Theme 3 - Labour markets Flashcards
what does MRP tell workers and firms
tells firms how many people to employ at a given wage rate
- tells workers whether their pay is good enough if their MRP is at least
limitations of MRPL
- its hard to measure productivity
- teamwork makes it difficult to measure individual productive
- the self employed
- we assume that we are working in a perfectly competitive market, may be the presence of monopsonies or trade unions
what is the elasticity of labour demanded
measures the responsiveness of labour demanded given a change in the wage rate
how does a change in the final price of the product shift the labour demand curve
- if the price of the final product goes up, the MRP of the worker will also go up
- Firms experience increased revenue and profit margins when the final product price rises.
- Higher profitability encourages firms to expand production to maximize profits
- To support higher production levels, firms demand more labor, shifting the labor demand curve to the right.
how does the substitutability of capital for labour affect the elasticity of labour demanded
- When capital can easily replace labor, firms are highly sensitive to changes in labor costs.
- A rise in wages significantly increases labor costs.
- Firms respond by substituting labor with more cost-effective capital (e.g., machinery, automation
- This substitution results in a substantial decrease in the quantity of labor demanded, making labor demand more elastic (high responsiveness to wage changes).
how does the cost of labour affect the elasticity of labour demanded
- When labor costs are high, firms face significant pressure to manage expenses to maintain profitability.
- High labor costs incentivize firms to find alternative means of production, such as automation or outsourcing, to reduce reliance on expensive labor
- The ability to substitute labor with capital or other inputs means that a small increase in wages leads to a large decrease in the quantity of labor demanded, making labor demand more elastic
how does the time period affect the elasticity of labour demanded
- In the short run, firms have limited ability to make significant changes to their production processes or workforce
- Many factors of production, such as capital and contracts, are fixed and cannot be easily altered
- Due to these constraints, the quantity of labor demanded is relatively unresponsive to changes in wages, resulting in inelastic labor demand
LONG RUN:
- Over the long run, firms have more flexibility to adjust their production processes, invest in new technologies, and change their workforce size
- Firms can substitute labor with capital (e.g., automation) and implement more efficient production techniques
- These adjustments make the quantity of labor demanded more responsive to changes in wages, leading to more elastic labor demand
where is wage set (industry)(perfect competition)
where demand of labour = supply of labour
revenue maximisation on an MRP/ACl diagram
where MRP = MCl (marginal cost labour) or when MRP = wage
what is the occupational mobility of labour
the ability of labour to move from one occupation or job to another job
what is geographical mobility of labour
the ability of labour to move from one location to another in taking
micro advantages of an increase in nmw
Increased Worker Income
- Higher wages boost the disposable income of low-paid workers, improving their standard of living and reducing income inequality.
- Can stimulate consumption in the economy, benefiting local businesses and industries reliant on consumer spending.
Reduced In-Work Poverty
- An increased NMW lifts many low-income workers above the poverty line, reducing reliance on welfare benefits.
- Reduces government expenditure on welfare and improves worker morale and productivity.
Improved Worker Retention
- Higher wages can reduce staff turnover and increase job satisfaction, lowering recruitment and training costs for firms.
- Enhances labour market stability and firm productivity.
Promotes Fairness in the Labour Market
- Prevents the exploitation of workers by setting a wage floor, ensuring a minimum standard of compensation for labour.
- Encourages greater equity in income distribution and fosters social cohesion
Counterbalance to Monopsony Power
- In markets where employers have significant monopsony power, a higher NMW prevents exploitation and ensures fairer wages.
- Encourages a more competitive and equitable labor market, improving overall economic efficiency
micro disadvantages of an increase in nmw
Increased Costs for Businesses
- Higher wage bills raise production costs, particularly for labor-intensive firms. Small businesses or those with narrow profit margins may struggle to absorb these costs.
- Firms may pass on higher costs to consumers through increased prices, or may reduce output to cut costs
Potential Job Losses
- Firms may respond to increased wage costs by cutting jobs, reducing hours, or automating tasks to maintain profitability.
- Could lead to higher unemployment, especially among low-skilled or entry-level workers, as firms seek to optimize labour efficiency
Compression of Wage Differentials
- Raising the NMW can lead to a smaller gap between low-wage and higher-wage workers, potentially demotivating skilled workers or those seeking promotions.
