Labour Market Failure (2019 Update)
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This document discusses various types of labour market failures including skills gaps, geographical immobility, economic inactivity, inequality, discrimination, and monopsony power. It provides examples and analysis of each failure using diagrams. Potential policy remedies are outlined for each failure, such as increasing apprenticeships, improving housing affordability, raising the minimum wage, and enhancing workers' rights. The impact of minimum wages on monopsony employers is analyzed using a diagram showing how a minimum wage can increase employment levels and wages by counteracting monopsony power.
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Labour Market Failure (2019 Update)
- 1. Labour Market Failure A Level Economics Tutor2u Economics
- 2. Main types of labour market failure Skills Gaps Geographical immobility Economic inactivity Inequality and working poverty Discrimination Monopsony power of employers
- 3. Skills Gaps • Markets often under-provide skills training because of the free rider problem • Leads to deficit of human capital • Holds back productivity growth • Occupational immobility a cause of structural unemployment • Remedies? • Apprenticeship Levy in the UK • More funding for STEM subjects • Skills-based immigration policies
- 4. Migration data for the UK
- 5. The UK Apprenticeship Levy All UK employers with a pay bill of over £3 million per year pay the apprenticeship levy.
- 6. Geographical immobility of labour FAMILY TIES HOUSING AFFORDABILITY PROBLEMS VISA RESTRICTIONS COMMUTING COSTS CULTURAL & LANGUAGE BARRIERS
- 7. Housing affordability is the crucial problem
- 8. Remedies to improve housing affordability Increased spending on social housing Relaxation of planning laws Rent controls being considered in London Changes to affordable housing policies Subsidies for home-buyers (including Help to Buy) Incentives to encourage innovation in house building Be prepared to analyse some of these policy options (e.g. rent controls, increased investment in new housebuilding) and then evaluate their likely effectiveness
- 9. Economic inactivity STAYING IN FULL TIME EDUCATION FULL TIME CARE CHRONIC ILLNESS DISCOURAGED WORKERS
- 10. Economic inactivity in the UK Look at long term trend here – falling for women and a long term rise for men. Economic inactivity is 20% of the population aged 16 to 64 years
- 11. Remedies to reduce economic inactivity Tax free child care Higher minimum wage / living wage Improved education outcomes Increased government investment in health & social care Welfare reforms Be prepared to analyse some of these policy options e.g. the impact of the roll out of Universal Credit and effects of the UK raising the minimum wage (now one of the highest)
- 12. Inequality and working poverty • Working poverty is where families with at least one person in paid work have a household income that keeps them below the official poverty line. • Joseph Rowntree Foundation (JRF) said that the number of workers in poverty in the UK reached 4 million in 2018, meaning about one in eight in the economy are now classified as working poor.
- 13. Working poverty in the UK
- 14. Labour market discrimination • Discrimination in the labour market occurs when employers make decisions on wages and employment based on prejudices, such as race, gender, religion. It can lead to big variations in wages for the same job and different employment rates within a population. • Why is discrimination a cause of market failure? 1. Often the result of deep information failures 2. Leads to human resources being under-utilised, slower trend growth rates 3. Lack of diversity in the workplace can hamper innovation 4. Male dominated financial markets may have contributed to the financial crisis!
- 15. Data on the UK gender pay gap 0 5 10 15 20 25 30 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Gender pay gap for median gross hourly earnings (excluding overtime), UK, April 1997 to 2018 (per cent) The gender pay gap is calculated as the difference between average hourly earnings (excluding overtime) of men and women as a proportion of average hourly earnings (excluding overtime) of men’s earnings.
- 16. Discrimination using analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 Labour Demand = MRPL • Employer may perceive that one group of potential employees is less productive than another – leading to a lower expected marginal revenue product. • The result is a contraction in employment and lower wages for the discriminated group. LD (Discriminated group) W2 E1
- 17. Diversity and business performance
- 18. Monopsony power of employers Monopsony is a labour market structure in which there is a single powerful buyer of a particular type of labour. For example, the main buyer of the labour of doctors and nurses is the NHS or large employers such as Capita, G4S, Amazon, Deliveroo and Sports Direct. A monopsony employer will tend to pay relatively lower wages and employ fewer people (than in a highly competitive labour market.
