3.3.5.2 - government intervention in labour markets

the case for government intervention

governments intervene to reduce inequality and market failure (eg. emergence of monopsonies under free markets), protecting workers from being exploited.

types of government intervention - maximum wage controls

maximum wage is a price ceiling above which firms cannot give as wages. this can help firms avoid spiralling wage costs and mitigate income inequality to a certain degree by closing the gap between executives' pay and those of their workers.

types of government intervention - minimum wage controls

minimum wage is a price floor below which firms cannot give as wages. this protects workers from being exploited to work for pay that would disallow them from meeting their basic needs.

may cause unemployment as minimum wage reduces demand for labour. may also counteract effects of a monopsony.

types of government intervention - direct tax

direct taxes are collected from the person/firm that pays them, rather than goods and services.

direct tax eg. corporation tax is generally progressive and is a way for the govt to earn revenue without harming firms, but when higher direct taxes are imposed, owners are likely to react by reducing investment.

this lowers employment in the firm, or possibly makes them relocate.

national insurance tax in the uk is a tax on employing labour, that both the employer and employee pay.

this entitles the worker to things like unemployment and sick benefits, but is an additional cost to the firm for employing each worker. particularly helpful to those on low incomes.

types of government intervention - reducing geographical/occupational immobility of labour

GEOGRAPHICAL - when workers cannot physically move to the areas where jobs are (eg. cost of rent, family ties)

- subsidise building houses in popular areas

- invest in infrastructure to move labour around more easily

- regional policy for firms to set up in deprived areas

OCCUPATIONAL - when workers have inadequate skills to do jobs, leads to structural unemployment

- education and training schemes

- subsidising firms to provide education and training schemes

types of government intervention - reducing discrimination and exploitation

discrimination in the labour market occurs when there is information failure to appreciate one societal group and undervalue another, often based on race or ethnicity. some governments have made it illegal for firms to discriminate, but this must be enforced to be effective.

exploitation occurs when workers are treated extremely poorly in terms of pay/working conditions. this us dealt with through minimum wage legislation and workplace inspections, which can inform governments of the exploitation so they can end it.