- Can reduce productivity as workers feel their efforts are not appropriately rewarded.
Reduced Demand for Low-Skilled Workers
- Firms may prioritize hiring fewer but more productive workers to justify higher wages, side-lining low-skilled workers.
- Increases structural unemployment as displaced workers struggle to find roles suited to their skills.
Potential Reduction in Training Opportunities
- Firms facing higher wage costs may cut back on investment in employee training or development programs to save costs.(r&d)
- Could harm long-term productivity growth and workers’ skill development.
macro advantages of an increase in national min wage
Boost to Aggregate Demand (AD)
- Higher wages increase disposable income for low-income households, who have a high marginal propensity to consume (MPC).
- Leads to increased consumer spending, stimulating economic growth and potentially reducing unemployment in the short term due to higher demand for goods and services
Reduction in Income Inequality
- Raising the NMW narrows the wage gap between low-income earners and higher-income individuals.
- Promotes social equity and reduces relative poverty, contributing to a more inclusive and cohesive society.
Increased Tax Revenues
- Higher wages lead to increased income tax revenues and National Insurance contributions for the government due to fiscal drag.
- Provides additional fiscal resources that can be used for public spending on infrastructure, education, or healthcare
Reduced Government Spending on Benefits
- With higher wages, fewer workers rely on welfare programs like housing benefits or tax credits.
- Alleviates pressure on public finances, allowing resources to be reallocated to other areas of the economy.
macro disadvantages of nmw
Reduced International Competitiveness
- Higher labor costs may make domestic goods and services less competitive compared to those from countries with lower wage levels.
- Could reduce exports, widen trade deficits, and discourage foreign direct investment (FDI).
Cost-Push Inflation
- Higher wages increase firms’ labour costs, leading to higher prices for goods and services to maintain profit margins.
- Could reduce the purchasing power of consumers and lead to inflationary pressures, particularly if wage increases are widespread across sectors
Risk of Higher Unemployment
- Firms may reduce hiring or lay off workers to manage increased wage costs, particularly in industries with tight profit margins.
- Could lead to higher structural or frictional unemployment, particularly for low-skilled or young workers who are more vulnerable in the labour market
Limited Effectiveness in Reducing Poverty
- Many low-income households may not benefit directly if the NMW increase leads to job losses or reduced hours.
- May fail to significantly reduce overall poverty levels, especially if inflation erodes real wages.
Reduced Investment by Firms
- Higher wage costs may leave firms with less capital to reinvest in research, development, or capital improvements.
- Could hinder long-term productivity growth and innovation, reducing potential GDP growth
What is market failure in labour markets
occurs when the labour market does not allocate labour resources efficiently
What are some current labour market issues?
Wage inequality: Growing disparities in wages between high and low-income earners.
Gig economy: The rise of short-term, freelance, and contract work, leading to concerns over job security, wages, and working conditions.
Skill shortages: Many sectors face skill shortages, especially in technology, healthcare, and engineering.
Unemployment: Persistent unemployment due to automation, globalization, or economic downturns.
Labour mobility: Issues related to workers’ ability to move geographically or between industries due to skills mismatch, housing constraints, or immigration laws.
