3.5.3 Wage determination

• Why are individual firms price takers in the labour market?

  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.
• Why is the labour market important?

  • 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 associates with a particular job.
  • These changes can decrease the standard of living.
• What are some current labour market issues in the UK?

  • Skill shortages (this means firms will have to increase wage rates to attract labour).
  • Youth unemployment
  • Changes to retirement ages
  • School leaving age (the earlier a student leaves school, the lower their skill level).
  • Zero-hour contracts
  • Temporary/flexible working
• What is youth unemployment caused by?

  • Employers may prefer to hire workers with more experience as is can lead to higher productivity.
  • The education skills gap. This is caused by young people leaving school without the skills that employers require.
• What are the problems with zero-hour contracts?

  • They are beneficial to employers.
  • Workers aren't guaranteed work & only get paid for the work they do.
  • Workers don't 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.
  • These contracts change unemployment figures as workers end up not receiving much work, but are no longer counted as unemployed.
• Why do governments intervene in the labour market?

  • To improve equity
  • To avoid exploitation of workers
• What is a minimum wage?

  A legally imposed wage level that employers must pay their workers.

  • It is set above the market rate.
• What are the implications of public sector wage setting?

  • Increasing wages increases the governments own bill.
  • The private sector often used public sector wages as a benchmark for their own wage calculations.
  • If public sector wages increase & private sector ones don't, it can create tension between workers in the different sectors.
  • Increases in public sector pay often have to be paid for by increases in tax rates.
• What are some policies used to tackle labour market immobility?

  • Improved education & training
  • Targeting skill shortages
  • Subsidising employers
  • Relocation subsidies
  • Reducing information asymmetry
  • Reducing discrimination
• What factors influence the PED of labour?

  • The proportion of labour costs to total costs
  • Ease & cost of factor substitution
  • PED of the final product
  • Time period
• What influences the PES of labour?

  Training period