Theme 3 - Labour markets Flashcards
what is MRPL, and what does it tell firms
MRPL is the additional revenue generated by employing one more unit of labour, assuming all other factors remain constant. It is calculated as:
MRPL=MPL×MR
where:
MPL (Marginal Product of Labour) = Additional output from hiring one more worker
MR (Marginal Revenue) = Extra revenue gained from selling that additional output
tells firms how many people to employ at a given wage rate
limitations of MRPL
🧑💼 Assumes Perfect Competition
🔗 MRPL assumes that firms operate in a perfectly competitive market, meaning they can’t influence the price of their product
🔗 In reality, many firms face imperfect competition and can set prices to some extent, which distorts the MRPL calculation
🔗 This means the MRPL may not accurately reflect the true value of labour, as firms with market power can adjust wages independently
🔗 The limitation is that MRPL doesn’t account for monopoly power or price-setting ability in real-world markets 💸📉
📉 Ignores Non-Market Factors
🔗 MRPL focuses purely on the economic value of a worker, excluding factors such as worker preferences, motivation, or working conditions
🔗 This narrow focus means MRPL overlooks how non-economic elements affect labour supply, such as job satisfaction or work-life balance
🔗 Non-monetary factors can influence a worker’s productivity or willingness to work, which MRPL fails to capture
🔗 MRPL becomes less useful in evaluating overall labour value, especially in non-economic terms 💼❌
🏭 Assumes Constant Marginal Productivity
🔗 MRPL assumes that each additional worker adds the same marginal value to a firm’s output, implying constant productivity
🔗 In practice, diminishing returns to labour often occur as more workers are added, especially when capital or resources are fixed
🔗 The assumption of constant marginal productivity can overestimate the contribution of additional workers in some industries
🔗 This limitation leads to inaccurate wage assessments in real-world scenarios where productivity varies with labour inputs 🏗️⬇️
📊 Doesn’t Consider Labour Market Structure
🔗 MRPL assumes a single, uniform wage for all workers, which doesn’t account for differences in skill levels or job types
🔗 In reality, wages often vary across different jobs or sectors, depending on factors such as skill specialization or experience
🔗 MRPL fails to reflect the complex structure of the labour market, where wages are influenced by job characteristics and bargaining power
🔗 As a result, MRPL doesn’t fully explain wage differentiation or the diversity of jobs in the market 🏢💵
🏠 Ignores Labour Market Frictions
🔗 MRPL assumes that the labour market is perfectly efficient, with no frictions like job-search costs or barriers to entry
🔗 In reality, workers may face search costs, geographical immobility, or discrimination, which limit their ability to find the best-paying jobs
🔗 These frictions distort the connection between marginal revenue and labour compensation, leading to less efficient labour markets
🔗 MRPL does not account for these real-world barriers that prevent labour markets from reaching equilibrium 🚧📉
🕒 Focuses on Short-Term Analysis
🔗 MRPL is often used in short-term labour market analysis, assuming that firms hire workers based on immediate contributions to revenue
🔗 However, over the long term, factors such as technological change, worker training, and capital investment can significantly alter the productivity of labour
🔗 MRPL fails to consider how long-term investment in human capital or changes in the production process affect labour demand
🔗 This limitation means MRPL doesn’t fully explain labour demand dynamics in the long term 📅🔧
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
💵 Price Increase
🔗 When the final price of a product increases, firms generally experience an increase in revenue from selling that product
🔗 This increase in revenue makes it more profitable for firms to expand production to meet higher demand
🔗 To increase production, firms will require more workers, leading to an increase in labour demand
🔗 As a result, the labour demand curve shifts to the right, indicating that more workers are required at every wage level 📈👷♀️
📉 Price Decrease
🔗 When the final price of a product decreases, firms experience a decrease in revenue from sales
🔗 This decrease reduces the profitability of producing the product, prompting firms to reduce production
🔗 With lower production levels, firms need fewer workers, leading to a decrease in labour demand
🔗 As a result, the labour demand curve shifts to the left, indicating that fewer workers are needed at each wage level 📉👥
⚖️ Elasticity of Labour Demand
🔗 The magnitude of the shift in the labour demand curve depends on the price elasticity of demand for the product
🔗 If the product is price elastic, a small price change will lead to a large change in quantity demanded, affecting labour demand significantly
🔗 If the product is price inelastic, a change in price has a smaller impact on quantity demanded, leading to a less noticeable shift in labour demand
🔗 The extent of the labour demand curve shift depends on how sensitive the product’s demand is to price changes 💡⚖️
🛠️ Substitute or Complementary Products
🔗 If a product has close substitutes, a price increase might lead to a shift in demand away from the product, reducing the need for labour
🔗 Conversely, if a product has complementary products, a price decrease for one product might increase demand for both products, boosting labour demand