general advantages of an increase in nmw
- Increased Income for Low-Wage Workers → Improved Standard of Living
Increased NMW → Higher disposable income for workers
→ Workers can afford better housing, healthcare, and education
→ This leads to an improved standard of living and overall well-being
→ Reduces financial stress, contributing to better mental health
→ Higher disposable income encourages workers to save more, ensuring financial security
→ Consumer confidence increases, boosting economic stability
→ Better living conditions contribute to a higher quality of life
→ Reduced reliance on government welfare programs due to increased self-sufficiency - Reduced Poverty and Income Inequality → Lower Government Welfare Spending
Increased NMW → Higher earnings for low-wage workers
→ Reduction in the poverty rate as workers can support themselves more effectively
→ This results in reduced demand for welfare programs (e.g., food stamps, housing benefits)
→ Governments face lower public expenditure on social benefits
→ With fewer people relying on welfare, there’s an increase in tax revenues from a larger tax base
→ Reduces income inequality, creating a more equitable economy
→ Lifts many people out of poverty, promoting social mobility
→ In the long run, this helps in building a more inclusive society, where all workers are compensated more fairly - Increased Worker Motivation and Productivity → Reduced Staff Turnover
Increased NMW → Higher wages for employees
→ Workers feel valued and more motivated to perform well in their roles
→ Increased job satisfaction leads to higher productivity in the workplace
→ Workers become more committed, contributing positively to company outcomes
→ Employee retention increases, reducing the costs of recruitment and training
→ Reduced turnover helps maintain a stable workforce, increasing the experience base
→ Longer-term employees contribute to a more skilled and efficient team
→ This creates a positive work culture and improves company morale - Positive Economic Stimulus → Increased Consumer Spending
Higher wages → Workers have more disposable income
→ This leads to higher consumer spending on goods and services
→ Increased demand stimulates economic growth by boosting aggregate demand
→ Businesses respond to higher demand by expanding operations and hiring more staff
→ Small and large businesses benefit from increased sales, driving job creation
→ As companies hire more workers, unemployment decreases, improving overall economic conditions
→ Increased spending leads to higher tax revenues for the government
→ Governments may reinvest the additional revenue into public services, benefiting the economy
→ Economic recovery can be accelerated during periods of downturn, due to increased consumption - Reduction in Income Inequality → More Fair Labor Market
Raising the NMW → Higher wages for workers in low-paid sectors
→ Reduces income inequality by narrowing the pay gap between the lowest and highest earners
→ A more equitable income distribution fosters a sense of social justice
→ Low-income workers feel more respected and empowered by their higher wages
→ Improved worker satisfaction leads to a more engaged workforce
→ Reducing inequality can create a more stable society, lowering the potential for social unrest
→ This can increase economic participation, as workers are more likely to invest in education and career growth
→ A fairer wage structure helps enhance social mobility, enabling individuals to escape poverty
→ Encourages fair labor market practices, where employees are compensated based on their contribution
Disadvantages of Increasing the National Minimum Wage (NMW): - Higher Costs for Firms → Potential for Increased Prices
Increased NMW → Higher labor costs for businesses
→ Firms may pass on these increased costs to consumers through higher prices
→ Cost-push inflation occurs, as the overall price level rises
→ Increased costs make essential goods and services (e.g., food, healthcare) more expensive for consumers
→ Higher prices can lead to a reduction in demand for products, particularly for price-sensitive consumers
→ Reduced consumer purchasing power may cause sales to drop
→ Small businesses, in particular, may struggle to absorb these costs, leading to financial strain
→ International competitiveness can be weakened, as domestically produced goods become more expensive compared to foreign alternatives
→ Businesses may reduce investment in innovation and growth due to the financial burden of higher wages - Potential for Job Losses → Reduced Employment Opportunities
Higher NMW → Increased labor costs for firms
→ Some businesses may reduce their workforce by laying off employees or reducing working hours
→ Businesses may also automate tasks that were previously done by low-wage workers, leading to job displacement
→ Unemployment rates for low-skilled workers could rise, as fewer entry-level positions are available
→ Employers may prefer to hire experienced workers over inexperienced ones, leaving younger and less skilled workers unemployed
→ Industries like hospitality and retail, which rely heavily on low-wage labor, may be particularly affected by job cuts
→ The youth unemployment rate could increase, as fewer opportunities for first-time workers are available
→ Layoffs or job freezes could become more common in businesses with tight profit margins
→ As firms reduce their workforce, overall unemployment may increase, negatively affecting the economy - Reduced Competitiveness of Small Firms → Risk of Business Closures
Raising NMW → Higher operating costs for small businesses
→ Small firms with limited financial resources may struggle to compete with larger businesses that can absorb higher costs more easily
→ Small businesses may face financial pressure, leading to reduced profit margins
→ Many small firms may need to increase prices to cover their additional labor costs, potentially reducing sales
→ Some small firms may choose to outsource jobs to countries with lower labor costs, resulting in a loss of domestic jobs
→ Unable to cope with rising wages, small businesses may be forced to shut down, reducing market competition
→ As smaller firms close, local economies may suffer from job losses and reduced economic activity
→ Local consumers may face fewer choices and higher prices, as large firms dominate the market
→ A decline in small business activity can harm community cohesion, as small firms often contribute to local development - Potential for Reduced Job Opportunities for Young or Inexperienced Workers
Higher NMW → Increased costs of employing low-skilled workers
→ Employers may become more reluctant to hire young or inexperienced workers, who may not justify the higher wages
→ With a higher wage bill, firms may choose to focus on hiring experienced workers instead, leading to fewer opportunities for newcomers to the job market
→ Youth unemployment may rise, as younger workers often occupy low-wage, entry-level positions
→ Companies may prefer to hire workers who already have the necessary skills or experience, leaving entry-level positions vacant
→ Internships or apprenticeships that previously offered experience-building opportunities may be at risk
→ Fewer job opportunities for young workers could lead to skills mismatches, where youth struggle to enter the labor market at a competitive level
→ Long-term career prospects for young people could be hindered, as they miss out on early work experience
→ A higher NMW could create a barrier to entry for young workers trying to gain essential workplace experience
general disadvantages of increasing nmw
- Higher Costs for Firms → Potential for Increased Prices
An increase in the NMW raises the cost of labor for businesses, particularly those in labor-intensive sectors.
