3.5.3: Wage determination in competitive and non-competitive markets

Labour market equilibrium

• The labour is a factor market

• The supply of labour is determined by those who want to be employed, whilst the demand for labour is from employers

• Labour market equilibrium is determined where the supply of labour and the demand for labour meet

• This determines the equilibrium price of labour i.e. the wage rate

• When the demand for labour falls, such as a recession, in a free market the wage rate would fall

• However, in the real labour market, wages are not this flexible- sticky wages

• Wages in an economy do adjust to changes in demand- due to minimum wage making sticky wages, during a recession, workers are made redundant instead of having lowered wages

Labour market issues: Wage differentials

• Sometimes, even in the same job, wplrers can be paid different amounts

Labour market issues: Formal education

• On average, those with a degree earn more over their lifetime than those who gain just A levels

Labour market issues: Skills, qualifications and training

• Jobs which require more training and education offer higher wages

• Training workers is expensive for firms, s they compensate for this by offering workers, who have already undergone education and training, higher wages

Labour market issues: Pay gaps

• The wage gap between skilled and unskilled workers has increased in the UK

• This is due to technological change and globalisation, which has shifted production abroad

Labour market issues: Gender

• Even with equal pay laws, women still earn less than men on average

• This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part time jobs, which may only require low skill levels

• Women could also be discriminated against when to comes to promotions, which effectively locks out higher paying jobs

• Although a gap exists, it is narrowing

Labour market issues: Discrimination

• Workers might be discriminated against due to age, disabilities, gender and race

The impact of migration on labour markets

• Increased competition to get a job due to an increased working population

• Productivity and skillset of labour increased due to the high quality skills brought by migrants- increased global competitiveness

• Migrant labour brings down the wages of the lower paid- only a small impact

• The skills of migrant labour could substitute those of the domestic market so workers could be replaced

• If the skills complement the domestic labour market, there could be a welfare gain from higher productiveness

Unemployment

• The government aims to have as close to full employment as possible

• They account for frictional unemployment aiming for an unemployment rate around 3%

• Unemployment is a problem since it means consumers have less disposable income and their standard of living may fall- there are also psychological consequences which could affect their mental health

• If it increases, there will be increased government spending on job seekers allowance- opportunity cost

• They would also receive less tax revenue

Government intervention in the labour market: Minimum and maximum wages

• The minimum wage has to be set above the free market price otherwise it would ineffective

• the NMW will yield positive externalities of a decent wage which will increase the standard of living for the poorest and increase the incentive to work

• Could also make it harder for young people to find a job due to lack of experience

• Increased tax revenue

• A higher wage could make the country less competitive globally since they cannot compete with countries that have lower wages

• A maximum wage/wage ceiling limits inflation- however, it disincentives innovations and workers may want less demand work as a result

• Maximum wages control the market wage but could result in government failure if the optimum wage is misjudged

• Can lead to a more equal wealth distribution in society

Government intervention in the labour market: Public sector wage setting

• The public sector is the compilation of industries owned by the government

• In the Uk, public sector pay is higher than the private sector, in raw terms

• About half of government spending goes towards public sector pay

Government intervention in the labour market: Policies to tackle labour market immobility

• The flexibility of the market is how wiling and able labour is to respond to changes in the conditions of the market

• It is important for labour to be able to adjust to changes in demand, and it is vital for the supply side of the economy

Government intervention in the labour market: Trade union power

• If trade unions are pushing for higher wages, the labour market is likely to be more flexible

• Trade unions can also increase job secrity

• If trade unions limit the rights of a worker to strike, there could be a decline in flexibility

Government intervention in the labour market: Welfare payments and income taxes

• The reward for working should be high

• If welfare payments are generous and income tax rates are high, labour market flexibility is likely to be lower

Government intervention in the labour market: Training

• More widely available training opportunities and a more skilled workforce makes the labour market more flexible

• The quality and price of education should be improved, so more people can afford a good education

Government intervention in the labour market: Infrastructure

• Improving infrastructure might help the geographical immobility of labour since it become easier to move around the country

Government intervention in the labour market: Housing

• If housing became more affordable, people might be more able to move around the country for work which improves the geographical mobility of labour

The elasticity of demand for labour

• The wage rate and level of employment is affected by shifting the demand or supply curve differently, depending on how elastic the other curve is

• If labour demand is inelastic due to few or no substitutes, strikes will increase the wage rate but not affect the employment rate much

• Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate than where there is a more elastic demand

• The elastic demand for labour measures how responsive the demand for labour is when the market wage rate changes

• This is affected by how much labour costs as a proportion of total costs, how easy it is to substitute factors, and the PED of the product

The elasticity of supply for labour

• Is the responsiveness of the quantity of labour supplied to a change in the wage rate

• This is affected by the skill of the workforce, the length of training needed, sense of vocation and time period