Wages differentials, equilibria, trade unions, monopsony

Question 1

Definition of wage differentials

Answer 1

the difference in wages between workers with different skills in the same industry, or between workers with comparable skills in different industries or locations

Question 2

define geographic and occupational labour mobility?

Answer 2

the ability of workers to move location for works/ move between jobs

Question 3

Define trade unions

Answer 3

an organisation of workers that negotiates with employers on behalf of its members

Question 4

define monopsony

Answer 4

a market in which there is single buyer of a good, service or factor of production

Question 5

Define bilateral monopoly

Answer 5

a monopoly trade union seller of labour faces a firm that is a monopsony buyer of labour

Question 6

Examples of wage differentials??

Answer 6

• medical median salaries varying between jobs eg doctor earning £95,000 and a vet earning £50,000 (people in the same industry)
• a lawyer earning £90,000 or a window cleaner earring £15,000

Question 7

What factors can cause wage differentials to exist

Answer 7

• compensation from risk taking or unsocial hours
• different skill levels
• high human capital ie significant training and many years to learn a profession
• trade unions
• differences in productivity

Question 8

What factors affect occupational and geographical mobility of labour?

Answer 8

Occupational- lack of training opportunities and cost of retraining staff

Geographical- house prices/ cost of moving

• continuing education
• ties to family and friends

Question 9

explain why geographical immobilities can impede the operation of the labour market and effect wage differentials

Answer 9

-workers aren’t readily able to move between different parts of the country, maybe due to differences in house prices
-therefore they may stay in an area of low pay despite the possibility of high pay in another area in the same industry
-house price differences can therefore lead to wage differentials too (market failure due to disequilibrium
)

Question 10

explain why occupational immobilities can cause market failure in the labour market and cause wage differentials

Answer 10

• workers unable to access retraining opportunities owing to their high cost, and the fact they would be earning no income for a sustained period of time, even if they would make much more Money after training
• therefore there could be further wage differentials and market failure in the labour. market

Question 11

How can the government decrease geographical immobility (reduce market failure?

Answer 11

1) moving bursary/ loan to make moving cheaper

2) increase the supply of houses in an area with high house prices to reduce house price differences

Question 12

How can the government decrease occupational immobility (reduce market failure?

Answer 12

1) apprenticeships so people are paid whilst training
2) evening classes/ online classes so they can work alongside training
3) universal basic income helps both immobility

Question 13

Example of normal trade unions, monopoly trade unions sellers of labour and monopsony single buyer of labour

Answer 13

normal= TUC

Monopoly trade unions seller of labour= BMA who are the sole contact negotiators for doctors

Monopsony single buyer of labour= NHS
buying doctors
-government- only buyers of soldiers/police

Question 14

How do trade unions impact on the labour supply/ market?

Answer 14

• restrict labour supply with barriers to entry, reducing firms flexibility to adapt to changing market conditions
• lead to higher wages for people already in the industry, at the expense of people prevented from getting into the industry and competing away high wages

Question 15

What things to trade unions campaign for?

Answer 15

• better pay
• performance related pay to increase productivity
• health and safety requirements
• better working conditions

Question 16

What does a trade union wage negotiation diagram look like??

non monopsony

Answer 16

Wage rate on y axis
quantity of labour on x axis
-wage rate union above equilibrium wage rate, due to unions increase barriers to entry for workers and forcing wage rate up to wage union
-new supply curve of labour is horizontal across wage rate union and then rises when it hits actual supply line
-downwards sloping demand for labour
-unemployment shown

Question 17

What does a monopsony labour market mean for people supplying the labour??

Answer 17

There is only one buyer of labour so they have no choice but to work for the certain employer

Question 18

What does a monopsony labour market diagram look like?

Answer 18

• wage rate on y axis
• quantity of labour on x axis
• supply line= average cost
• marginal cost is above the AC because each time an additional worker is hired, they don’t just pay the marginal wage of this worker, but must increase the wage of everyone else too
• the quantity of labour is where MC crosses MRPL (profit max) and wage rate is where this line crosses AC line
• wage rate of perfect competition is where supply line meets demand line (perfect competition)

Question 19

Why do monopsony show imperfect markets?

Answer 19

• In a perfectly competitive labour market, firms are price takers and can’t affect the wage rate, so the supply is perfectly elastic and equal to both MC and AC, as employing one more worker costs the same every time
• in a monopsony, they are profit maximisers and so they operate where MC=MRPL, which gives a lower wage rate than if they were to accept a universal wage rate

Question 20

How might trade unions cause unemployment/ market failure??

Answer 20

-raising the wage rate above equilibrium will lead to an excess of supply of labour, making people unemployed due to demand not matching the supply (new kinked supply curve alone new wage rate)

Question 21

How can trade unions avoid unemployment/ market failure??

Answer 21

-if unions can encourage an agreement where employers raise the wage rate and in return workers become more productive, this increases the MRPL and shifts the demand for labour right, so firms can afford to pay higher wages as they are benefiting from increases revenue due to higher productivity

Question 22

What is a bilateral monopoly of labour?

Answer 22

where there is one buyer of Labour ie the government employing police, and one seller of labour ie one police trade union operating on their behalf

Question 23

Why are trade union less likely to cause market failure nowadays??

Answer 23

• in return for higher pay and better working conditions, firms have benefited from more flexible and more productive workers, reducing unemployment by shifting MRPL right
• they also have less power due to the government

Question 24

What does the extent of the difference between wage of trade unions and free market wage depend on?

Answer 24

-relationship with union and firm; If theres a good relationship, unions may accept a Lower wage in exchange for non pecuniary benefits, reducing unemployment

Question 25

Evaluation for impact of monopsony employer on labour market?

Answer 25

Depends on objectives- a profit maximising firm will offer a low wage rate where MRPL= MC, decreasing employment opportunities

-if the monopsony has an objective of higher output, such as sales maximisation, then the firm will employ between the low quantity and the perfect competition quantity

Question 26

Evaluation for effect of trade unions in a bilateral monopoly on increasing the wage rate

Answer 26

• relative strength of the two groups; if the monopsonist is financially stable, they have greater bargaining power, if the trade union is more militant/ likely to strike, they are more effective
• elasticity of demand for labour; if the labour is very elastic, capital can easily replace workers for lower prices, also the PeD of the good, if inelastic higher costs can be passed on and the trade union can negotiate higher wages as people will continue to purchase the good