🔗 The impact on labour demand will depend on whether the price change strengthens or weakens the demand for complementary or substitute products
🔗 Changes in price for related products can therefore indirectly affect labour demand through shifts in the demand for other goods 🏭🔄
🌐 External Market Factors
🔗 The final price of a product can also be influenced by external factors such as global competition, input costs, or government policy
🔗 For example, a rise in tariffs may increase the price of imported goods, potentially raising domestic product prices and increasing labour demand
🔗 Changes in external conditions might lead to shifts in labour demand, even if the product’s price change is not purely market-driven
🔗 Therefore, the labour demand curve is also sensitive to broader economic conditions affecting the final price 🏙️🌍
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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
💰 Higher Cost of Labour
🔗 When the cost of labour increases (e.g., higher wages or benefits), firms face higher production costs
🔗 If the labour market is price elastic, a higher labour cost may lead firms to reduce the number of workers they employ, as labour becomes more expensive relative to other inputs or factors of production
🔗 This results in a larger decrease in demand for labour, making labour demand more elastic
🔗 As the cost of labour increases, the elasticity of labour demand increases, meaning the demand for labour becomes more sensitive to wage changes 🏭📉
💸 Lower Cost of Labour
🔗 When the cost of labour decreases (e.g., lower wages or reduced benefits), firms face lower production costs, making it more affordable to hire more workers
🔗 If the labour market is price inelastic, a decrease in labour costs may not significantly increase the demand for labour, as firms may already be employing the maximum number of workers needed for efficient production
🔗 This results in a smaller increase in demand for labour, making labour demand more inelastic
🔗 As the cost of labour decreases, the elasticity of labour demand decreases, meaning the demand for labour becomes less sensitive to wage changes 🏢⬇️
🛠️ Availability of Substitutes
🔗 The elasticity of labour demand also depends on the availability of substitutes for labour, such as automation or technology
🔗 If there are substitutes for labour (e.g., machines or software), firms can replace workers when labour costs rise, making labour demand more elastic
🔗 Conversely, if there are few or no substitutes for labour, firms cannot easily reduce their workforce even when wages increase, leading to less elastic demand
🔗 The availability of substitutes means that when the cost of labour rises, the ability to shift to other inputs can increase the elasticity of labour demand 🤖⚙️
🔄 Degree of Labour Specialization
🔗 If labour is highly specialized (e.g., skilled workers), the elasticity of labour demand tends to be inelastic
🔗 Firms may be less able to substitute workers with other types of labour or capital, so even if labour costs rise, they may still need these workers for production
🔗 However, if labour is non-specialized or easily substitutable, a rise in the cost of labour will lead to a larger reduction in demand, making labour demand more elastic
🔗 The specialization of labour affects how responsive labour demand is to changes in wages or costs 🧑🏭🔧
🌍 Industry Type and Market Conditions
🔗 The elasticity of labour demand also varies by industry type and market conditions
🔗 In industries with high competition and low profit margins, firms are more sensitive to wage increases because higher labour costs could drive up final product prices and make them less competitive
🔗 In contrast, firms in industries with high market power (e.g., monopolies) or inelastic demand for their products may not reduce their workforce as much when wages rise, making labour demand less elastic
🔗 Market conditions, like demand elasticity for products and industry structure, affect how sensitive labour demand is to changes in wages 🏢📊
how does the time period affect the elasticity of labour demanded
⏳ Short-Term: Inelastic Labour Demand
🔗 In the short term, firms have limited ability to adjust their production processes or substitute labour with capital or technology
🔗 As a result, even if wages increase, firms may not be able to significantly reduce their workforce because they are tied to existing production methods or equipment
🔗 Therefore, labour demand is inelastic in the short term, meaning firms are less responsive to changes in wages
🔗 The demand for labour is less sensitive to wage changes due to fixed production capacity and limited substitution options in the immediate term 🕒👷♂️
🕰 Long-Term: More Elastic Labour Demand
🔗 In the long term, firms have more flexibility to adjust their production methods and can invest in new technology or automation to replace labour
🔗 This greater flexibility allows firms to respond to higher wages by substituting capital for labour, making labour demand more elastic
🔗 If wages increase over a longer period, firms can adjust their workforce by investing in capital goods or altering their production processes
🔗 Therefore, in the long run, labour demand becomes more responsive to wage changes, leading to a larger decrease in demand as wages rise 🕒⚙️
🔄 Time for Worker Adjustment
🔗 Over time, workers can retrain or acquire new skills, which can affect their demand in certain sectors
🔗 In the short run, workers may not have the opportunity to switch industries or retrain quickly, so their demand remains relatively inelastic
