A LevelEconomicsEdexcelEconomics ARevision Notes3. Business Behaviour & the Labour Market3.5 Labour MarketWage Determination in Competitive & Non-Competitive Markets

Wage Determination in Competitive & Non-Competitive Markets (Edexcel A Level Economics A)

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Diagrammatic Analysis of Labour Market Equilibrium

  • Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)

    • The DL is the demand by firms for workers

    • The SL is the supply of labour by workers

  • Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry

    • 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

3-5-3--wage-equilibrium_edexcel-al-economics
In the labour market for graphic designers, the equilibrium wage rate is W and the equilibrium quantity is Q. At this point the DL = SL

Diagram analysis

  • The market for graphic designers is in equilibrium where DL = SL 

  • The equilibrium wage is W and the quantity of labour is Q

  • There is no excess supply of labour

  • There is no excess demand for labour

Current Labour Market Issues

  • The labour market is extremely important as jobs provide income to households, which directly impacts the standard of living in an economy

  • Changes to conditions in the labour market can be traumatic as they may result in changes to wage rates, working conditions and/or the benefits associated with a particular job

    • These changes can possibly decrease the standard of living for many people

Current Labour Market Issues in the UK

Skills shortages

Youth unemployment

Changes to retirement ages

  • 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

  • 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

  • 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

Zero-hour contracts

Temporary/flexible working

  • 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

  • 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

  • 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 the Labour Market

Maximum and minimum wages

  • The UK Government usually intervenes in the labour market in order to improve equity and avoid the exploitation of workers

    • A maximum wage is a government imposed price ceiling below the market price and is rarely used

      • 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

    • A minimum wage is a legally imposed wage level that employers must pay their workers

      • It is set above the market rate

      • The minimum wage/hour varies based on age

3-5-3--minimum-wage_edexcel-al-economics
A national minimum wage (NMW1) is imposed above the market wage rate (We) at W1

Diagram analysis

  • The market equilibrium wage and quantity for truck drivers in the UK is seen at WeQe

  • The UK government imposes a national minimum wage (NMW) at W1

  • Incentivised by higher wages, the supply of labour increases from Qe to Qs

  • Facing higher production costs, the demand for labour by firms decreases from Qe to Qd

  • This means that at a wage rate of W1 there is excess supply of labour and the potential for real wage unemployment equal to QdQs

Examiner Tip

When evaluating national minimum wages, do not assume that they will 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.

Public sector wage setting

  • The UK government is the largest employer in the nation

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

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

  • There are several implications of this 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

  • 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

  • There are many individual policies that the UK Government employs in order to reduce labour market immobility and together they help reduce the labour market failures

Examples Of Policies Used To Tackle Labour Market Immobility

Policy

Explanation

Improved education/training

Education improves skills and a wider skill base allows workers to move more easily between jobs which are not 100% identical

Targeting skills shortages

Identifying markets with specific skills shortages and training workers in those skills provides some opportunity for workers to switch between occupations

Subsidising employers

A per hire subsidy from the government provides an incentive for employers to take on workers without the necessary skills (and train them) - or workers from a specific demographic (e.g. disabled workers) and this improves occupational mobility

Relocation subsidies

Providing relocation subsidies to workers reduces both geographical and occupational immobility

Reducing information asymmetry

Setting up job centres and improving the flow of information between employers and the unemployed helps workers to quickly identify new opportunities

Reducing discrimination

Reducing discrimination in hiring practices will help some workers improve occupational mobility

Significance of the PED & PES for Labour

The elasticity of demand for labour

  •  This refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate)

    • If the demand for labour is elastic, then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firms

    • If the demand for labour is inelastic, then an increase in the wage rate will result in a less than proportional decrease in the quantity demanded of labour demanded by firms

  • If demand is elastic firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise

  • If demand is inelastic firms will have a much smaller response to rising or falling wages

Factors That Influence PED of Labour

The proportion of labour costs to total costs

The higher these are then the more elastic the demand for labour will be; the lower these are then the more inelastic the demand for labour will be

Ease and cost of factor substitution

If substituting capital for labour is easy and the cost is comparable to the increase in wages, the demand for labour will be more elastic - and vice versa

PED of the final product

If the product being produced is price inelastic in demand, then the demand for labour is likely to be more inelastic i.e if wages rise, firms will pass on the increased costs of production to the final consumers

Time period

In the short-run, demand for labour is likely to be more price inelastic i.e an increase in wages will have a less than proportional decrease in the quantity demanded. However, in the medium to long-term firms can research alternative methods of production and the demand for labour becomes more price elastic

The elasticity of supply of labour

  • This refers to how responsive the supply of labour is to a change in the price of labour (wage rate)

    • If the supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in the quantity of labour supplied 

    • If the supply of labour is inelastic, then an increase in the wage rate will result in a less than proportional increase in the quantity of labour supplied 

  • In low skilled occupations the quantity of labour supplied is very responsive to a change in wage rates i.e. supply of labour is elastic

  • Occupations which require a longer and higher level of training tend to have an inelastic supply of labour i.e even if wage rates increased significantly, there would be a less than proportional increase in the supply of labour in the short run

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