OCR Economics A-level Microeconomics Topic 4: Labour Market 4.2 Labour market issues and themes Notes
The labour force and the working population The working age population is between the ages of 18 and 65 who are actively looking for work. These are the economically active members of the population. Inactivity: The economically inactive are those who are not actively looking for jobs. These could include carer s for the elderly, disabled or children, or those who have retired. Some workers are discouraged from the labour market, since they have been out of work for so long that they have stopped looking for work. If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potential of the economy could fall. The unemployed are those able and willing to work, but are not employed. They are actively seeking work and usually looking to start within the next two weeks. Those in employment are those with a job. Dependency ratio, the participation rate and the replacement ratio The dependency ratio is the ratio between age and population of the people who are not in the labour force and those who are. This measures how much pressure is on the population who work. The participation rate is the number of people who are employed or looking for work. These are the economically active. The replacement ratio is the income after retirement divided by gross income before retirement. The impact of maximum wages, minimum wages and the living wage The National Minimum Wage is an example of a minimum price. The minimum wage has to be set above the free market price, just like other minimum prices, otherwise it would be ineffective.
The diagram above suggests that a minimum wage leads to a fall in the employment rate (Q1 Q3). It depends on what level the wage is set at. An inelastic labour demand (diagram below) will mean there is only a small contraction in demand for labour (Q1 Q3). There has been no evidence of a rise in unemployment with a rise in the NMW so far in the UK. Some firms say this is because the NMW is still relatively low.
The NMW will yield the positive externalities of a decent wage, which will increase the standard of living of the poorest, and provide an incentive for people to work. It could make it harder for young people to find a job, because their lack of experience might not be valuable to firms who are paying more for their labour. The government might make more tax revenue, due to more people earning higher wages. A higher wage could make the country less competitive on a global scale, since they cannot compete with countries that have lower wages. A maximum wage is also known as a wage ceiling, and it limits how much income someone can earn. It can be used as a means to redistribute wealth more equitably in society. In theory, a maximum wage should limit inflation, since wages (and therefore consumer demand) is limited. Maximum wages must be set below the free market equilibrium wage to be effective. One criticism of a maximum wage is that it could be a disincentive to innovate, and workers might opt for less demanding work. The free market equilibrium is at P1, Q1.
Maximum wages control the market wage, but this could lead to government failure if they misjudge where the optimum wage should be. It can lead to a more equal distribution of wealth in society. 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. Between 2008 and 2010, public sector pay grew (4.5%) relative to the private sector (1%). Women in the public sector were paid about 8% more than those in the private sector between 2013 and 2014. Across the country, public sector pay is more equal than private sector pay. About half of government spending goes towards public sector pay. The living wage The living wage is a wage above the NMW that the government believes is the necessary minimum to cover the basic cost of living. It is only an informal level and it is not required by law, whereas the NMW is required by law.
The impact of individual bargaining, collective bargaining, productivity bargaining and trade union activity on labour markets Trade union power: If trade unions are pushing for higher wages above the market equilibrium, the labour market is likely to be more flexible. Trade unions can also increase job security. Higher wages can be demanded by limiting the supply of labour, by closing firms, or by threatening strike action. Higher wages could cause unemployment, however. Trade unions can counter-balance exploitative monopsony power. These could attract workers to the labour market, because they know their employment rights will be defended. However, the limits on workers, such as limiting their ability to strike, might cause some people to withdraw from the labour market. Trade unions aim to protect workers, secure jobs, improve working conditions and try and achieve higher wages. If trade unions try and increase wage rates too much, firms might no longer be able to afford to employ workers. This could cause them to close down or reduce the number of workers they employ. Some workers might prefer a low paid job rather than be without employment. In a market where an employer has monopsony power, workers are only paid W2, and only Q2 number of workers is employed. This is the profit maximising level. A trade union aims to increase marginal revenue product in the market, as well as increase wages to the level of MRP (W3). This is to stop the exploitation of labour. The perfectly competitive level of employment and wage rate is W1, Q1.
Individual bargaining Individual bargaining is a negotiation between a single employee and the employer. Collective bargaining This is a negotiation between employers and a collective group of employees. This is with the aim of regulating working conditions and representing the interest of employees. This is more likely to give the employees strength in the negotiation. Productivity bargaining This is an agreement where employees agree to make changes which improve productivity in order to receive higher wages. The impact of: o Migration o Migrants are usually of working age, so the supply of labour at all wage rates tends to increase. Migration particularly affects the supply of labour at the lower wage rates, because migrants are usually from economies with average wages lower than the UK minimum wage. o There could be more competition to get a job due to the rise in the size of the working population. o Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market. This could increase global competitiveness. o Migrant labour affects the wages of the lowest paid in the domestic labour market, by bringing them down. However, this impact is only small. For the
medium and higher income households, it is hard to find evidence of worker displacement or depressed wages. o 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 through higher productivities. o Discrimination o 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 parttime jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. There are inequalities with paternity and maternity leave. 26% of 1500 workers felt that they had been held back from a promotion because they had children. Although a wage gap still exists, it is narrowing, albeit slowly. This article highlights the issue of women missing out on top jobs http://www.bbc.co.uk/news/mobile/uk-wales-12676564 o Discrimination. Workers might be discriminated against due to age, disabilities, gender and ethnicity. Workers from ethnic minorities have faced prejudice and discrimination. This article highlights some of the issues which could arise: http://www.bbc.co.uk/news/uk-31856147 o Demographic changes o The more people there who are able and willing to work, the higher the supply of labour. This changes with retirement and school leaving ages, the number of university students and immigration. o It can be illustrated with a shift to the right of the supply curve.
o Incentives Laffer curve analysis The Laffer curve shows how much tax revenue the government receives at each level of tax. Up until the point T, as tax rates increase, government tax revenue increases. After point T, people do not think it is as worthwhile working, and the lack of incentive to work leads to falling tax revenue. T is the optimum tax rate where the government can maximise their revenue. Laffer argued that tax rates are
too high, so they provide a disincentive to work. To encourage people to work harder, Laffer argued, tax rates should be reduced. The significance of informal labour markets In developing economies, there are large informal labour markets. The informal sector is characterised by a small scale of enterprise, ease of entry, family ownership of the firm or an unregulated market. There are no social security benefits provided by employers in an informal labour market, and workers are not taxed or monitored by the government. They are important in developing countries where there is a heavy reliance on the agricultural sector. The output produced by the informal sector is not included in the calculation for GNP or GDP. This can make it difficult to calculate the size of the whole economy, since estimates are required. Labour market flexibility and mobility, and government policies to improve them The geographical immobility of labour refers to the obstacles which prevent labour from moving between areas. For example, labour might find it hard to find work due to family and social ties, the financial costs involved with moving, imperfect market knowledge on work and the regional variations in house prices and living costs across the UK. The occupational immobility of labour refers to the obstacles which prevent labour from changing their use. For example, labour might find it difficult to change the occupation. This occurred in the UK with the collapse of the mining industry, when workers did not have transferable skills to find other work. The causes include insufficient education, training and skills. The flexibility of the labour market is how willing 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. 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 security. If trade unions limit the rights of a worker to strike, there could be a decline in flexibility.
Regulation: The more freedom firms have to hire and fire workers and the more freedom workers have in terms of their rights, the more flexible the labour market. Excessive regulation will limit flexibility. Welfare payments and income tax rates: 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. 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. Infrastructure: Improving infrastructure might help the geographical immobility of labour, since it becomes easier to move around the country. Housing: If housing became more affordable, then people might be more able to move around the country for work, which improves the geographical mobility of labour.