🔗 However, in the long run, workers can adjust to new industries or skills that are in higher demand, allowing firms to adjust the supply of workers they hire, making labour demand more elastic
🔗 The time workers have to adapt to new skill requirements or industries plays a role in how sensitive labour demand is to wage changes 🧑🏫🔄
🔧 Product Substitution and Technological Change
🔗 In the short term, firms may be stuck with existing technology or product designs, limiting their ability to change production processes to respond to wage changes
🔗 However, in the long term, firms can invest in new technologies that reduce their reliance on labour, increasing the elasticity of labour demand
🔗 For example, in industries such as manufacturing, firms might take time to invest in automation or adopt more labour-efficient processes when wages rise
🔗 The ability to switch to capital-intensive production techniques over time makes the demand for labour more elastic as technological advances make it easier to substitute labour for capital 🏭🤖
🏷 Contractual Obligations and Labour Market Rigidity
🔗 In the short run, firms may be constrained by long-term labour contracts or other legal obligations, limiting their ability to reduce labour demand in response to wage increases
🔗 In the long run, these contracts can be renegotiated, and firms may have more flexibility in adjusting wages or workforce levels, leading to more elastic labour demand
🔗 Moreover, the mobility of labour between sectors may be limited in the short term but more flexible in the long term, which can also affect the elasticity of demand
🔗 The more time firms and workers have to adjust to new labour market conditions, the more elastic labour demand becomes 📝📉
🌍 Economic Cycles and Market Conditions
🔗 Over time, economic conditions such as recession or growth can impact the elasticity of labour demand
🔗 In the short term, firms may be more resistant to changes in wages because they are adjusting to current economic conditions and may have limited ability to change their production strategies
🔗 In contrast, in the long run, firms have more time to adjust to changes in the economic environment, including shifts in market demand or global competition, making labour demand more elastic
🔗 The ability to adapt to new economic conditions over time increases the responsiveness of labour demand to changes in wages 🏙️📊
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 Disposable Income for Low-Income Workers
🔗 An increase in the NMW raises the income of low-wage workers
🔗 With higher wages, workers have more disposable income to spend on goods and services, increasing their purchasing power
🔗 This boost in demand can help stimulate consumer spending in the economy, which may benefit businesses by increasing sales
🔗 The result is that increased demand from low-income workers can lead to a positive multiplier effect, benefiting the wider economy 🛒📈
👨👩👧👦 Improved Living Standards for Workers
🔗 Higher NMW improves the standard of living for low-paid workers by enabling them to afford better housing, healthcare, and education
🔗 This enhanced financial security can improve workers’ well-being, leading to better physical and mental health
🔗 Healthier and more satisfied workers are likely to have higher productivity, benefiting their employers
🔗 The overall improvement in quality of life for low-wage workers leads to a more content and motivated workforce 🏠💪
🏢 Increased Worker Retention and Reduced Turnover
🔗 Higher wages make jobs more attractive, which can lead to lower turnover rates
🔗 Reduced turnover means firms spend less on recruitment and training new employees, which lowers labour market costs for businesses
🔗 With a more stable workforce, businesses can benefit from more experienced and skilled employees, improving productivity
🔗 In the long run, higher wages can help companies to retain their most skilled and loyal employees, reducing costly staff turnover 📉👨💼
🏭 Incentive for Firms to Improve Productivity
🔗 With higher labour costs, businesses may seek to increase productivity to maintain their profit margins
🔗 This can encourage firms to invest in training, technology, or process improvements to boost the efficiency of their workforce
🔗 Firms might also seek to innovate or automate tasks to reduce reliance on low-wage workers, further improving overall productivity
🔗 As firms innovate and improve their efficiency, the economy can benefit from higher output per worker in the long term 📈🤖
💼 Reduction in Income Inequality
🔗 An increase in the NMW can help to narrow the income gap between low and high earners
🔗 As the earnings of low-income workers rise, this can reduce the poverty gap, promoting a fairer society
🔗 This reduction in income inequality can lead to a more socially cohesive society, where wealth is more evenly distributed
🔗 The overall improvement in equity benefits society by reducing tensions and creating a more inclusive economy 🏙️⚖️
🏅 Boost in Labour Force Participation
🔗 Higher wages from the increase in the NMW may encourage more people, especially those in low-income households, to enter the labour force
🔗 The increased incentive to work can lead to higher employment rates and a more productive economy
🔗 Additionally, higher wages may reduce the need for government welfare programs, as people can support themselves through employment
🔗 As more individuals join the workforce, the economy benefits from a larger productive labour force 👩💻📊
micro disadvantages of an increase in nmw
💼 Higher Labour Costs for Firms