To maintain profitability, firms may pass on these higher labor costs to consumers in the form of higher prices for goods and services.
Cost-push inflation can occur, leading to an overall increase in the general price level, which erodes the purchasing power of consumers.
Essential goods and services such as food, healthcare, and housing may become more expensive, hurting low-income households.
Higher prices may reduce demand for products, especially for price-sensitive consumers, leading to a potential reduction in sales.
Increased prices can make it harder for firms to compete, particularly small businesses that lack the ability to absorb higher labor costs.
Higher prices can make the economy less competitive internationally, as domestic goods become more expensive relative to foreign alternatives.
In extreme cases, businesses may reduce production or even shut down if they cannot maintain profitability, leading to job losses.
For firms in competitive industries, the higher wages may lead to reduced profit margins, affecting their ability to reinvest in innovation or expansion. - Potential for Job Losses → Reduced Employment Opportunities
With higher wage costs, firms might find it more expensive to hire as many workers, leading to potential job cuts or reduced hiring.
Some businesses may reduce their workforce by automating or outsourcing jobs to countries with lower labor costs.
Low-wage workers may find it harder to gain entry-level jobs, as firms may be reluctant to hire those without experience at the higher wage rate.
In sectors with low profit margins, like hospitality, employers may be forced to reduce the number of hours worked or eliminate jobs to maintain profitability.
Youth unemployment may rise, as younger workers (often employed in lower-paid, entry-level positions) face difficulties finding work at the higher wage rate.
Small businesses may be particularly vulnerable, as they are less likely to absorb the additional costs and might close down or scale back operations.
In certain sectors, the higher NMW could lead to higher unemployment rates as firms cannot afford to maintain staffing levels.
Firms in competitive labor markets may focus on hiring workers with more experience or skills, leaving younger or less skilled workers without opportunities.
Increased automation in response to labor cost increases could lead to a reduction in low-skilled jobs, reducing employment prospects for many. - Reduced Competitiveness of Small Firms → Risk of Business Closures
Small businesses with limited resources and lower profit margins may struggle to afford higher wages.
These businesses may have fewer opportunities to pass on wage costs through higher prices, leading to financial strain.
Increased wages could put smaller firms at a disadvantage compared to larger corporations that have economies of scale.
Some small businesses may be forced to reduce their workforce or close down entirely due to higher operational costs.
Local businesses may be outcompeted by larger firms that can better absorb the increased cost of labor.
High labor costs could push small businesses to relocate or outsource production to countries with lower wage expectations, potentially reducing domestic job creation.
As small firms close, there is less local economic activity, which could harm local communities that rely on small businesses for employment.
The loss of small firms could lead to reduced market diversity, with fewer options available for consumers.
Business closures can lead to a loss of jobs in local economies, further exacerbating unemployment. - Potential for Reduced Job Opportunities for Young or Inexperienced Workers
With higher labor costs, employers may prefer hiring more experienced workers who justify the higher wages with their skills and qualifications.
Young workers and those with limited work experience may struggle to find their first job, as employers may be less willing to take on new entrants into the workforce at the higher wage rate.
This could particularly affect industries that traditionally employ young people, such as retail or hospitality, where entry-level jobs are common.