- 19. Monopsony power enters the mainstream
- 20. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2
- 21. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 • Monopsony power of the employer allows them to pay a wage rate W3 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3
- 22. Wages lost from under-payment by employer Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 • Monopsony power of the employer allows them to pay a wage rate W3 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3
- 23. Wages lost from under-payment by employer Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • Monopsony employer can use their buying power to pay a wage lower than the value of the marginal revenue product of workers employed at E2 • Monopsony power can lead to exploitation of employed workers
- 24. The late Alan Krueger developed key insights into the impact of ”superstar” businesses who develop significant monopsony power in both product and labour markets. His work helped overturn the conventional wisdom on the employment impact of carefully set minimum wages. His research found that a higher minimum wage had little effect on unemployment at least in the short term.
- 25. Remedies for monopsony power of employers Statutory minimum wage for low paid jobs Improved legal protection of basic employment rights Encourage higher trade union membership / union density Enhanced scrutiny of mergers for adverse labour market effects
- 26. Monopsony with a minimum wage Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3
- 27. Monopsony with a minimum wage Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 Min Wage
- 28. Monopsony with a minimum wage Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 Min Wage E3 • The new profit maximising level of employment with the minimum wage is now at E3 – which is a higher employment level and paying a higher wage than the previous wage paid by the monopsony employer.
- 29. Evaluating government intervention in the labour market Are interventions in the labour market effective in meeting specific aims? Which stakeholders are impacted? What are the risks of government failure? Can interventions improve macroeconomic objectives? In theory .. but in practice ... what does the evidence show about interventions?
- 30. Labour Market Failure A Level Economics Tutor2u Economics
Hinweis der Redaktion
- For many economists, the labour market is the most important market of all to study, analyse and evaluate. Like product markets for goods and services, labour markets can also fail. The main types of labour market failure are labour immobility including skills gaps, inequality, disincentives to be economically active, labour market discrimination and the effects of monopsony power of employers.
- An estimated 283,000 more people came to the UK with an intention to stay 12 months or more than left in the year ending September 2018 (net migration). Over the year, 627,000 people arrived in the UK (immigration) and 345,000 people left the UK (emigration).
- Apprenticeships are paid jobs that incorporate on and off the job training. A successful apprentice may qualify with a nationally recognised qualification on completion of their contract. In 2017/18, there were 814,800 people participating in an apprenticeship in England The Apprenticeship Levy All UK employers with a pay bill of over £3 million per year pay the apprenticeship levy. The levy is set at 0.5% of the value of the employer’s pay bill, minus an apprenticeship levy allowance of £15,000 per financial year. The funds generated by the levy have to be spent on apprenticeship training costs. The government tops ups the funds paid by the employer by 10%.
- Geographical mobility is the ability of labour to move around an area, region or country in order to work. Half of children are now born in rented accommodation, versus a third back in 2003-4. The number of families renting with children has doubled in a decade, according to the insurance provider Royal London.
- Economic inactivity is that section of the working age population which is not in employment and is not actively seeking employment. These persons are therefore not part of the working population. March 2019 - The UK economic inactivity rate was estimated at 20.7%, lower than for a year earlier (21.2%) and the lowest figure on record.
- Working poverty refers to a situation where families with at least one person in paid work have a household income that keeps them below an officially recognised poverty line. A new report from the Joseph Rowntree Foundation shows that more than half of people in poverty in the UK live in a family where at least one person is in paid work
- In many countries there has been a significant rise in the scale of working poverty over the last ten years. In part this has been caused by stagnant or falling real wages for millions of people in below-average paid jobs. Trade union membership has declined and many jobs offer vulnerable job security and uncertain weekly and monthly income streams - evidenced by the rapid growth of the Gig Economy and zero hours contracts. In the UK, cuts in welfare benefits and tax credits since 2015 mean that many households are also seeing some of the welfare safety net being taken away.
- Discrimination in the labour market occurs when employers make decisions on wages and employment based on prejudices, such as race, gender, religion. It can lead to variations in wages for the same job and different employment rates.
- The gender pay gap is calculated as the difference between average hourly earnings (excluding overtime) of men and women as a proportion of average hourly earnings (excluding overtime) of men’s earnings. For example, a 4.0% gender pay gap denotes that women earn 4.0% less per hour, on average, than men. Conversely, a negative 4.0% gender pay gap denotes that women earn 4.0% more, on average, then men.
- In a nutshell, monopsony is the employer-led buying power in the labour market
- According to the late Alan Krueger, “Labour market collusion or monopsonization—the exercise of employer market power in labour markets—may contribute to wage stagnation, rising inequality, and declining productivity in the American economy, trends which have hit low-income workers especially hard.”
- For many economists, the labour market is the most important market of all to study, analyse and evaluate. Like product markets for goods and services, labour markets can also fail. The main types of labour market failure are labour immobility including skills gaps, inequality, disincentives to be economically active, labour market discrimination and the effects of monopsony power of employers.