3.5.3 Wage determination in competitive and non-competitive markets

• Elasticity of demand for labour:

  (w/ formula)

  The responsiveness of the quantity demanded for labour to changes in wages.

  PED for labour = %∆ Qd for labour / %∆ wages

  The more elastic the demand for labour, the more responsive the demand for labour is to changes in wages.
• Factors that determine the PED for labour

  1) Time

  2)Availability of substitutes

  3) Elasticity of demand for the product

  4) The proportion of labour costs to total costs
• Elasticity of supply for labour:

  (w/ formula)

  The responsiveness of the quantity supplied of labour to changes in wages.

  PES for labour: %∆ Qs for labour / %∆ Wages

  The more elastic the supply for labour, the more responsive the supply for labour is to changes in wages.
• Factors that affect PES for labour

  -Skills/qualifications required for the job

  -Time
• How are wage rates determined?

  The equilibrium wage rate and equilibrium quantity of workers will be where labour demand = labour supply.
• Factors that cause wage rates in an industry to change

  Rise in wage rates:

  -↑demand for labour, e.g. ↑productivity -> ↑MRP

  -↓supply of labour, e.g. lower migration, higher income tax, etc

  
  

  Fall in wage rates:

  -↓demand for labour, e.g. ↓price of the product -> ↓MRP

  -↑supply of labour, e.g. lower skills/qualifications required, lower wages in other industries.
• Why do wage rates differ?

  -Differences in demand for labour

  -Differences in supply of labour

  -Impact of trade unions

  -Impact of discrimination

  -Immobility of labour
• Perfectly competitive labour market:

  A large number of small firms hiring a large number of workers.

  In this market:

  -Demand for labour (MRP) is downward sloping

  -Supply of labour for an individual firm is perfectly elastic - the firm can hire any number of workers at the market wage rate.

  Firms will hire workers up to the point where the wage rate = MRP.
• Imperfect competition in labour markets:

  There are two types of imperfect competition in labour markets:

  -Where there is a monopsonist buyer of labour

  -Where there is a monopoly seller of labour (trade unions)
• Impact of a monopsony buyer on a labour market

  E.g. in the UK, the government employs over 90% of teachers.

  The monopsonist will be able to use its market power to force down wages. Consequently, the Q of labour supplied will ↓.
• Impact of trade unions on labour markets

  Trade unions negotiate with employers on behalf of their members. This means they act as a monopoly seller of labour.

  Trade unions can use their market power to push wages above the equilibrium wage. This results in ↑ wages for their members but an increase in unemployment in the industry.
• Minimum wage:

  The minimum firms are legally allowed to pay their workers.
• Benefits (+) of a minimum wage:

  -Higher wages for workers who would have been paid below the minimum

  -This can increase living standards and reduce poverty

  -Impact on unemployment may be low if the PED for labour at low wage rates is inelastic

  -Incentivise employers to make workers more productive to justify their higher wages -> increased spending on training -> higher economic growth.
• Drawbacks (-) of a minimum wage:

  -Can lead to higher unemployment as the min wage force the wage above the equilibrium meaning that labour supply > labour demand.

  -Increases costs for firms -> potential for cost push inflation.
• What does the impact of a minimum wage depend on?

  If PED and PES are relatively inelastic, then the unemployment created by minimum wages will be smaller.
• Reasons for a maximum wage:

  -To prevent inflation

  -To reduce inequality, e.g. by limiting the pay of very highly paid workers.
• Adv (+) and disadv (-) of a maximum wage?

  (+) Can reduce inequality

  (-) Fewer workers will seek management positions

  (-) Highly skilled workers may emigrate.
• How can the govt influence the labour market through public sector wage setting?

  In the short term, a public sector pay freeze -> downward pressure on private sector pay -> as workers will be less likely to expect pay rises.

  In the long term, a public sector pay freeze may make it difficult for the govt to recruit public sector workers.
• What policies can the govt use to increase labour market mobility?

  -Improving education and training (reduce occupational immobility)

  -Providing subsidies to workers who have to relocate

  -Improving transport infrastructure to enable workers to commute longer distances

  -Legislating to reduce discrimination that may be preventing certain groups from getting employment in certain industries.
• Current labour market issues:

  -Skill shortages

  -Youth unemployment

  -Change to retirement ages

  -School leaving ages

  -Flexible working/zero hours contracts