3.5.3 Wage determination in competitive and non-competitive markets

labour market equilibrium 

where demand for labour is equal to supply of labour

what are individual firms in labour market

price takers as they have to accept the wage rate that workers are being paid in the industry

what happens if firms offer a lower or higher wage than wage rate

• If they offer a lower wage, they will likely struggle to recruit workers

• If they offer a higher wage there will be a large number of workers applying to work there

demand and supply of labour graph

what can the demand curve for labour also be called

MRP curve

current labour market issues

• skills shortages

• youth and graduate unemployment

• changes to retirement age

• school leaving ages

• zero hour contracts

• temporary/flexible working

• increased technology-job loss

• strikes-tube

• labour shortages - brexit

• gender pay gap

skills shortages in uk labour market

• In December 2021 more than 50% of firms surveyed reported difficulties in finding skilled workers

• A shortage of skilled labour means that firms are having to increase wage rates to attract labour

• Firms are effectively poaching skilled labour from each other and there is a shortage of new skilled labour entering the market

• Some of the many labour markets experiencing shortages include nursing, engineering, pharmacies, secondary teaching, and graphic design

youth unemployment in uk labour market

• Unemployment for 16-24 year olds in April 2022 was at 10.8% compared to the general unemployment rate of 3.8%

• This means that it is nearly three times as likely for a young person to be unemployed

• Where possible employers prefer to hire workers with more experience as it can lead to higher productivity

• The education or skills gap is another reason for youth unemployment. Young people leave school without the skills that employers require

changes to retirement ages issues in labour market

• In 1995 the state retirement age was 60 for women and 65 for men

• In recent years, State Pension reform has been ongoing and the retirement age is gradually being increased to 68 for both men and women

• This means that workers are expected to remain in the workforce for longer

• One reason for the change is that with too many pensioners in the system, it is difficult for the government to fund monthly pension payments

• An improvement to life expectancy has meant there are more pensioners in the system

school leaving age 9n uk labour market

• The earlier a student leaves school the lower their skill level

• Different policies are in place in England as compared with Scotland, Northern Ireland and Wales

• In the latter three the school leaving age is 16 and there are no further conditions in place

• In England,students can leave school at 16 but have to do one of the following until they are 18

  • Stay in full-time education, e.g. at a college

  • Start an apprenticeship or traineeship

  • Spend 20 hours or more a week working or volunteering, while in part-time education or training

  • This aims to increase the skill level but also puts increased pressure on training providers

  • There are not enough apprenticeships to match the demand

zero hour contracts labour market

• In 2022, nearly 1 million workers were on zero-hour contracts which is more than five times the number in 2000

• These contracts are extremely beneficial to employers

• Workers are not guaranteed work and only get paid for the work they do

• Workers do not receive many of the benefits that full-time employees receive - this reduces costs for the firm

•  Some workers do enjoy the flexibility this provides as they can sign contracts with several firms and sometimes enjoy a wider variety of work

• These contracts change unemployment figures as workers may not end up receiving much work, but are no longer counted as unemployed

Temporary/flexible working uk labour market

• Flexible working is working in such a way that it meets the employee's needs

• Covid19 has driven changes in thinking around where work happens

• Many workers now want to work from home Some employers prefer this as it lowers company costs

• Other employers are insisting on a return to the workplace as it is required, or they want more control over their workforce

• There is an increasing focus on well-being and more people are opting to work part-time jobs or jobs that offer more flexibility

government intervention in labour market

• max and min wages

• public sector wage setting

maximum wage

government imposed price ceiling below the market price and is rarely used

who has their been discussions about setting max wages for 

• There has been some discussion recently to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full-time employees

• If CEOs were paid less then the average pay per worker may increase

minimum wage

legally imposed wage level that employers must pay their workers

how does the minimum wage vary

varies based on age

minimum wage diagram

max wage diagram

why doesnt minimum wage automatically increase unemployment

Many studies have shown that unemployment does not increase - and in some instances employment increases. This is likely due to the fact that workers are receiving higher wages and choose to consume more. This increases aggregate demand (AD) in the economy which in turn increases the demand for labour by firms - thus eradicating any potential real wage unemployment.

who is the larger employer in UK

government

how many public sector workers

• In April 2022 there were 5.74 million public sector workers out of a total of 29.6 million employed workers (19.39%)

public sector wage setting

• In many industries, the UK Government is the dominant employer and so is able to exercise monopsony power in setting the wage rates

implications of public sector wage setting

• If the government increases the NMW, they are significantly increasing their own wage bill

• The private sector often uses public sector wages as a benchmark for their own wage calculations

• If public sector wages increase and private sector ones do not, it can create tension between workers in the different sectors

• Increases to public sector pay often have to be paid for by increases in tax rates for the entire working population

when and why did public sector workers strike

• In June 2022, public sector workers were striking due to issues with the pay increases offered by the Government

  • Worker's wages were frozen from 2010 to 2015 after the 2008 global financial crisis

  • This was followed by rampant inflation and wage increases well below the level of inflation

policies to tackle labour market immobility

• improved education/training

• targeted skills shortages

• subsidising employers

• relocation subsidies

• reducing information asymmetry to help workers quickly identify new opportunities

• reducing discrimination

wage differentials

differences in wages arising between individuals, occupations,industries,firms and regions

reasons for labour differentials

• different workers have different MRPs

• workers have different skills and preferences

• labour market discrimination

  • compensating differentiaks

positive discrimination

when a group of workers are treated more favorably than others

negative discrimination

when a group of workers are treated less favourablt than others

could the laest rise in min wage affect jobs

• mw and ni increases

• small businesses with low profit margins struggke

• incentivise firms to invest in tech

• increase consumer spending

• improved productivity

• attracts more skilled and motivated workers

advantages for minimum wage

• equity justification

• poverty reduction

• incentives

• anti discrimination

disadvantages of min wage

• job losses

• raise costs

• wage spiral

rea living wage

only rate independently calculated annually based on the real cost of living

national livign wage

legal minimum hourly wage that employers must pay to workers aged 21 and over in the UK

arguments for maximum wage

• reduce inflation

• reduce inequality

• reduces labor costs and increases demand for workers

arguments against  max wage

• should reward greater effort and ability with more pay

• higher pay - increased productivity as higher motivation

• emigration - move to countries with no wage cap

wage determination in perfectly comptitive kabour market

wages determind by demand and supply

monopsony labour market

• singe employer so only one choice of employer to work for

• pay less than  a workers MRP

• marginal cost of labour curve is above average cost of labour curve as each time worker hired firm has to pay higher wage to attracte and also increase existing workers wages

• firms will hire number that maximise profits where MRP meets MC

monopoly in labour market

• The existence of trade unions means they can operate as the only seller of labour

trade union

organisation formed to reprsent interests of a group of workets

collective bargaining 

trade union negottiates with employers 

productivity bargains

unions agreee to specific changes that will increase productivity in return for higher wages

what rule in teachers union

must habve degree

how has government reduced power of trade union

introduced postal ballots, outlawed secondary picketing, restricted the size of the picket
line and forced unions to provide 14 days’ notice of action. The Trade Union Act 2016 was
the most recent act, and this included a clause saying that at least 50% of people must vote
in the ballot; the most recent teachers union ballot only had 28% voting turnout

how can trade unions cause labour market failure 

forcing wages u to a level higher than market equilibrium wage 

bilateral monopoly

trade union enters monosonistic labor market

single buyer and seller

trad eunion increase wage