🔗 An increase in the NMW raises wage costs for businesses, particularly for those employing low-wage workers
🔗 Higher wages lead to higher operating expenses, reducing firms’ profit margins
🔗 In response, businesses may reduce their workforce or raise prices to offset the increased costs
🔗 This can result in job losses or higher prices for consumers, potentially hurting the economy and employment levels 🏢📉
📉 Reduced Hiring of Low-Skilled Workers
🔗 Firms may decide to substitute labour with capital or technology to reduce the impact of higher wages
🔗 Automation or process improvements could replace jobs traditionally held by low-wage workers, resulting in job displacement
🔗 As a result, low-skilled workers may find it harder to find employment, and the labour market becomes more competitive for available jobs
🔗 This may exacerbate structural unemployment, particularly for individuals with fewer skills or qualifications 🖥️👩🏭
🏚 Impact on Small Businesses
🔗 Small businesses with limited financial resources may struggle to absorb the increased costs associated with a higher NMW
🔗 These businesses may reduce their workforce, cut hours, or increase prices, potentially reducing consumer demand
🔗 The cost burden may force some small businesses to downsize or even close due to insufficient cash flow
🔗 The result could be a loss of market competition, as smaller firms are squeezed out of the market by larger competitors with more resources 💵🏪
📉 Potential for Reduced Non-Wage Benefits
🔗 To offset the higher wages, some firms may reduce non-wage benefits, such as health insurance, bonuses, or pension contributions
🔗 This could reduce the overall well-being of workers, as they may not receive the full package of benefits they once had
🔗 If businesses cut these benefits, it may have a negative impact on workers’ job satisfaction and overall motivation
🔗 Workers may find that the increased wage doesn’t make up for the loss of other valuable benefits, lowering their total compensation 💔💼
📊 Distortion of Market Signals
🔗 An increase in the NMW might distort market signals, leading firms to make decisions based on artificial price floors rather than market-driven wages
🔗 This can lead to inefficiencies in the labour market, where workers are paid more than their marginal productivity, creating misallocations of resources
🔗 For instance, firms may hire fewer workers or employ those with less relevant skills, leading to a mismatch between available workers and market needs
🔗 The outcome is a less efficient labour market, with resources being misallocated and productivity potentially reduced 🏢⚖️
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.
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.
How MRPL determines wages in a competitive labour markets
1️⃣ Firms hire workers up to the point where MRPL = Wage Rate → Determines Equilibrium Wage
In a perfectly competitive labour market, firms are wage takers, meaning they cannot set wages but must accept the market wage.
Firms compare the wage rate to the MRPL of hiring an additional worker.
If MRPL > wage, hiring an extra worker is profitable, so firms increase employment.
If MRPL < wage, the firm is paying more than the worker’s contribution, so it reduces employment.
This ensures that in equilibrium, the wage rate equals MRPL.
Example: A car manufacturer calculates that each additional worker generates £30 per hour in revenue. If the wage rate is £25 per hour, they will hire more workers. If wages rise to £35, they may cut jobs.
2️⃣ Higher Labour Productivity → Higher MRPL → Higher Wages
If workers become more productive (e.g., through better training or technology), their MPL increases, boosting MRPL.
A higher MRPL means firms can afford to pay higher wages without losing profitability.
This explains why skilled workers earn more, as their productivity generates more revenue per hour.
Example: A software engineer with AI expertise contributes more to a firm’s revenue than a general IT technician, leading to higher wages for AI engineers.
3️⃣ Higher Product Prices → Higher MRPL → Higher Wages
If a firm’s product becomes more expensive (higher MR), then the MRPL increases, making it more profitable to hire workers at higher wages.
This explains why wages are higher in booming industries where demand and prices are rising.
Example: During a tech boom, wages for software developers rise sharply because their MRPL increases due to higher demand for software products.
4️⃣ Industry Differences in MRPL Explain Wage Differentials
Industries with high MRPL (e.g., finance, law, medicine) can afford to pay higher wages than industries with low MRPL (e.g., retail, hospitality).
This leads to wage differentials even for jobs requiring similar effort levels.
Example: A hedge fund manager may earn millions due to high MRPL in finance, while a cashier in retail earns much less because the MRPL is low.
5️⃣ MRPL Declines Due to Diminishing Returns → Limits Hiring & Wage Growth
As more workers are employed, each additional worker contributes less output (due to fixed capital/resources).
This means MRPL starts to fall, limiting the number of workers firms are willing to hire at any given wage.
As a result, wage growth may stagnate unless worker productivity increases.
Example: In a factory, hiring too many workers without increasing machinery leads to diminishing returns, reducing the MRPL and limiting wage increases.
when can we use MRPL/refer to MRPL
In a perfectly competitive labour market, as labour is homogenous, so all workers have the same MRPL
