exams are popular as a respected qualification and as a way to improve chances of admission to UK universities. Many UK universities also have a high reputation and attract students from afar. The education sector makes
a valuable contribution to invisible exports. Skills shortages could threaten this position if, for
example, students lose confidence in non-specialist teachers.

There is a global race to develop skills for growing industries such as those in the quaternary sector.
Competitiveness in established sectors depends in part on maintaining skills advantages over rivals who are
improving their training and skills levels. There is no room for complacency.

Question 72

Making minimum wage legislation work: Migration

Answer 72

Geographical mobility has increased over time. There are still areas of the world where some people spend
their entire lives in the town or village where they were born. But industrialisation has often entailed mass
migrations to towns and cities, as illustrated by China in the last 50 years. In developed economies, structural
change has often forced people to move to find work. The spread of higher education has meant more 18
year olds leaving home to study in recent decades. Young UK professionals in their thousands accept that
their career development is likely to entail moving to London or other centres, then perhaps moving
repeatedly in future. Some retired people migrate to warmer climates.

International migration is not new. Early in the 20th century the USA welcomed 1 million legal migrants each
year, the record was 1.8 million in 1991. Australia and Canada also welcomed many migrants as they
developed. What has changed is that one-off migrations are now combined with people moving between
countries for a stage of their career, and then perhaps moving on. There is freedom of movement between
EU member states. Whether we regard them as asylum seekers or as economic migrants, people are leaving
conflict zones such as Syria, Iraq and Afghanistan, and some of the poorest countries, in search of a better
life for themselves and their children.

Question 73

Making minimum wage legislation work: Migration (Easier recruitment for business)

Answer 73

Migrants can be very valuable to the economy. Where there are skills shortages, attracting suitable staff from
abroad is much quicker than training new recruits. The NHS is increasingly dependent on immigrant doctors
and nurses. Half of the 119 occupations on the UK government’s ‘shortage occupation list’ are in areas of
engineering. Another 20% involve scientific and technical roles. A fifth of workers in aerospace manufacturing and computer, electronic and optical engineering are migrants (Daily Telegraph, 3 November 2013). The UK’s continued high reputation and competitiveness in such areas depends on migrants.

Question 74

Making minimum wage legislation work: Migration (Enhanced competitiveness)

Answer 74

Unskilled migrants have sometimes been willing to take on unpopular jobs that are otherwise hard to fill;
some agricultural employers would struggle at harvest time without them. With ageing populations in
northern Europe, the relative youth of most migrants can help to rebalance the workforce. However,
untrained migrants add to the relatively plentiful supply of unskilled labour, causing downward pressure on
unskilled wages. More migrants add to pressure on housing, schools and hospitals. International migration
is an emotive topic for many people. Whatever official controls are imposed, greater international mobility
is a trend that seems unlikely to change in the foreseeable future.

Question 75

Making minimum wage legislation work: Inequality and incentives

Answer 75

Inequality of incomes has increased since the 1980s. Top earners have increased their incomes faster
than other groups. HMRC tax authorities have more than 10,000 people now declaring incomes above
£1 million p.a. Meantime many employees in the UK found that their real incomes actually decreased during
the period 2009-13. Low paid full-time workers were affected, but part-timers and those on zero hours
contracts were often even worse off. Chapters 16 and 18 examine inequality, but in the context of wage
levels and minimum wages it is important to note that earnings differences create wide diversity in
household incomes

Question 76

Making minimum wage legislation work: Inequality and incentives (Motivation)

Answer 76

The incentives argument is one of the justifications put forward for the extent of inequality. This has two
strands:
● Higher pay is necessary to attract people to unpleasant or responsible jobs.

● Rewarding success with extra income will motivate people to work harder.

Highest pay does go to people in responsible jobs (such as top bankers) but their working conditions are
rarely unpleasant. Evidence from the financial crisis shows that their high rewards did not lead to ideal decision making. Even in poor performing years, their earnings stay remarkably high. The incentives
argument cannot fully explain their income levels. This may change.

Question 77

Making minimum wage legislation work: Inequality and incentives (Incentives)

Answer 77

Top earners may gain little real benefit from extra pay. Financial incentives are arguably more
powerful at low wage levels. A national minimum wage offers an incentive for more people to work, for
example. Higher pay may be useful as an incentive to take a job that few people are willing to do. This
does not just apply to oil-rig workers; head teachers receive much more than teachers lower down the scale,
because the job involves responsibilities that few teachers relish.