Wage determinants in competitive and non competitive markets Flashcards
sticky wages
Wages aren’t as flexible in reality as they seem theoretically on a graph, minimum wage means during a recession employers would be sacked rather than wage reduced
What are the current labour market issues
- Wage Differentials
- Impact of Migration
- Imperfect information
- Unemployment
Reasons why there are wage differentials
- Formal education = higher wage
- More training and qualifications = higher wage
- Pay gaps as unskilled work has shifted abroad
- Skilled workers are more productive so In higher demand = higher wage
- Discrimination may receive lower wages due to age gender race religion
How does imperfect information result in labour market failure
Workers and employees don’t have perfect information so don’t all have the perfect job or perfect amount of productive workers, causes underemployment, frictional unemployment and workers being less productive
How can migration cause labour market failure
Increases size of workforce thus increasing the competition to get a job which increases unemployment for some. Migration labour is so cheap it brings down the wages of the lowest paid and can displace some.
Reasons why Unemployment is a labour market failure
- psychological consequences of unemployment
- Consumers have less disposable income so their standard of living drops and risk of recession
- Damages Government finances as they receive less tax revenue and spend more on JSA
- Opportunity cost to society of missed production value of employees
- Increase in crime
- Youth unemployment causes hysteresis as their skills won’t develop so they will remain unskilled and unemployed into adulthood causing structural unemployment
Unemployment Trap
When benefits are too high so encourages people not to work and take benefits
What is the unemployment to the left of Q1 when a NMW is introduced
The unemployment created in that industry as firms lay off workers as they can’t afford to employ as many with a NMW
What does a NMW do
Reduces demand for labour and increases supply causing unemployment
What is the unemployment to the right of Q1 when a NMW is introduced
Unemployment caused by people leaving their old job and coming to this industry with the NMW
What is the main evaluative point for NMW
No evidence in the UK ever of a rise in unemployment as a result of a NMW
Advantages of a NMW
- Help people on low incomes ensuring a basic living wage, stopping absolute poverty
- Make workers more productive as they receive better wages
- More incentive to get a job rather than be unemployed
- Greater gov tax revenue
Disadvantages of a NMW
- Increase wage costs for firms causing them to have to cut jobs causing unemployment
- Decrease international competitiveness of UK as other countries have lower wage costs
- Could cause inflation if wage cost rises are passed on
- NMW doesn’t benefit the poorest people who can’t work like the elderly and sick
Maximum wage
Is done to limit wages to increase demand for labour set below equilibrium
Advantages of maximum wages
- Control wage cost push Inflation
- Redistribute wealth, limiting inequality
- Increase firms willingness to hire workers
Disadvantages of maximum wages
- Unfair to not reward better work with better income
- Decreases motivation and incentive to work so productivity decreases
- Can cause brain drains or labour deficiencies in industries with maximum wages
- Must be judged perfectly by the government
Public sector Wage setting
Set by the government means that wages are fairer and more equal than private sector
what percentage of gov spending is public sector wages
almost half
What are some problems with public sector wages
- Government will restrict wages as well causing high skill labour to go private
- If government reduces this can have huge consequences and strikes
- Monopsony employers can manipulate wage rate to whatever they want
What is labour market flexibility
How willing and able labour is to respond to changes in market conditions, namely demand changes, relies on labour mobility
Policies to increase labour market flexibility
Trade Unions - Reducing their power increases flexibility
Regulation - excessive regulation on firms about workers rights decreases flexibility
Benefits and tax - lower benefits and lower tax rates will increase flexibility
Training - More training and cheaper to make a more skilled workforce so more flexible
Education - improve quality and implement apprenticeships gives young people practical skills for jobs increasing flexibility
Infrastructure - improves geographical mobility
Housing - More affordable increases flexibility
Short term and zero hour contracts
Allow much easier hiring and firing of workers which increases the flexibility