A higher NMW could lead to greater competition for jobs, making it harder for young workers to find opportunities to gain work experience.
Employers might opt to hire older, more experienced workers, thereby increasing youth unemployment.
Higher wages could result in a longer wait for young or inexperienced workers to secure full-time employment, as companies may delay hiring.
This can also result in a lack of career progression for young people, as they find themselves in lower-paying or less fulfilling jobs.
For workers just entering the workforce, the combination of higher NMW and reduced job availability can result in career stagnation and lower lifetime earnings.
Internships or apprenticeships that previously offered entry-level opportunities may also be at risk if companies cannot afford to pay competitive wages.
reasons for wage differentials
- Educational/Skills/Wage Differences → Higher Earnings Gap
→ Individuals with higher education and specialized skills tend to earn significantly more than those with lower levels of education.
→ Low-skilled workers often find themselves in low-paying, insecure jobs, while high-skilled workers secure high salaries in professional roles.
→ The wage gap between skilled and unskilled workers widens, leading to greater income inequality.
→ Access to quality education and training is often unequal, meaning those from disadvantaged backgrounds struggle to move up the income ladder.
→ Over time, income inequality becomes self-perpetuating, as wealthier families can afford better education for their children, reinforcing the cycle. - Changing Patterns of Trade/Globalization → Decline of Low-Skilled Wages
→ Globalization has led to offshoring of manufacturing jobs to low-cost countries, reducing demand for domestic low-skilled workers.
→ High-skilled workers in technology, finance, and services benefit from globalization, while low-skilled workers face job losses and wage stagnation.
→ Wages in high-tech and knowledge-based industries grow faster, while wages in traditional industries decline.
→ Inequality rises as job opportunities concentrate in certain regions, leaving other areas with high unemployment and low income levels.
→ The gap between those who benefit from globalization (e.g., skilled workers, multinational executives) and those who don’t (e.g., low-wage workers in declining industries) continues to widen. - Government Policy/Austerity/Universal Credit → Reduced Welfare Support
→ Austerity measures after the 2008 financial crisis led to cuts in social spending, reducing benefits for lower-income households.
→ Policies like universal credit reforms reduced financial support for low-income individuals, increasing financial hardship.
→ Public sector job cuts and reduced government investment led to fewer employment opportunities, especially for vulnerable groups.
→ The rich were less affected by austerity since they rely less on government services, while the poor faced deeper financial struggles.
→ This policy approach widened the income gap by shifting financial burdens disproportionately onto lower-income groups. - Income Generated from Inheritance → Wealth Passed Down Unequally
→ High-income families pass down large inheritances, allowing future generations to start life with significant financial advantages.
→ Lower-income families leave little or no inheritance, making upward mobility difficult for their children.
→ The cycle of wealth accumulation among the rich continues, leading to greater intergenerational inequality.
→ Those who inherit wealth can invest in education, property, and businesses, further increasing their income potential.
→ Over time, this leads to a growing divide between those with inherited wealth and those without, reinforcing long-term income inequality. - Payments Generated from Debt → Disproportionate Burden on Low Earners
→ Low-income individuals often rely on debt (e.g., payday loans, credit cards) to cover basic expenses due to insufficient wages.
→ Interest payments on debt reduce disposable income, making it harder for lower earners to accumulate wealth.
→ Higher earners can borrow at lower interest rates and invest in assets, while low earners face high-cost borrowing that traps them in financial hardship.
→ As debt repayments consume a larger share of low-income households’ income, they struggle to escape financial difficulties.
→ This dynamic reinforces long-term income inequality, as the rich benefit from cheap credit, while the poor pay more to borrow. - Race, Gender, Age, Geographical Issues → Structural Pay Gaps
→ Women and ethnic minorities often face wage discrimination and fewer opportunities for career progression.
→ Certain regions have fewer high-paying job opportunities, meaning income disparities exist based on location.
→ Older workers who lose their jobs may struggle to find new employment, while younger workers enter low-paid, insecure jobs.
→ Discriminatory hiring practices and wage gaps in various industries further widen income inequality.
→ These structural inequalities limit earning potential for certain groups, leading to persistent income gaps. - Changes in Direct Tax → Benefits High Earners More
→ Cuts to top income tax rates disproportionately benefit high earners, allowing them to retain more income.
