Imperfections in the labour market - Booklet 2

list imperfections

monopsony

trade unions

immpobilities

minimum wage

wage discrimination

not profit maximising 

Explain why monopsony is imperfection

Exploitation of work - they are underpaid

Firms operate at profit max at MC=MRP

results in a market failure s wage is not at the allocatively efficient point

Explain why Trade union is imperfection. However…

they restrict supply until they bargain for higher wages so there is unemployment in the market 

However may not result in unemployment due to productivity deal 

What is the productivity deal?

Trade unions shift MRP right as workers gain higher wages but must also work harder to increase productivity

Depends on factors for trade union

strength and elasticities

behaviour of firms 

What is wage discrimination and explain why is it an imperfection?

firms pay workers differently based on age, race and gender leading to efficiency and welfare loss

underemployment and inefficient resource allocation

So what if firms are not profit maximisers?

If demand for a good falls MRP theory suggests wages will also fall however firms may be reluctant to cut wages or layoff workers so they continue to employ and pay them

What is minimum wage legislation and critics of it?

does not cover the self employed or workers in the gig economy

Evaluation of trade unions

in highly competitive markets (contestable markets) excessive union demand may damage firms profit such as low budget airlines like Ryanair. They cannot afford increased wages - they are a firm who choose not to bargain

Unions have less strength in new tech industries compared to traditional ones

Define trade union

aim to protect workers and promote worker interests by bargaining for higher wages and better working conditions by restricting supply of labour

define monopsony

A market with only one supplier such as the NHS

Define bilateral monopoly

market with only one buyer and one supplier

explain bilateral monopoly

monopsonist pays the lowest wage so trade unions bargain for higher wages at the efficient wage.

However if trade unions become top greedy negotiating for wages above the efficient wage there will be a great increase in cost for firms so they aim to reduce supply of workers due to the contraction in demand

Pensions are merit goods - they have long term social benefits therefore are under consumed

Public sector does not fit the MRP model as they have no financial value to compare

Immigration pros and cons

higher potential economic growth - increased workforce increases productive capacity

gain to public finances - migrants contribute more to Uk tax revenue than they receive in benefits

Fill in skill gaps - improve allocative efficiency

Pressure on housing market - inelastic supply and high demand so potential black market - increased rent and housing prices

Increased labour supply - changes age demographics increased AD and multiplier

What could happen if NMW increased?

firms costs increase so they layoff workers (depends on behaviour of firm)

may incentivise firms to automate and replace their labour force with capital - serious investment needed

what is the flexible labour market?

adapts quickly to change in demand and supply matching workforce to demand

Characetristics of the flexible labour market

ease of hiring and firing workers

part time and zero hours contract - gig economy

easily adjustable wages

low Trade union influence

Advantage and disadvantage of flexible labour market

more efficient and greater productivity for a firm 

greater competitiveness as workforce is adjustable per standards 

work life balance good for workers 

wage stagnation 

underemployment - people may work in lower skill fields

Gender pay gap 2022

8.3% - this is the difference in average earnings of men and women

Micro effects of immigration

increase in the labour supply - reduces wages - firms become more price competitive

fill skills gaps - improving allocative efficiency

pressure on housing market - increases rent and house prices - incentivises developers to increase residential building

Macro effects of net migration

higher potential economic growth - increase in workforce

increased AD - more consumption - multiplier

pressure on public finances, healthcare and education- migrants contribute to UK tax revenue and pay more than the benefits they receive

Effect of net migration depends on?

skill level - highly skilled increases productivity and innovation - lower puts downward pressure on wages

Time - in the short run it raises unemployment temporarily if supply grows faster than demand