→ A shift from progressive taxation (where the rich pay more) to regressive taxation (where everyone pays the same rate) can widen inequality.
→ Reduced taxation on capital gains and investments allows wealthy individuals to accumulate more wealth, widening the gap.
→ Lower-income workers, who rely on earned wages rather than investment income, see little benefit from tax cuts.
→ Over time, tax policy changes can lead to wealth concentration among the top earners, increasing income inequality. - Stage of the Economic Cycle/Financial Crisis 2008 → Unequal Impact on Workers
→ The 2008 financial crisis led to job losses primarily in low-wage sectors, while higher earners were often less affected.
→ Government bailouts and stimulus programs helped banks and corporations, but direct support for workers was often limited.
→ Many low-skilled jobs never fully recovered, leaving many workers in long-term unemployment or underemployment.
→ Meanwhile, financial markets rebounded quickly, benefiting those who owned stocks and assets, widening the wealth gap.
→ As a result, the crisis exacerbated income inequality, with lower-income individuals bearing the brunt of economic downturns. - House Prices (Related to Income, Not Wealth) → Barrier to Upward Mobility
→ As house prices rise, low-income individuals struggle to afford homeownership, while high-income earners can invest in property.
→ Rent costs take up a larger portion of income for low earners, leaving them with less disposable income to save or invest.
→ Wealthy individuals can accumulate rental properties, increasing their income streams while renters remain trapped in financial instability.
→ Rising property values benefit homeowners but hurt renters, leading to increased income and housing inequality.
→ The gap between those who own property and those who don’t widens, reinforcing long-term inequality. - Weakened Power of Trade Unions → Lower Wages for Low Earners
→ Declining union membership has led to reduced bargaining power for workers, especially in low-paid sectors.
→ Without strong unions, employers have greater control over wages, leading to wage stagnation for lower-income workers.
→ High earners, who negotiate their own salaries, are less affected, widening the pay gap.
→ Weaker unions also lead to fewer worker benefits, such as job security, pensions, and paid leave, disproportionately affecting the lower class.
→ As collective bargaining power declines, income inequality rises, with profits increasingly favoring business owners over workers. - Level of Unemployment/Underemployment → Greater Income Disparities
→ High unemployment rates mean more people rely on low-paying, insecure jobs, reducing overall earnings.
→ Underemployment (working fewer hours than desired) leads to lower income stability, keeping many workers in financial difficulty.
→ The longer someone remains unemployed, the harder it is to find high-paying work, leading to long-term income disparity.
→ Those who lose jobs often struggle to retrain, limiting their ability to move into higher-paying sectors.
→ A dual labor market emerges, where high-skilled workers thrive while low-skilled workers face permanent financial insecurity. - Irrational Behavior/Information Gaps/Myopia → Poor Financial Decisions
→ Many low-income individuals lack access to financial education, leading to poor saving and investment decisions.
→ Short-term financial thinking (myopia) results in higher debt levels, as individuals prioritize immediate needs over long-term stability.
→ Employers may exploit information asymmetry, paying workers less than they could earn elsewhere due to lack of awareness.
→ Wealthy individuals have better access to financial advice, helping them grow their incomes through smart investments.
→ Over time, these behavioral and knowledge gaps reinforce income inequality, as the rich continue to accumulate wealth while the poor remain financially vulnerable.
arguments against lower trade unions leading to higher wage differentials
upcoming gig economies/zero hr contracts
- eg uber and self employed
trade union application points
UNISON has over 1.2 million members
GMB has over 617,00 members
- trade unions have more success in raising prices if the demand for labour is relatively wage inelastic
- unions more influential when union density is high
- pay may also rise if unions and employees agree a pay deal based on better productivity
evs for wage differentials
- Labour Supply and Demand → Wages Not Always Reflective of Market Forces
→ Some industries rely on government intervention, such as minimum wages or wage subsidies, which distort pure market-based wages.
→ Public sector jobs (e.g., teachers, nurses) often have wages set by the government rather than supply and demand.
→ Certain industries face inelastic labour supply, meaning even higher wages may not attract more workers (e.g., doctors, pilots).
→ Labour supply can be artificially restricted by professional licensing requirements, limiting wage competition.
→ Short-term labour shortages (e.g., due to sudden economic shifts) may not lead to sustained wage increases.
→ Monopsony employers (single large buyers of labor, like Amazon warehouses) can suppress wages despite high demand.
→ Automation and AI could reduce future demand for many jobs, even if wages rise temporarily. - Different Skill Levels → Skill Premiums May Decline Over Time
→ Over time, increased access to education can reduce wage gaps by making high-skill workers more abundant.
→ Technological advancements can reduce the need for highly skilled workers in some areas (e.g., AI replacing accountants).
→ Mismatch between education and jobs can lead to overqualification, reducing wage benefits of higher education.
→ Experience and on-the-job training can sometimes substitute formal education, reducing wage gaps between skill levels.
→ Government initiatives (e.g., free university education, apprenticeships) may help reduce wage inequality in the long run.
→ Global labor markets mean skilled workers from other countries may compete, reducing wages in previously high-paying jobs.
→ Union bargaining power in skilled professions can sometimes artificially inflate wages rather than reflecting true skill-based value. - Marginal Productivity of Labour → Productivity Doesn’t Always Determine Pay
→ Some high-productivity workers are underpaid due to lack of bargaining power (e.g., nurses, teachers).
→ Wage stickiness means that even when productivity rises, wages don’t always increase at the same rate.
→ Many high earners (e.g., CEOs, hedge fund managers) earn significantly more than their marginal productivity suggests, due to market imperfections.
→ Team-based work makes it hard to measure individual productivity, leading to unfair pay differences.
→ Some low-productivity sectors (e.g., entertainment, sports, social media influencers) can command high wages due to branding rather than productivity.
→ Global outsourcing means productivity improvements in one country may not lead to wage growth if jobs are moved elsewhere.
→ Government regulations (e.g., minimum wage laws) can prevent firms from fully using marginal productivity to set wages. - Trade Unions → Unions Can Distort Wage Differentials
→ Unionized workers may earn more than non-unionized workers, even if their productivity is the same.
→ Strong unions may create wage rigidities, preventing wages from adjusting to economic conditions.
→ Union wage premiums can lead to job losses, as firms may hire fewer workers or relocate to non-unionized regions.
→ Public sector unions can sometimes negotiate excessively high wages, leading to budget constraints for governments.
→ Declining union membership in many countries means union influence on wages is shrinking over time.
→ Unions tend to benefit insiders (long-term workers) more than outsiders (young or new workers), leading to labor market segmentation.
→ In some cases, union-negotiated wages may not reflect actual market demand, leading to inefficiencies. - Other Barriers to Labour Supply → Not All Barriers Are Permanent
→ Government policies can reduce barriers, such as funding for retraining programs or relaxed visa restrictions.
→ Technology (e.g., online education, remote work) is lowering traditional barriers to high-paying jobs.
→ Labour mobility is increasing, as workers migrate for better opportunities, reducing wage differentials over time.
→ Discriminatory barriers (e.g., against women or disabled workers) are being challenged by laws and social change.
→ Gig economy jobs offer alternative employment options, reducing dependency on traditional high-barrier jobs.
→ Some barriers (e.g., licensing in medicine and law) are necessary to maintain professional standards and protect consumers.
→ Informal job markets can sometimes allow people to bypass barriers, but at the cost of lower job security and benefits. - Employer Discrimination
→ Legislation (e.g., Equal Pay Acts) is reducing wage discrimination, though enforcement varies.
→ Blind hiring practices (e.g., removing names from CVs) can reduce employer bias in pay decisions.
→ Discrimination lawsuits and public pressure can force firms to improve wage equality. - Geographical Location → Wage Gaps May Shrink Due to Remote Work
→ Remote work is reducing geographical wage differentials, as employees from low-cost areas can access high-paying jobs.
→ High cost of living in certain areas (e.g., New York, London) means higher wages don’t always translate to better living standards.
→ Labour mobility improvements (e.g., better transport, migration policies) are making it easier for workers to move for higher wages.
→ Some regions specialize in certain industries** (e.g., Silicon Valley a global hub for tech)**, meaning wage gaps persist due to economic clustering.
→ Urbanization trends mean more workers are moving to high-wage areas, reducing wage gaps in the long run.
